A guide to Traditional and Roth 401(k)s and IRAs for American expats

including the best strategies based on your country of residence.

Executive Summary: The Expat's Dilemma

For U.S. expats, the choice between Traditional and Roth accounts is less about your future tax bracket and more about your current U.S. tax filing strategy.

The accounts themselves (401(k)s and IRAs) are the same for all Americans, but your ability to contribute—and the strategy you should use—is dictated by two key tax tools:

1. Foreign Earned Income Exclusion (FEIE): Lets you exclude a large amount of foreign income (up to $130,000 in 2025) from U.S. tax.

2. Foreign Tax Credit (FTC): Lets you claim a dollar-for-dollar credit for income taxes paid to a foreign country to offset your U.S. tax bill.

The Golden Rule for Most Expats: Because both the FEIE and FTC can often reduce your U.S. tax liability to $0, your effective U.S. tax rate today is 0%. A pre-tax (Traditional) deduction is worthless if you have no tax to deduct from.

Therefore, the Roth (post-tax) version is almost always the superior choice for expats. You "pay" 0% U.S. tax on the contribution now, and your money grows and can be withdrawn 100% U.S. tax-free forever.

The real challenge isn't Traditional vs. Roth; it's IRA eligibility.

The Four Retirement Accounts: A Quick Review

• Traditional 401(k): Employer-sponsored. Contributions are pre-tax, lowering your current taxable income. Growth is tax-deferred. Withdrawals in retirement are taxed as ordinary income.

• Roth 401(k): Employer-sponsored. Contributions are post-tax. Growth is 100% tax-free. Qualified withdrawals in retirement are 100% tax-free.

• Traditional IRA: Individual account. Contributions may be tax-deductible (if you're under AGI limits). Growth is tax-deferred. Withdrawals in retirement are taxed as ordinary income.

• Roth IRA: Individual account. Contributions are post-tax. Growth is 100% tax-free. Qualified withdrawals in retirement are 100% tax-free. (Has income limits for direct contributions).

The "IRA Trap": FEIE and Taxable Compensation

This is the single most important concept for expats to understand.

• To contribute to any IRA (Traditional or Roth), you must have "taxable compensation" (i.e., earned income that is reported on your U.S. tax return).

• The FEIE Trap: Income you exclude using the FEIE does not count as "taxable compensation."

• The FTC Benefit: Income you report when using the FTC does count as "taxable compensation" because it is included in your income (you just use credits to wipe out the tax).

Example: You earn $100,000 in Dubai.

• If you use the FEIE: You exclude all $100,000. Your taxable compensation for IRA purposes is **$0**. You are ineligible to contribute to an IRA.

• If you use the FTC: You report $100,000 in income. Your taxable compensation is **$100,000**. You are eligible to contribute to an IRA. (You would claim $0 in foreign tax credits, meaning you would have to pay U.S. tax on this income, making this a bad choice for a low-tax country).

This distinction forms the basis of your entire retirement strategy.

Strategy 1: Expats in LOW-Income-Tax Countries

(e.g., UAE, Saudi Arabia, Singapore, Cayman Islands, Panama)

Your Situation: You pay little to no income tax to your host country.

Best Tax Tool: The Foreign Earned Income Exclusion (FEIE) is your primary tool. It's the only way to avoid double taxation, as you have no foreign taxes to claim with the FTC.

Best Retirement Strategy:

1. Priority #1: 401(k) (if available)

   • If you work for a U.S. employer (or a subsidiary) that offers a 401(k), this is your best and simplest option.

   • Choose the Roth 401(k). This is a "no-brainer." The FEIE will wipe out your U.S. tax liability, so a Traditional 401(k)'s pre-tax deduction is completely wasted. By using the Roth 401(k), you contribute with dollars that the U.S. isn't taxing, and you get tax-free growth and withdrawals for life. It is the best of all worlds.

2. Priority #2: IRA (Individual Retirement Account)

   • The Challenge: As explained in the "IRA Trap," using the FEIE makes you ineligible to contribute to an IRA if your income is below the FEIE limit ($130,000 for 2025).

   • Solution A (High Earners): If you earn more than the FEIE limit, you can contribute. For example, if you earn $140,000, you can exclude $130,000, leaving $10,000 in taxable compensation. You could contribute up to the IRA limit ($7,000 for 2025 ($8,000 if you're age 50 or older)) from that remainder. The clear choice here is the Roth IRA.

   • Solution B (Revoke FEIE): You could choose not to use the FEIE. This would make your income eligible for IRA contributions, but it would also subject it to U.S. income tax, which you'd have to pay. This is rarely a good trade-off.

   • Solution C (Spousal IRA): If you file jointly and your spouse is a non-working-in-the-US-tax-system homemaker, they also have $0 in taxable compensation. However, if you have taxable compensation (e.g., you earn over the FEIE), you can contribute to a "Spousal Roth IRA" for them.

Low-Tax Country Bottom Line: Max out your Roth 401(k) if you have one. If you don't, contributing to an IRA is difficult and often not possible unless you are a very high earner.

Strategy 2: Expats in HIGH-Income-Tax Countries

(e.g., UK, Germany, Canada, Japan, Australia, most of Western Europe)

Your Situation: Your host country's income tax rate is equal to or higher than the U.S. rate.

Best Tax Tool: The Foreign Tax Credit (FTC) is almost always the superior choice. You will pay your high local taxes, and the FTC will wipe out your U.S. tax liability and make you eligible for other benefits (like the Additional Child Tax Credit) that the FEIE blocks.

