Summary: David Kuenzi addresses the problem of Benefitting from the significant tax advantages of qualified retirement accounts is difficult because of their complexity, especially when the special tax implications of living abroad are factored in.

Problem: Benefitting from the significant tax advantages of qualified retirement accounts is difficult because of their complexity, especially when the special tax implications of living abroad are factored in

Understanding how to properly employ tax advantaged retirement accounts is particularly vexing for Americans abroad because they often do not have the easy option of simply adopting the company 401k plan. Rather, Americans abroad must proactively learn how to employ IRAs, Roths and SEPs to fill the gap. Over a lifetime of saving and investing, these accounts can provide enormous benefits not only in terms of tax savings, but also in terms of asset protection in litigation situations and estate planning. But investors need to very carefully navigate the complex rules governing these accounts to avoid mistakes that might trigger unnecessary taxation or even loss of tax deferred status. Furthermore, optimizing the tax advantage of these accounts also requires careful calculation of how stock and bond investments are allocated between taxable and tax-deferred or tax exempt accounts.

For the self-employed, proper use of retirement savings accounts is particularly important because of the onerous tax regime imposed by the IRS on Americans with self-employment income derived from non-US sources. Generally, Americans employed abroad by non-US employers can escape the self-employment tax altogether. But any American living abroad with self-employment (Schedule C) income must pay the full 15.3% tax (unless exempted by a bilateral "totalization agreement"). The burden is compounded by the fact that the IRS limits deductions when determining the amount of self-employment income subject to the tax.

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About the Author David Kuenzi is the founder of Thun Financial Advisors. He is a Certified Financial Planner® and has previously held positions with Chase Manhattan Bank, Deutsche Bank and Bank Austria. His financial industry career included postings in New York, London and Moscow. Kuenzi grew up in Wisconsin but spent most of his professional career in New York City and in Europe, before returning to the Midwest in 2005. He received his undergraduate degree from the University of Wisconsin and completed graduate work in politics and economics at Columbia University and Harvard University before launching a career in finance.

First Published: Jun 24, 2009