What Is a Roth IRA in UK – Should You Include IRAs in Your Retirement Plan?

Written by Andrea Solana, CFP™

An important and often discussed element of a successful investment strategy for a US person living in the UK includes ensuring your investments are tax-efficient from both a US and UK perspective. When you are a US person paying tax in the UK, it’s crucial to examine the structure of both onshore and offshore assets. For example, investments in tax-transparent accounts like an individual or joint account, or a UK ISA (Individual Savings Account), should be carefully considered to avoid falling foul of US Passive Foreign Investment Company (PFIC) and UK Offshore Income Gains(OIG) rules, which could lead to unnecessary and disadvantageous tax charges.

Another important aspect of successful investing is taking advantage of various recognised US and UK tax-wrapped vehicles that provide tax deferral opportunities and offer greater flexibility in investment selection. By using different savings opportunities, you can build assets in different tax “buckets” — such as taxable, tax-deferred, and potentially tax-exempt assets — during your working life, providing flexibility on how you eventually choose to draw down your savings in retirement.

Within this context, much attention is often paid to the opportunities to save within UK pension vehicles, and the key considerations for a US person when reporting UK pensions from a US tax perspective. However, less attention is given to the opportunities available through US Individual Retirement Accounts (IRA accounts), which are also recognised in the UK.

For a US person still deemed to have US-sourced earned income during the tax year (which is typically the case for those claiming foreign tax credits or earning above the foreign earned income exclusion amounts), opportunities to contribute to a US IRA account often exist through either a Traditional IRA or a Roth IRA. In certain self-employment situations, a SEP IRA (not covered in this article) may also be available.

 The Benefits of Building IRA Savings

Taking advantage of opportunities to contribute to an IRA account plays a crucial role in building out comprehensive retirement plans, regardless of whether your planned retirement is in the US or the UK. For those wondering, what is a Roth IRA, it is important to understand how these accounts work. As a reminder, a Traditional IRA (where income thresholds are not exceeded) offers tax relief on contributions and tax-deferred growth while funds remain within the tax wrapper. A Roth IRA, on the other hand, offers no tax relief on contributions but provides tax-exempt growth and tax-free qualified distributions. Each year, where you have relevant sourced earned income, up to $7,000 (2025 limits) can be contributed into one of these plans (an additional catch-up contribution of $1,000 is available for those aged 50 or older). Consistent annual contributions and investment growth over time can accumulate into meaningful retirement balances that supplement your broader investment strategy.

For UK residents, there is no direct UK equivalent to Roth IRA, but understanding how these plans fit into your retirement goals is essential. The allowability and deductibility of any contributions are determined based on an individual’s US filing status and are subject to income limitations. For example, to add a full contribution directly to a Roth IRA, a single tax filer must have a modified adjusted gross income (MAGI) of less than $150,000, and a married filing jointly tax filer must have a MAGI of less than $236,000 in 2025. A married filing separate tax filer must have a MAGI of less than $10,000. However, there are no upper income limitations for individuals seeking to make non-deductible Traditional IRA contributions in a given year. This means that a contribution can be made without tax relief, but earnings on the contribution will grow tax-deferred. This original non-deductible contribution creates an after-tax basis within the plan, meaning only the earnings portion of the eventual distribution will be subject to income tax in the future. This is generally a more favourable outcome compared to scenarios where a UK excess pension contribution exceeds an individual’s annual allowance, resulting in taxable income both at contribution and at distribution in the UK.

For individuals unable to make direct Roth IRA contributions due to income levels but who also do not have other existing IRA balances, an opportunity arises to make ‘backdoor’ Roth IRA contributions. This involves making a current-year non-deductible Traditional IRA contribution of, say, $7,000, and immediately converting the balance to a Roth IRA via a Roth IRA conversion. As the original contribution did not receive tax relief, the conversion does not attract additional income tax, and the funds are transferred into the Roth IRA as though the contribution had been made directly. Hence the term ‘backdoor’ Roth IRA contribution. The key benefit of getting funds into a Roth IRA is that money held within this type of plan will be considered tax-exempt, provided qualified distributions are made in the future.

Regardless of whether savings are built up within a Traditional IRA or a Roth IRA, given that US pensions are recognised under the US/UK tax treaty, it is important to note that you do not need to be concerned about whether underlying investments are considered PFICs or OIGs. This generally offers more flexibility in investment choice compared with unwrapped taxable assets. Additionally, IRAs do not attract additional informational tax reporting requirements such as FBAR, Form 8938, or Form 3520 filings, as is generally required for UK pensions or other assets held outside of the US.

IRA Treatment at Drawdown

When it comes to retirement, IRA accounts are generally accessible for qualified distributions from age 59.5. They can be drawn down flexibly based on individual needs and circumstances. While Traditional IRAs have a required minimum distribution (RMD) that begins at age 73, Roth IRAs do not require RMDs at any age, offering greater flexibility in managing retirement income.

If you are living in the UK when you begin taking distributions, the US/UK tax treaty generally grants the country of residence (the UK) primary taxing rights over distributions. However, Roth IRAs are treated in a tax-exempt manner both in the US and the UK, making them an attractive vehicle for long-term retirement savings.

The Importance of US Pension Planning for US Persons in the UK

Whether you are accumulating assets in a Traditional IRA or a Roth IRA, it is important to remember that US pensions are recognised under the US-UK tax treaty, which generally offers more flexibility around investment choices compared to unwrapped taxable assets. Additionally, IRAs are not subject to additional informational tax reporting requirements such as FBAR, Form 8938, or Form 3520 filings (which are often required for UK pensions or other foreign assets).

In summary, for US citizens living in the UK, contributing to IRA accounts — particularly Roth IRAs — can provide significant long-term tax advantages. By incorporating US pension planning into your broader retirement strategy, you can maximise tax efficiencies and avoid pitfalls. To explore these options in the context of your individual situation, it’s important to seek advice from a wealth manager and tax adviser who is experienced in cross-border wealth planning.

The Legal Stuff

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