Retiring abroad while retaining your US citizenship may seem like a dream. Without careful planning and help from international tax advisors, unexpected foreign taxes can put a sizeable dent in your retirement income. While foreign taxes will always be complicated, tax advisors can help retirees navigate the critical issues. There is something undeniably appealing about the idea of living an expatriate adventure in retirement. But relocating to another country is not easy. You will need to consider a range of factors, from your destination country’s political stability to the logistics of managing your assets from afar.
Social Security benefits are largely tax-free in the United States. But a country with a less nuanced tax regime may tax those benefits like regular income. For this reason, the U.S. has tax treaties with certain nations to avoid double taxation. The terms of each treaty differ, but the objective is to offset foreign taxation through U.S. tax credits. In some cases, a treaty allows only one country to tax income.
When retiring abroad, individuals should consider retaining a tax advisor in their home country, as well as the host country. Retirees should discuss with their advisors on how the following factors impact how their retirement funds are taxed:
Country of retirement – Keep in mind the tax rates of the country before committing to retire there. For instance, The Netherlands and Switzerland are beautiful places to spend in retirement, but they have heavy tax regimes that could affect your quality of life.
Citizenship – Citizenship affects which foreign taxes an individual is subject to. For instance, all U.S. citizens and Green Card holders must pay U.S. taxes on worldwide income.
Treaties – To encourage foreign trade and investments, some nations, like the countries that comprise the U.K., have more favorable treaties with the U.S. than others. As long as a foreigner does not deposit his or her income in a U.K.-based bank account, any income withdrawn from retirement funds is tax-free.
Types of accounts – Generally, treaties excuse accounts such as pensions and 401(k) plans from double taxation. But individual retirement accounts (IRAs) are so unique to the U.S. that they often end up being taxed twice, even in countries with treaties.
Currency value – An unfavorable exchange rate can have a significant impact on the value of money that is converted from domestic accounts into foreign currency. Therefore, it is crucial that retirees talk with tax advisors and foreign exchange providers about strategies to preserve their funds in times of both favorable and unfavorable exchange rates. On an ongoing basis, individuals can also sign up for market-rate alerts via an online foreign exchange service, in order to keep tabs on a country’s currency value.
Consider spending a few months in a potential destination before making a permanent move. There is a hidden layer of complexity to almost all aspects of retirement planning. Hence, ensure you check with your tax advisor on how the tax situation in your chosen destination can impact your portfolio and lifestyle.
Do not wait until your retirement to consult a tax professional. Call us at GKM today and find out what your options are.
