You cannot contribute to your IRA if almost all your taxable compensation is excluded via Foreign Earned Income Exclusion/Form 2555. Remember, Form 2555/FEIE This form is also not a required expat tax form – you can use either Form 2555 or Form 1116 (as used in your tax package) to offset US taxes.
Instead, it may be more beneficial to claim the FTC (Foreign Tax Credit) since it can bring better results than the FEIE and still allow you to contribute to your IRA as a US citizen abroad.
As an American abroad, when you claim the Foreign Tax Credit, you will declare your net self-employment income or wages as taxable. Both will allow you to open up and contribute to an IRA account in the US. Plus, the Foreign Tax Credit gives a tax reduction in the United States from any tax amount paid to the country you work and/or reside in, so it can still eliminate your US tax liability to $0 as FEIE would generally do.
Saving for retirement as an American abroad by having an IRA helps with financial security for your future. As you are coming into retirement, you know you will have money to live off of due to your efforts in early investing.
Learn more about IRS contribution limits and retirements topics or about revoking the Foreign Earned Income Exclusion.
