Contributions to retirement plans are not all made equal
Retirement, and how one will fund their retirement, should be at the forefront of most people. We’ll aim to explain the differences between different types of retirement plans below.
This will best be shown with a working example. Peter, Katie, and Mary all live and work outside the U.S. for one full year. All three receive $100k earned income (ie a job) & $25k of unearned income (investments, rentals, etc). All three utilize the foreign earned income exclusion (FEIE).
The main difference between the three is that they have different sources of income, and contribute to different retirement plans.
Peter receives a salary of $100k from a U.S. employer. He also receives $25K of unearned income from U.S. investments. Peter makes a contribution of $15K to his employer-provided 401K plan.
Katie is self-employed. Her net income from self-employment was $100K, of which amount she contributed $15K to a U.S. SEP. Katie receives $25K of unearned income.
Whole Story at TFX.