We consistently say on the podcast to do your research and to ask questions. This approach applies to the recruiting process and to all aspects of life as an international educator. From signing a lease on an apartment to buying a car to all that goes into finances, put in the time to research and ask questions of people “in the know” to help you make these important decisions!
If your school offers a retirement program, what are your options? We learned from our guest Dr. Stephen Boush that some schools offer the Roth 401(k) for American teachers. You can learn more by listening to episodes 2: International Teacher Finances: An Interview with Millionaire Teacher Andrew Hallam, 5: Much Ado about Money! An Interview with Dr. Stephen Boush of TIE TAX, and 16B. Demystifying Taxes & Investing for Americans with Dr. Jeff Devens.
After recording these episodes, I did some research to build my knowledge of Roth 401(k)s to support our guiding mantra of “eyes wide open” when it comes to living life as an international educator. I’m writing this post to help readers begin their own research efforts. My disclaimer is that I am not a financial planner and am not offering financial advice. I would like to direct you to resources and offer some considerations that might help guide your search.
Let’s start with a definition. Investopedia states,
“A Roth 401(k) is an employer-sponsored retirement savings account funded using after-tax dollars. This means that income tax is paid immediately on the earnings the employee deducts from each paycheck and deposits into the account. Withdrawals from the account are tax-free upon retirement.”
As a US citizen teaching internationally, your foreign-earned income exclusion for 2023 is USD 120,000, according to the IRS. Connecting to the Roth means you can put some of your salaries - tax-free under the income exclusion - into a school-provided Roth 401(k) to be invested through the plan’s investment offerings. Your investment will not be taxed for dividends or for capital gains annually. When you reach retirement age, there will be no taxes to pay, and you will be able to draw funds from the Roth.
How much can an international teacher contribute annually to a Roth 401(k)? According to Andrew Hallam, writing in 2019, “Teachers who are below the age of 50 can contribute USD 18,000 per calendar year. Teachers over 50 can contribute USD 24,000 per calendar year.”
Let’s take a look at the costs. According to Stephen, it costs more for international schools to administer a Roth 401(k) than for US-based schools because they are overseas. Thus, more parties are involved in administering it.
Does investing in the Roth 401(k) - with higher fees but no taxation - come out ahead over individually making the same investments but in taxable accounts - i.e., ETFs, Mutual Funds, etc.? According to Andrew Hallam, the higher fees over time lead to a lower return on your investment from the Roth 410 (k) compared to a taxable low-cost investment account. Read Andrew’s complete comparison here.
All of our podcast guests speaking about finances have pointed out that US citizens can only sign up for brokerage accounts with American providers - such as Vanguard, Fidelity, and Schwab - if they have a US address and don’t disclose that they are living overseas. Keep this in mind.
What are your comfort and knowledge levels regarding financial planning and investment choices? Would you benefit from working with a financial advisor?
How disciplined are you in making contributions to your investment portfolio?
How would investing in ETFs or mutual funds that put off regular dividends or consistently have capital gains affect whether the Roth 401(k) or regular taxable investment account provides higher returns?
Does your school match a portion of your contribution to the Roth 401(k)? This is a part of the equation because the matching might offset, to some degree, the extra fees paid.
Does your school cover some of the administrative costs of their Roth 401(k), or do the teachers pay these in full?
Do you have children who will attend university in the US? See Andrew’s point below.
If you already have a financial advisor, what is their take on having a Roth 401(K) as part of a diversified portfolio?
Do you see yourself returning to the US in the near future? If so, this probably means that your tax bracket will increase. How will being in a higher tax bracket affect the long-term earning potential of your Roth 401(k) compared to having those funds in a taxable brokerage account?
Would it make sense to at some point roll out of a Roth 401(k) into a regular Roth IRA – in order to reduce the fees you’ll be paying – while remaining an international educator? Is there a cost to doing this? Does a transfer jeopardize your standing with your US brokerage company? Should you perhaps wait until you repatriate to the US to make this transfer?
Here are some more considerations from Andrew’s article:
“I’m not saying international teachers shouldn’t contribute to a Roth 401(k). There are plenty of pros and cons. And people’s situations vary. For example, such money would be designated as a retirement account. As such, it wouldn’t jeopardize a parent’s chance of earning financial aid for their children’s education. And when international teachers leave their current employer, they might be able to roll over their Roth 401(k) into a low-cost IRA if their new employer doesn’t offer a Roth 401(k).
But these Roth 401(k)s are expensive. And they might not be as legally solid as those offered to stateside employees. Ask your provider this: “If the IRS challenges these things many years from now, will you legally stand by your Roth 401(k) for international teachers?” I asked the lawyer who represented one of these firms. He firmly said, “No.”
Hopefully, this blog post adds to your understanding of the Roth 401(k). Remember that in no way is there any intent on my part to provide financial advice. I think the most important step you can take is to follow Stephen’s and Jeff’s advice to ask questions – lots of questions – about your financial situation to the HR department at your school and – if you have a financial advisor – to seek out advice for your individual needs and situation.
Related Educators Going Global Resources:
The Kiplinger Personal Finance Website and Magazine has several articles on Roth 401(k)s.