Retiring Abroad on U.S. Retirement Income? The FEIE Won't Help

The Foreign Earned Income Exclusion applies only to earned income. Retirement income is not earned income. So the FEIE does nothing for a retiree living abroad.

That is the whole trap in two sentences. The rest of this post is why it works that way and what tools replace the one you thought you had.

Does the Foreign Earned Income Exclusion cover pension or Social Security income?

No. The FEIE under §911 excludes only "foreign earned income," which §911(b)(1)(A) defines as amounts received for personal services performed abroad. Wages and self-employment income qualify. Distributions from a pension, an IRA, or a 401(k) do not, because you are not performing services to receive them.

§911(b)(1)(B) makes this explicit. It lists items that are not foreign earned income, and pensions and annuities are on that list. Social Security benefits are excluded too.

So the retiree who moved to Lisbon or Chiang Mai and assumed the $130,000 exclusion (2025, indexed under §911(b)(2)(D)) would wipe out the tax bill is in for a surprise. That number is real. It just applies to a category of income the retiree no longer has.

Quick sort of what counts:

Income type	Foreign earned income under §911?
Wages for work performed abroad	Yes
Self-employment abroad	Yes (earned portion)
Pension or annuity	No
Traditional IRA / 401(k) distribution	No
Roth distribution	No (and usually not taxable anyway)
Social Security	No
Rental income	No (passive)
Dividends, interest, capital gains	No (passive)

If your income is on the bottom half of that table, the FEIE is not your tool.

Then how do you avoid double tax on U.S. retirement income abroad?

Three tools, in this order of usual usefulness: the foreign tax credit, an income tax treaty, and careful timing. None of them is the FEIE, and that is the point.

The U.S. taxes its citizens and green card holders on worldwide income no matter where they live. §1 does not have a "moved away" exception. So a retiree in France still files a Form 1040 on the same income France may also tax. The mechanisms below keep the same dollar from being taxed twice.

How does the foreign tax credit work for retirement income?

The foreign tax credit under §901 gives you a dollar-for-dollar U.S. credit for income tax you paid to a foreign country on the same income. You claim it on Form 1116.

This is usually the main event for retirees abroad. Live somewhere with an income tax at or above U.S. rates, and the credit often zeroes out the U.S. tax on that income. You still file. You may owe nothing.

Points that decide whether the credit actually helps:

• The credit is limited to the U.S. tax on that foreign-source income (§904). Pay foreign tax at a higher rate than the U.S. rate and the excess does not refund. It carries: back one year, forward ten, under §904(c).
• The income has to be foreign-source to soak up the foreign tax under the §904 limit. U.S.-source pension income is, by default, U.S.-source, which creates a mismatch. Treaties often fix the sourcing.
• You cannot double dip. Income excluded under the FEIE cannot also generate a foreign tax credit (§911(d)(6)). Not a concern here, since the FEIE does not reach this income anyway.

What do tax treaties do that the credit does not?

A treaty reassigns which country gets to tax a given kind of income, and sometimes hands exclusive rights to one side. That can eliminate double tax at the source instead of cleaning it up after the fact with a credit.

Treaties are specific. Read the one that governs your country. But some recurring patterns:

• Many U.S. treaties assign Social Security to the country of residence only. Under the U.S.-Germany treaty, for example, U.S. Social Security paid to a German resident is taxable only by Germany. The U.S. gives it up.
• Private pensions are frequently taxable only in the residence country under the pension article. Government (civil service) pensions usually stay with the paying country.
• Treaty benefits collide with the saving clause, the provision that lets the U.S. tax its own citizens as if the treaty did not exist. Every U.S. treaty has one. Most carve out exceptions to it, and whether a given article survives the saving clause is the question that decides your return.

Claiming a treaty position that overrides U.S. law means Form 8833. Do not skip it. §6712 imposes a $1,000 penalty per failure to disclose a treaty-based return position (higher for entities).

Can a Roth or Roth conversion help before you go?

Sometimes, and the window matters. A Roth pays out tax-free under U.S. law (§408A), and many treaties respect that character abroad. Converting before you establish foreign residence can lock in a known U.S. rate and produce income the destination country may agree not to tax.

Two cautions. First, not every country honors the Roth's tax-free status; some tax the distribution as ordinary income regardless of U.S. treatment. Second, a conversion is a taxable event now. Run the arithmetic before assuming a conversion beats leaving the money where it is.

What still trips people up

The FEIE is the headline mistake, but the same move creates quieter problems.

• Foreign pension plans are rarely "qualified" for U.S. purposes. Contributions and inside buildup can be currently taxable to a U.S. person, and the plan may be a foreign trust or hold PFICs, dragging in Form 3520, Form 3520-A, and Form 8621. If you are new to PFIC exposure, our post on the PFIC trap in foreign mutual funds covers the mechanics.
• Foreign accounts holding the retirement money still trigger the FBAR (FinCEN Form 114) over $10,000 aggregate and Form 8938 over the FATCA thresholds.
• State tax can follow you if you never cut ties. California in particular does not care that you left the country.

A retired U.S. Navy civilian employee, single, moved to Portugal and lived on a federal civil-service pension plus a modest traditional IRA. He filed his first year abroad claiming the FEIE against the pension. The IRS adjusted it: pension income is not earned income, the exclusion was denied, and a balance due appeared with interest. The fix was not the FEIE at all. His civil-service pension, being a government pension, stayed U.S.-taxable under the treaty, but Portugal's NHR regime and the foreign tax credit handled the IRA distributions, and a Form 8833 disclosure squared the treaty positions. Same money, correct tools, near-zero double tax. The wrong tool had cost him a year of interest and an amended return.

The rule to carry: the FEIE is for people still working. Retire, and your toolbox changes to the foreign tax credit, the treaty, and timing. Tax positions turn on your specific facts and the specific treaty; confirm both before you file, and loop in a cross-border advisor or attorney where residency and estate questions overlap.

Sources

• IRC §1 (worldwide taxation of U.S. persons)
• IRC §911(b)(1)(A), §911(b)(1)(B), §911(b)(2)(D), §911(d)(6) (foreign earned income exclusion, definitions, 2025 exclusion cap)
• IRC §901, §904, §904(c) (foreign tax credit and limitation, carryover)
• IRC §408A (Roth accounts)
• IRC §6712 (penalty for failure to disclose treaty-based position)
• Form 1116 (Foreign Tax Credit)
• Form 8833 (Treaty-Based Return Position Disclosure)
• Forms 3520 / 3520-A (foreign trusts), Form 8621 (PFIC)
• FinCEN Form 114 (FBAR), Form 8938 (FATCA)
• U.S.-Germany Income Tax Treaty (Social Security and pension articles; saving clause)