Crucially, using the FTC makes your income "taxable compensation," so you ARE eligible to contribute to an IRA.

Best Retirement Strategy:

1. Priority #1: 401(k) (if available)

   • Choose the Roth 401(k). The logic is identical to the low-tax country. The FTC is reducing your U.S. tax bill to $0. A Traditional 401(k) deduction is worthless. Use the Roth 401(k) to secure tax-free growth.

2. Priority #2: IRA (Individual Retirement Account)

   • Choose the Roth IRA. Since the FTC is handling your U.S. tax bill, a Traditional IRA deduction provides no benefit. Contributing to a Roth IRA means you use your post-foreign-tax dollars to fund an account that will be 100% tax-free from a U.S. perspective.

   • The "Backdoor" Roth IRA: Many expats in high-tax countries are high earners. Your Adjusted Gross Income (AGI) may be too high to contribute to a Roth IRA directly.

     • Solution: Use the Backdoor Roth IRA strategy. This is perfectly legal and widely used.

     1. You make a non-deductible contribution to a Traditional IRA (which has no income limit).

     2. You immediately convert that Traditional IRA to a Roth IRA.

     3. This makes your income eligible for Roth treatment, regardless of your AGI.

High-Tax Country Bottom Line: Use the FTC. This makes you eligible for all accounts. Your strategy should be to fill up Roth 401(k) and Roth IRA accounts, in that order (via Backdoor if necessary).

2025 Roth 401(k) Contribution Limits

Here are the official IRS limits for 401(k) contributions in 2025.

Important: The limit is a combined total across all your 401(k) contributions (both Traditional and Roth). You cannot contribute the maximum to each.

• Employee Contribution Limit: $23,500

  • This is the maximum you can contribute from your salary, split however you choose between your Roth 401(k) and Traditional 401(k).

• Catch-Up Contributions: These are additional contributions allowed if you are age 50 or older.

  • Ages 50-59 (and 64+): An additional $7,500.

  • Ages 60, 61, 62, and 63: A new, higher catch-up of $11,250. (This special, higher amount is a new rule from the SECURE 2.0 Act that starts in 2025).

Difference between the employee contribution limit and the total 401(k) limit (which includes employer matching)

Think of your 401(k) as having two separate contribution limits that work together:

1. The Employee Contribution Limit (Your Part)

2. The Total Contribution Limit (Your Part + Your Employer's Part)

Here is the breakdown for 2025.

The Employee Contribution Limit (Your Part)

This is the famous number you hear about most often. It's the maximum amount you can personally have deducted from your paychecks and put into the 401(k).

• 2025 Limit (Under Age 50): $23,500

• This $23,500 is a combined limit for your Traditional 401(k) and Roth 401(k) contributions. You can split it any way you like (e.g., $10,000 Roth / $13,500 Traditional), but your total cannot exceed $23,500.

Catch-Up Contributions (Age 50+): If you are age 50 or older, you are allowed to contribute more than this limit.

• Ages 50-59 (and 64+): You can contribute an additional $7,500, for a total employee contribution of $31,000.

• Ages 60-63: Thanks to a new rule (SECURE 2.0 Act), you get an even larger "super" catch-up contribution. You can contribute an additional $11,250, for a total employee contribution of $34,750.

The Total Contribution Limit (The Overall Limit)

This is a much larger limit that includes all money going into your account from all sources. This is also known as the "Section 415 limit."

• 2025 Limit (Under Age 50): $70,000

• This $70,000 (or 100% of your compensation, whichever is less) is the absolute maximum that can be contributed to your 401(k) for the year.

This total limit is made up of three parts:

1. Your Employee Contributions (the $23,500 limit discussed above)

2. Your Employer's Matching Contributions (the "free money" they give you)

3. Your Employer's Other Contributions (like profit-sharing, which not all plans have)

The "Bucket" Analogy: Think of your 401(k) as a $70,000 bucket (for 2025).

You are allowed to fill the first $23,500 of that bucket yourself.

Your employer can then pour in their matching funds and profit-sharing to help fill the rest of the bucket.

The total of your pour and your employer's pour cannot exceed $70,000.

(Note: Catch-up contributions are treated separately and allow the total bucket size to increase. For example, for someone aged 60, the total bucket size becomes $81,250, which is $70,000 + $11,250).

The Key Caveat for Expats Using Roth 401(k)s

This is the most important part of the strategy for you.

• Your Contribution: As we discussed, your $23,500 (or more with catch-up) should go into the Roth 401(k) to get the "double tax-free" benefit.

• Your Employer's Contribution: By law, any money your employer contributes (their match, profit-sharing, etc.) must go into a Traditional (pre-tax) 401(k) account.

This means that even if you select "100% Roth 401(k)" in your benefits, you will still end up with two "sub-accounts":

1. Your Roth 401(k): Contains all your contributions. This will grow and be withdrawn 100% tax-free.

2. A Traditional 401(k): Contains all your employer's contributions. This money will grow tax-deferred, but you will have to pay ordinary income tax on it when you withdraw it in retirement.

This is not a bad thing—it's still free money. It's just crucial to know that the "expat loophole" only applies to the money you contribute.

Additional Strategies

See the detailed explanations of the Backdoor Roth IRA and the Mega-Backdoor Roth, and how they specifically relate to American expats

Last Updated on Nov. 5, 2025