US Traditional IRA (Account Options)

This is an option with a big question mark, even if the question is answered favorably, it’s still relatively limited, but I wanted to include it in the list of account options to be comprehensive. I’d be interested in your thoughts about how you use it as an American in the UK, if you do.


US tax deductible, if you’re eligible, and tax deferred.

UK tax deferred at least, big question if it’s UK deductible.

If it’s not UK tax deductible, it’s fairly useless for most people, except as a means to a backdoor Roth contribution. I won’t cover the backdoor Roth here, but will go into that in the future.

The Big Question

Before explaining further, it’s worth going into this question up front: can you deduct contributions to your US Traditional IRA on your UK taxes.

Why is this so important? If you can’t deduct the contributions from your UK taxes, you’ll probably have enough Foreign Tax Credits from your UK taxes that the deduction on your US taxes doesn’t change anything (you still owe nothing to the US, typically, due to the FTCs). In that case, there’s no real advantage to a Traditional IRA – you’re better off with a Roth IRA in almost any case, even if you get there via the Traditional IRA.

Argument for UK Deductions

Paragraph 2 of Article 18 of the US/UK tax treaty says, in plain English, that for a person with a pension in the US but working in the UK, contributions to the US pension while working in the UK are deductible in the UK. If the Traditional IRA is a pension, Traditional IRA deductions by somebody working in the UK but with a pension in the US are deductible in the UK.

Arguments against UK Deductions
  1. The Savings Clause (Article 1 Paragraph 4) says that the UK can tax its residents as if the treaty didn’t exist, with a short list of exceptions. Paragraph 2 of Article 18 referenced above is not on that list of exemptions – therefore the UK can ignore it and you can’t deduct your IRA contributions.
  2. The Traditional IRA doesn’t have a UK counterpart “pension”, so it doesn’t count. I think this is the weaker of the two arguments – Traditional IRAs are on the list of products that the countries have agreed are pensions, and you could argue a SIPP is somewhat comparable.
Bottom Line

I can’t make this call definitively, although I’m leaning towards “not UK deductible” – if you really want to rely on a Traditional IRA being UK tax deductible, you probably should talk to a lawyer, or at least decide for yourself. For me, it’s just not useful enough to be worth the chance that it’s not deductible, so why take that chance?

  • The contribution limits are relatively low – if you want to make UK-deductible savings contributions, use a UK pension or SIPP. They have their own treaty questions, but I think they’re clearer.
  • The eligibility for US tax deductions is fairly limited (details below).
  • Put those together, and best case you’re making about $105k a year (married filing jointly), which is about £75,000, so you’re in the higher (40%) rate bracket for UK taxes. If you contribute the max $6,000, that’s a $2,400 (about £1,700) savings on your UK taxes, potentially double that if you and your spouse both contribute. I’m not going to turn up my nose at a “free” £1,700 every year (they tax you on the back end, of course), but given the uncertainty and the other options available, I just don’t see it as a strong option.

That said, the details below may help you do your own evaluation and see if a Traditional IRA is something you’re interested in. If you have a different interpretation, I’d also be very keen to hear it in the comments!


If it’s UK deductible, you’ll probably have this in the same priority position as a Roth IRA – you have to pick one (or split the limit between them).


You must have earned income – foreign earned income is fine, as long as you don’t exclude it from your US taxes via the Foreign Earned Income Exclusion. The Foreign Tax Credit is typically the better option, anyway.

There are somewhat restrictive income limits if you want the contributions to be deductible. For 2021, they deduction starts to phase out at $65k (single), $105k (married filing jointly), and $0 (married filing separately – yes, that’s zero dollars, it’s pretty much useless if you’re in this situation). These assume you’re covered by a retirement plan at work, but since the UK requires employers to provide a pension, you probably are. You can still contribute if you’re above these limits, but can’t deduct the contributions on your taxes.

You may find it challenging to keep an IRA with a foreign address, and may find your investment options limited.

You probably can’t start contributing to a Traditional IRA from the UK if you didn’t open it before leaving the US, at least not if you want to deduct the contributions on UK taxes based on the US/UK tax treaty (some people also think the tax deferral advantage in the UK also depends on having the IRA open before moving, but I think that’s an overly restrictive definition – more details in my Roth IRA post at the bottom). Definitely worth some professional advice if you want to try this – it’s not 100% certain, but I tend to agree with this interpretation.

Investment Options

You can invest in anything you want, that your broker will sell you (possibly no US mutual funds or ETFs, due to the UK/EU MiFID/PRIIP rules). No concerns about HMRC reporting funds.

This is almost as good as a Roth IRA for any of your weird, super high risk/high return investments. You’ll eventually pay taxes on your 1000x returns when you withdraw, but it’s deferred until then.

Risk & Return

Entirely dependent on what you invest in. Capital at risk, no guarantees.

Withdrawal Options

Earnings can be withdrawn at 59 1/2 or older and you’ve held the account 5 years or more, without penalties. Under 59 1/2 is typically penalized, with some exceptions for home purchases, education, disability, and death. If you need to do this, you’ll want to check in to how the UK treats early withdrawals.

You have to start taking withdrawals, called Minimum Required Distributions, from age 72 – the IRS wants to tax you some day!

Contribution Limit

$6,000 per year, per person in 2021. $7,000 if you’re over 50. The amount is shared with a Roth IRA.


These will depend on your broker, but typically the account is free or nearly free, with transaction fees depending on what you invest in (there are likely some free mutual fund and/or ETF options).

There will also be fees on the underlying funds, if you go for mutual funds or ETFs. You typically want to try to keep these low, under about 0.1% for an index fund.

UK Tax Treatment – Contributions

See the Big Question up above – maybe UK tax deductible, but I lean towards not.

UK Tax Treatment – Withdrawals

The UK recognizes the US tax advantages, so taxes on capital gains, dividends, and interest are deferred until withdrawal. Withdrawals are treated as income and are fully taxable.

US Tax Treatment – Contributions

Contributions are deductible on your US taxes, subject to the eligibility limits.

US Tax Treatment – Withdrawals

All withdrawals are taxed as normal income, both contributions and gains.

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