4 Tax and Planning Tips for Retiring Abroad


The idea of spending retirement years in a new country may sound romantic, but Americans considering it need to prepare for the potential pitfalls that can damage their finances and estate plans.

By planning ahead, guided by professionals who specialize in expat issues, retirees should be able to avoid unpleasant and costly surprises, according to two experts from Creative Planning.

David Kuenzi, Creative Planning partner and international wealth management director, and Hanna Kennedy, international wealth manager, hosted a webcast Monday in which they outlined several risks and offered advice for protecting finances, health care and estate plans.

Here are their four major tips on preparing to retire abroad:

1. Explore the tax implications.

If ignored, the intricacies of U.S. and foreign tax laws can severely hit the bottom line for Americans residing abroad, Kuenzi indicated.

The U.S. is the only country in the world that taxes people based on citizenship, so taking up residence elsewhere doesn’t give Americans a pass from the Internal Revenue Service. U.S. citizens abroad often face dual taxation from their home country and the nation where they live, he noted.

“You will face a uniquely complex tax environment” but with careful planning can avoid that dual burden, Kuenzi said.

“Understand your potential tax obligations before you make a move overseas,” he advised. “Understand that mistakes made here may be extremely costly.”

He offered some specifics to keep in mind:

Americans living abroad can usually claim foreign tax credits to partly or totally offset their U.S. tax bills. In addition, more than 60 countries have tax treaties with the U.S., which can help as well, Kuenzi said, noting these agreements help coordinate taxation between the countries and cover pension and retirement income taxation.

Some countries have special tax programs that minimize local taxation for U.S. retirees, Kuenzi noted.

“Each country’s tax rules are unique and each one will interact with your U.S. taxes in slightly different ways,” he said. 

Tax treaties in most countries don’t view Roth retirement plan income as tax-exempt, so retirees whose Roth accounts may be taxed should consider withdrawing those funds before moving, delaying distributions until returning to the U.S. or leaving them in their estates to pass along to heirs in the U.S., he added.

No tax treaty covers health savings accounts or college 529 savings plans, which will be fully taxable in countries that tax worldwide income, he also noted. And some countries tax mutual funds and ETFs, so investors should work with an advisor who understands U.S. and foreign tax rules, Kuenzi suggested.

Investors also might consider terminating their state domicile so they can avoid state tax obligations there, he said. This is easier in some states than in others, he added.

2. Safeguard estate plans.

Retirees should be prepared to update their estate plans before heading overseas, according to Kennedy, as doing nothing will increase the risk that assets won’t be passed to the intended heirs, and that the estate could be tied up in probate abroad and potentially incur unnecessarily high taxes.

Long-term residence in a new country likely means a client’s estate plan will be subject to new laws and regulations, she noted.

If a retiree has been living permanently outside the U.S. when they die, it may be impossible to go through U.S. probate, she explained. The estate instead may go through probate in the country where the person lived, using a locally prepared will that encompasses their worldwide assets, including the U.S., said Kennedy.

While Americans commonly use trusts to circumvent probate, this will rarely work as intended for those who die while living abroad, she added. Most countries will require local probate, which may trigger punitive tax obligations, according to Kennedy.

Similarly, investors expecting to pass along their 401(k) assets by designating beneficiaries on a financial firm’s forms may also leave intended heirs without their inheritance. Financial institutions might not recognize the beneficiary designations and pass the money to heirs if the retiree was living abroad, she explained.

Meanwhile, the U.S. enjoys the highest estate tax exemption, while many other countries have much lower exemption levels and may impose a tax on any inheritance a retiree might receive from parents or other relatives in the U.S., according to Kennedy.

3. Plan for Social Security and health care coverage.

The good news for retirees is that they can receive Social Security benefits almost everywhere outside the country, and usually, with some exceptions, the payments are taxed only by the U.S., according to Kennedy.

Moreover, the Social Security Administration is familiar with wiring money to local bank accounts overseas, she said.

Medicare is a different story, she said. The government health care program for Americans 65 and older provides services only in the U.S., but retirees may want to keep paying premiums if they plan to return to or seek treatment in the U.S., Kennedy added.

American retirees abroad should consider buying local or expat coverage, including buying into national health care programs, she said; they should be aware, however, that private expat coverage doesn’t pay for treatment provided in the U.S.

 4. Assemble an expert team.

Retirees will need to consider the need to file taxes in a new country, and to find the right bank and the right brokerage as well, Kuenzi noted.

“Put a financial team together before you depart,” he said.

Kuenzi recommended that investors work with a fiduciary financial advisor who specializes in issues that U.S. expats face, and a tax preparer who specializes in tax issues facing Americans retiring outside the U.S.

Photo: Adobe Stock


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