Dec 5, 2025
1. What is an IRA and why does it remain relevant while living in Costa Rica?
An Individual Retirement Account (IRA) is a retirement savings vehicle regulated by the Internal Revenue Service (IRS), designed to provide tax advantages for long-term retirement planning. The two main types—Traditional IRA and Roth IRA—are fully accessible to expatriates, provided they meet eligibility rules.
Importantly, IRAs do not lose their validity or tax benefits simply because the taxpayer lives outside the United States. For U.S. citizens residing in Costa Rica, an IRA is often a cornerstone of dollar-denominated retirement planning and long-term financial security.
2. Key eligibility considerations: how the FEIE impacts contributions
To contribute to an IRA, the IRS requires that the taxpayer have earned income. This becomes challenging for expatriates because the FEIE allows the exclusion of up to US$130,000 of foreign-earned income (2025 limit). If the exclusion is applied in full, the IRS considers that the taxpayer has no eligible earned income available for IRA contributions.
This requires expatriates to evaluate carefully:
how much income to exclude under the FEIE,
whether the Foreign Tax Credit (FTC) is more advantageous than the exclusion, and
how to balance global tax exposure with retirement savings capacity.
A common mistake among expatriates is applying the FEIE automatically, without realizing that doing so may eliminate their ability to contribute to a Traditional or Roth IRA for that tax year.
3. Benefits for U.S. expatriates residing in Costa Rica
For expatriates living in Costa Rica, IRAs offer several strategic advantages:
Savings in U.S. dollars, reducing exposure to local currency volatility.
Tax-efficient growth (deferral under a Traditional IRA and tax-free growth under a Roth IRA).
Flexibility when planning to remain abroad or potentially return to the U.S.
Compatibility with Costa Rica’s territorial tax system, which only taxes Costa Rican-source income.
Many U.S. employers with personnel based in Costa Rica include IRAs as part of their international compensation policies, reinforcing their value for long-term planning.
4. Risks and points of attention
As with any cross-border tax regime, maintaining an IRA as an expatriate involves specific risks:
Full FEIE application may prevent IRA contributions.
Some U.S. custodians restrict account servicing for clients residing outside the U.S.
Expatriates must maintain full IRS compliance (Form 1040, Form 2555, Form 1116, FBAR, FATCA/8938).
Roth conversions must be analyzed carefully to avoid unnecessary tax events.
At EAS LATAM, we often observe confusion regarding the belief that relocation to Costa Rica reduces or eliminates U.S. tax obligations. This is incorrect. IRAs remain valid and beneficial, but their proper management requires technical oversight.
5. Practical considerations for expatriates living in Costa Rica
Any U.S. expatriate living in Costa Rica who maintains or plans to open an IRA should review the following:
Tax residency and FEIE vs. FTC strategy under U.S. rules.
Sufficient earned income to support contributions.
Availability of a compliant U.S. custodian willing to service non-U.S. residents.
Currency and diversification strategy, balancing Costa Rican assets with U.S. retirement holdings.
Long-term retirement planning, including whether a Roth IRA aligns with their expected future tax bracket.
Proper analysis can significantly reduce global tax exposure while strengthening retirement planning.
For U.S. citizens residing in Costa Rica, IRAs remain a powerful component of long-term financial and tax planning, provided they understand the interaction between U.S. taxation and Costa Rica’s territorial system. A disciplined approach—balancing FEIE, FTC, and IRA contribution strategies—can optimize retirement savings, minimize tax risk, and ensure compliance in both jurisdictions.
At EAS LATAM, we recommend that expatriates evaluate annually the viability of IRA contributions, the optimal IRA structure for their circumstances, and the implications for U.S. tax reporting. A proactive and technically sound strategy is essential to avoid compliance issues and to fully leverage the benefits available under U.S. retirement rules.