| ||||||||||||
For many people, retirement offers the promise of more time to enjoy what’s familiar: The home where they’ve had their scrambled eggs and coffee most mornings for the last 38 years, the garden where they’ve grown every type of tomato in the seed catalog, the park where they’ve trained for so many 5Ks and half marathons that they know exactly which parts get muddy when it rains.
Others see it as the chance of a lifetime to change everything completely. They want to wake up to different songbirds in the morning, admire intriguing flowers in the courtyard, and stroll past buildings drenched in vibrant blues and pinks as they refresh their perspective, develop new friendships and pursue the invigorating challenge of speaking and thinking in another language. Ideally, all of this will be accompanied by the opportunity to stretch retirement dollars further.
There’s a fly in the ointment, of course: taxes. Here’s an overview of what you’ll need to figure out if you want to retire abroad, plus a list of resources that may help.
Americans can’t escape the tax man
As a U.S. citizen, moving overseas does not relieve you of your U.S. tax obligations. You may still be required to file an annual income tax return with the IRS, especially if you’re drawing Social Security or taking retirement account distributions.
“A U.S. citizen planning to retire abroad is still subject to U.S. federal income tax, and sometimes state tax, on their worldwide income and should consult with an expert who knows the specific foreign country’s tax law and how it applies to U.S. citizens living in that country,” said Ed Borgstrom, a Certified Public Accountant and the owner of Borgstrom Accountancy Corporation in San Ramon, California, in an email interview. “The U.S. citizen should also consult with an expert in U.S. tax law, as their U.S. tax reporting will likely become more complicated.”
Whether you’re required to file a tax return in a foreign country and how much you’ll owe will depend on the laws of that country and whether that country has an income or estate tax treaty with the United States. Even if you renounce your U.S. citizenship, you may still be subject to tax on U.S.-based assets, such as 401(k)s and other retirement accounts.
How 401(k) and IRA distributions are taxed overseas
In the United States, traditional IRAs and 401(k)s let you save pretax dollars for retirement and pay taxes on the distributions. Roth IRAs and Roth 401(k)s let you pay taxes when you contribute and enjoy tax-free distributions in retirement. Both offer tax-deferred growth in the meantime.
The same rules don’t always apply overseas.
First, you should know that foreign countries often refer to American retirement accounts as pensions, whereas in the United States, a pension usually refers specifically to guaranteed retirement income paid by a former employer under a defined benefit plan.
Second, the taxes you’ll owe will depend on your retirement destination’s laws, whether it has a tax treaty with the United States, and the details of that treaty. These treaties try to prevent citizens and residents of each country from paying taxes twice on the same assets or income.
Retirement distribution taxes vary by country
To get an idea of how things can shake out, here are a few country-specific examples of how your retirement distributions may be taxed abroad.
“Roth IRA distributions are not taxable in Spain and Portugal,” said Antonio Rodríguez de Peñaranda, CEO of U.S. Tax Consultants, a company with offices in Spain and Portugal that has helped U.S. expats file taxes since 1965.
However, traditional IRA distributions are taxable. In Portugal, the first 4,104 euro are exempt from taxation, after which progressive income tax rates apply if you’re a resident. Spain has no such exemption, and distributions are taxable at progressive regular earned income tax rates.
“401(k) distributions are treated the same way as traditional IRA distributions in both Spain and Portugal,” Rodríguez said.
Portugal had a tax status for non-habitual residents from 2009 through 2023 that provided generous tax exemptions for certain foreign residents during their first 10 years in the country. The Portuguese government discontinued this program for most people relocating to Portugal on or after January 1, 2024.
More examples …
- Canada does not tax Roth IRA distributions that would not be taxable in the United States.
- Americans who become French residents will not face French taxes on U.S. retirement accounts.
- Then there’s Denmark, which taxes the yearly increase in IRA values at capital gains tax rates, but does not tax distributions.
Some countries, such as Belize, Costa Rica, and Malaysia, only tax locally sourced income. So, if you opened a local business in Ambergris Caye, you could owe income tax to Belize (and the United States, because it taxes Americans’ worldwide income). But your Roth IRA distributions would be tax-free, just like they would be if you were living in the United States.
“Most non-U.S. countries tax 401(k) distributions similarly to traditional IRA distributions — only when distributions are received,” said Mike Wallace, CEO at Greenback Expat Tax Services, in an email interview.
These examples highlight the importance of doing some serious tax planning before you make a big retirement move. For example, if you’ll be relying on Roth distributions, you may need to choose a country that won’t tax that income (or the account’s value) — or determine how to minimize taxes on that money while still retiring in your destination of choice.
Social Security
U.S. citizens can still receive Social Security payments when living outside the United States, with the exception of a few countries (Azerbaijan, Belarus, Cuba, Kazakhstan, Kyrgyzstan, North Korea, Tajikistan, Turkmenistan, and Uzbekistan).
You will pay U.S. tax on your benefits as if you lived in the United States. You may have to pay federal income tax on up to 85 percent of your Social Security benefits. If your income is below $25,000 as an individual filer or $32,000 as a married filer, you may only pay tax on up to 50 percent of your benefits.
What about foreign taxation of your Social Security payments? As with retirement accounts, it will depend on the country.
