Solo 401(k) Planning for Self-Employed Americans Abroad

Self-employed Americans abroad may be able to use a Solo 401(k), but the plan should be reviewed carefully before it is opened, funded or relied on.

A review should usually consider:

• whether the person is self-employed
• whether the person has eligible compensation
• whether the person is a US citizen
• whether the person is a green card holder
• whether the person is a US tax resident
• whether foreign earned income is involved
• whether the foreign earned income exclusion is used
• whether foreign tax credits are used
• whether self-employment tax applies
• whether net earnings from self-employment exist
• whether the business has employees
• whether a spouse works in the business
• whether the business is a sole proprietorship, partnership, LLC, corporation or foreign company
• whether employee elective deferrals are available
• whether employer contributions are available
• whether Roth contributions are available
• whether loan provisions are available
• whether plan reporting may be required
• whether the provider accepts a foreign address
• whether local tax recognises the account
• whether the person may return to the United States later

The IRS says a one-participant 401(k), sometimes called a Solo 401(k), covers a business owner with no employees, or that person and their spouse.

The IRS also says the business owner can contribute both as employee and employer, subject to current limits and plan rules.

That can make a Solo 401(k) powerful.

But for Americans abroad, the planning must be coordinated with income, FEIE, business structure, employees, provider access, tax and future residence.

A Solo 401(k) can be attractive because it may allow contributions in more than one capacity.

You may be able to contribute as the employee.

The business may also be able to contribute as the employer.

Some plans may also offer Roth contributions, loans or wider investment flexibility.

That can make a Solo 401(k) more flexible than a SEP IRA in some cases.

But the structure must fit the facts.

For self-employed Americans abroad, a proper review should consider:

• whether the business has no employees other than an eligible spouse
• whether income is genuinely self-employment income
• whether income is paid personally or through a company
• whether foreign earned income exclusion affects contribution planning
• whether foreign tax credits are being used instead
• whether self-employment tax applies
• whether a foreign company complicates eligibility
• whether the plan documents are properly established
• whether the plan requires tax reporting
• whether the provider accepts non-US addresses
• whether investment access is available abroad
• whether local tax recognises the account
• whether Roth contributions make sense
• whether loans are appropriate
• whether a SEP IRA is simpler
• whether a taxable investment account is more practical

The Solo 401(k) can be a good planning tool in the right case.

It can also be a poor fit if the business structure, income, employees, tax position or provider access do not support it.

The best approach is to decide on the retirement structure after reviewing the business and tax position, not before.

This page is for general information only and does not constitute personalised financial, tax, legal, pension, retirement, investment, business, payroll, Solo 401(k), SEP IRA, SIMPLE IRA, FEIE, US tax, local tax or currency advice.

Solo 401(k) eligibility, contributions, employee elective deferrals, employer contributions, Roth contributions, loans, net earnings from self-employment, self-employment tax, foreign earned income exclusion, foreign tax credits, employees, business structure, foreign company ownership, provider access, reporting, investments, local tax, retirement account rules, currency and future residence depend on personal circumstances and may change.

US tax advice should be taken from a suitably qualified US tax adviser or CPA. Local tax, legal, business structuring, payroll and retirement plan advice should also be taken where relevant.

Financial planning should be coordinated with tax, legal, pension, investment, business owner and retirement planning advice where appropriate.

Do not open, fund, amend, borrow from or close a Solo 401(k) without reviewing tax, contribution, business structure, provider, reporting, investment and retirement planning implications.

Investing involves risk. Retirement account and investment values can fall as well as rise, and you may get back less than you invest.

Currency movements can affect the value of retirement accounts, contributions, withdrawals, tax liabilities and future spending.