When you exclude income from federal tax using form 2555, you are also excluding that income from eligibility to go into your traditional or Roth IRA.
If you are unaware of this, and contribute anyway, you will are liable for a 6% excise tax on the amount. To avoid this, withdraw the erroneous contribution before your tax filing deadline, and report any interest earned on that amount as taxable interest.
The excise tax is annual; that is, if you made an erroneous contribution three years ago, then you owe 18%.
In some circumstances, you may be able to make a contribution even when claiming the Foreign Earned Income exclusion:
- You earned more than the exclusion's upper limit ($85,700 for tax year 2007). The excess amount is available for IRA contributions.
- You earned some money while in the USA, making that amount ineligible for the exclusion.
- You are a US government employee. Federal employees are not eligible for the exclusion and thus are free to make IRA contributions based on their full income.