For example, France’s tax treaty with the United States stipulates that Americans living in France only owe tax on their Social Security benefits to the United States.
Wealth taxes on Americans residing abroad
Some countries don’t just tax income. Under certain circumstances, they tax the assets you own — like the value of financial accounts or real estate — even if you didn’t generate income from them or sell them. Merely owning enough assets can subject you to annual taxes on their value.
For example, Spain has worldwide asset reporting requirements for residents. If you own a house in the United States but you’re a tax resident of Spain, you may owe a wealth tax if the net value of certain assets — such as real estate, savings, and investments — exceeds a certain threshold. Whether you owe this tax and what the thresholds and tax rates are depends on which of Spain’s autonomous communities you live in.
Norway and Switzerland also impose net wealth taxes on what essentially amounts to net worth, while France and Italy impose a wealth tax only on certain assets. Portugal does not have a wealth tax.
Receiving an inheritance
“The tax implications of receiving an inheritance while living abroad vary significantly by country,” Wallace said. “Many countries don’t tax inheritances, but several, particularly in Europe and some in Asia and South America, do impose such taxes.”
Inheritance taxes can be unfamiliar territory for Americans. The United States has gift taxes and estate taxes, but they always apply to the giver or the estate, not to the recipient. (Estate taxes do, of course, ultimately fall on recipients.) (Related: 6 ways life insurance can be used for estate planning)
For example, in Spain and Portugal, regardless of nationality, inheritance tax is paid by the person receiving the inheritance, said Rodríguez, who is an expert in U.S. fiscal law for expats and a registered tax return preparer and acceptance agent with the IRS. Spanish residents of the autonomous communities of Madrid and Andalusia are exempt. Other communities impose taxes based on the relationship between the heir and the deceased. Rates can be as high as 30 percent.
In Portugal, spouses, common-law partners, children, parents, grandparents, and grandchildren are exempt from paying inheritance tax, Rodríguez explained. The remaining beneficiaries must pay 10 percent of the inherited value.
Other countries where you might pay taxes on an inheritance from the United States include Germany and Japan.
What’s more, the American strategy of using trusts to reduce taxes may not work overseas. Your retirement country may view them differently or not recognize them at all.
“The U.S. has estate and gift tax treaties with 15 countries that might mitigate tax burdens,” Wallace said, noting that laws vary, so it’s a good idea to consult a local tax advisor.
U.S. reporting requirements
You’ll need to get familiar with all the U.S. laws that apply to your finances when you live abroad, including the foreign tax credit, foreign earned income exclusion, Foreign Account Tax Compliance Act (FATCA), and Foreign Bank and Financial Account (FBAR) reporting.
“Information reports and special forms will normally have to be filed annually with both the IRS and the U.S. Treasury,” Borgstrom said. “There are significant U.S. penalties for people and businesses that are unaware of their reporting obligations, and the IRS and U.S. Treasury have a long reach when it comes to third-party reporting and enforcement abroad.”
Where to get help with taxes if you want to retire abroad
Expat tax preparation and advising is considered a specialty. You may need to hire separate tax professionals for your U.S. expat taxes and your overseas taxes.
You might start by consulting your current financial professional, who may be able to tap into a professional or corporate network.
Another place to look for help with U.S. taxes is the National Association of Enrolled Agents directory, which lets you search for preparers who specialize in helping expats.
Navigating your new country’s tax code — one that hasn’t necessarily been translated into English — usually means finding a foreign tax preparer you can trust.
For foreign taxes, the U.S. Embassy website can sometimes help with locating tax experts in your destination country. In most instances, you first navigate to the appropriate country page, then go to the menu and select U.S. Citizen Services, Local Resources, Additional Information for U.S. Citizens, Local U.S. Tax Consultants (or Tax Advisors, or Public Accountants and Tax Advisors). In some cases, you’ll need to select Other English-Speaking Services before you’ll find the tax consultant list.
This resource doesn’t appear to be available for every country — Italy has it, Portugal doesn’t, for example — and the U.S. government stresses that a tax professional’s inclusion on the list is not an endorsement of their abilities or reputation. Still, it can be a good starting point.
And there are private companies and services. For example, PwC’s worldwide tax summaries for individuals can be a good place to get an overview of a country’s tax laws. They aren’t the easiest for the layperson to understand, but they can be more comprehensible than reading U.S. and foreign tax treaties (plus, they’re in English).
Additionally, Greenback Expat Tax Services provides individualized tax help as well as dozens of country guides summarizing U.S. expat tax concerns.
Conclusion
Taxes can be complicated enough when you’re living in the United States. Add foreign residency to the mix and things get far more complex.
Working with a tax professional who specializes in serving U.S. expats — ideally, ones who have retired abroad — can help you avoid major mistakes that could have costly tax consequences in more than one country. The tax implications of your move could mean the difference between stretching your savings further than they could ever go in the United States — the goal of many retirees abroad — and depleting your savings prematurely.
Although MassMutual does not provide tax advice, our financial professionals can be an important part of your retirement accumulation and distribution strategies and can work with your tax advisor as needed.
Discover more from MassMutual…
Married to a non-citizen? 3 estate planning traps
How to emotionally prepare for retirement with your spouse
What to do one year before retirement checklist
_______________________________