Someone asked a question about working overseas and the answer pointed to this link: Foreign earned income exclusion.

Could a person that is retired, and living overseas use this deduction for retirement plan distributions? This would include a 401K or IRA.

Essentially one could reap the benefits of both a ROTH and 401K by living out of the country for one year. They need not remain in the same place, so they could also avoid paying taxes in the host countries.

  • Here's an interesting article I found: marketwatch.com/story/… – Michael Apr 7 '17 at 18:32
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    Outside of the question asked (which I believe is already answered correctly below), note that this statement is also not true in principle: "They need not remain in the same place, so they could also avoid paying taxes in the host countries." For the FEIE to apply, the income would need to be earned in the foreign country. That foreign country's tax rules would then apply to that income. The FEIE is really a simplified method of avoiding double-taxation (instead of the often more complicated Foreign Tax Credit method), not a straight tax eliminator. – Grade 'Eh' Bacon Apr 7 '17 at 19:02
  • @Grade'Eh'Bacon not 100% true. Many contractors employed overseas pay no income tax on the first ~100K or so, any only US income tax on the overages. They can move around and the ones I am thinking about are paid by US companies. For example contractors in Afghanistan do not pay income tax for that nation, and have the FEIE apply. – Pete B. Apr 7 '17 at 19:29
  • @PeteB. To the extent you can earn income elsewhere and not pay tax on it, you would need to rely on that country's income tax regulations. If an overseas contractor in Afghanistan doesn't need to pay income tax earned there, then it may be possible for the income to be taxed nowhere. However flipping through some online resources I can't find anything that confirms that contractor income in Afghanistan wouldn't face the typical tax rate there of 20%. – Grade 'Eh' Bacon Apr 7 '17 at 19:48

According to this IRS article, the exclusion does not apply to IRA distributions:

For this purpose, foreign earned income is income you receive for services you perform in a foreign country during a period your tax home is in a foreign country and during which you meet either the bona fide residence test or the physical presence test.

Because 1) IRA distributions are not "earned income" and 2) they were not received for services you performed in that country.

So I strongly suspect that you could not use the exclusion to avoid tax on 401(k) or traditional IRA withdrawals.

  • Are you sure that IRA distributions are not considered earned earned income? I have seen some conflicting information. – Pete B. Apr 7 '17 at 18:42
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    @Pete B the article I linked doesn't list IRAs specifically, but it lists Pensions and Annuities under "unearned income", which I'd consider in the same class. In any case you didn't earn it for "services performed" in that country. You might be able to find a good lawyer who could argue it, but it seems pretty clear to me. – D Stanley Apr 7 '17 at 18:44

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