This post was updated on February 15th, 2023
Many Americans dream of retiring abroad. Who wouldn’t want to spend their golden years in a retirement-friendly country with a rich culture, gorgeous climate, and more affordable cost of living? But when it comes to the specifics of how to retire abroad, it’s easy to get confused.
That’s where Bright!Tax comes in. With years of experience helping American expats all over the world file their taxes, we know all about the tax implications that come with retiring abroad.
Overview: Expat Taxes 101
First, the not-so-great news: Americans who retire abroad are still on the hook to file their US taxes annually as long as they meet the reporting threshold, no matter where they reside or earn money. Fortunately, they can often eliminate their IRS bill entirely through tax breaks and treaties (which we’ll dive into later).
June 15th – 2023 tax filing deadline for US expats
The standard IRS tax filing deadline is April 15th, however, expats get an automatic tax-filing extension until June 15th. In 2023, federal returns for US-Americans based in the US are due April 18th on account of the 15th falling on a Saturday.
October 15th – another 2023 tax filing deadline extension for US expats
Of additional interest to expats may be a second extension until October 15th, however, this extension is not automatic and must be requested by filing Form 4868 which can (and should) be done electronically.
In addition to filing a federal income tax return, expats may also have to report or file:
- The Foreign Bank Account Report (FBAR): Mandatory for expats with over $10,000 total in offshore bank or investment accounts (including pensions with a cash balance)
- Form 8938: Mandatory for expats with offshore financial assets worth over $200,000 per person at the end of the year or $300,000 per person at any point in the year
- State & local taxes: While most places don’t require former residents who have moved abroad to pay taxes, there are exceptions, so it’s worth looking into
Fines and penalties for late, missing, or inaccurate tax returns can be steep, so getting your tax return done right and on time is essential.
It’s never too soon to plan for retirement
The key to successfully retiring abroad is planning ahead. Ideally, you’ll have already saved up a decent-sized nest egg over the years — one that has accumulated compound interest over time in your retirement accounts (US, foreign, or both). You should also have an idea of what your post-retirement finances will look like, including how much you will:
- Have saved up by that point
- Receive via retirement plan/pension/social security payments
- Need for one-time moving expenses (e.g. plane tickets, down payment on a home)
- Spend per month, adjusted for the local cost of living.
With a holistic view of your future finances, you’ll have a better understanding of whether you’re on track.
US pensions and retirement abroad
Receiving distributions from qualified US retirement plans (like traditional pensions, IRAs, and 401(k) plans, among others) while living in another country is typically a straightforward process, with payments taxed the same abroad as they would be in the US. (Withdrawals from Roth IRAs, however, would not be taxed, as contributions are taxed upfront.)
If you’re eligible for US social security payments, you will still be able to receive them abroad in the vast majority of countries (with a few exceptions). If you do live in an affected country, though, you can recoup any missed payments by moving to a country where the US does send social security payments.
As in the US, up to 85% of social security benefits received abroad may be subject to federal income tax. They may also be subject to taxation by foreign governments, depending on where you reside/earn income.
What are portable benefits?
Portable benefits refer to funds that have been paid into an employer-sponsored plan, such as 401(k)s and 403(b)s, that can be transferred into a new retirement plan not associated with your previous employer, such as an IRA.
When it comes to managing these benefits, you generally have three options:
- Roll the funds over from a US-based account to a foreign one
- Withdraw funds from a US-based account and deposit them into a foreign retirement account
- Manage your US-based account from abroad.
Managing a US bank account from abroad can be tricky
US-based banks have been known to lock accounts with foreign addresses associated with their client accounts, so it may be worth scheduling a consultation with an expat tax professional prior to moving abroad to discuss the best options for you.
While accessing your US bank from another country can be cumbersome, there are benefits to maintaining it. From a tax standpoint, doing so is typically the best strategy for expats, as overseas rollovers are difficult (if not impossible) while withdrawing funds a) triggers penalties before retirement age and b) counts as taxable income, possibly in both the US and your country of residence.
Foreign pensions and retirement abroad
If you’ve already legally worked or resided abroad for some time, you may qualify for a foreign pension or retirement plan in addition to, or instead of, a US one. This could include:
- A pension/annuity plan, or trust provided to you by a foreign employer
- Foreign social security payments
- Foreign insurance payments.
There are a few potential challenges you can run into when receiving foreign pension or retirement plan payouts:
- They may trigger mandatory FBAR or Form 8938 filings if they meet the reporting thresholds
- They may be classified as Passive Foreign Investment Companies (PFICs), which are taxed at the maximum capital gains rate of 37%
- They are often considered taxable worldwide income by the US — generally calculated as the gross distribution minus the cost — even if they aren’t in the country where they’re paid out
Read More: Foreign Pensions & US Taxes For Expats
Retiring abroad – quick tips for expats
Fortunately for US-Americans retiring abroad, there are a number of breaks and measures that can mitigate their tax liability on income from retirement plans, pensions, and social security payouts.
Tax Treaties – know your expat tax rights
The US has tax treaties in place with a number of different countries which are designed to prevent double taxation. Unfortunately, a tricky clause means that the IRS often acts as if no treaty were in place at all. If you can benefit from a tax treaty, claim it on Form 8833. If not, you may be better off pursuing one of the other options below.
The Foreign Tax Credit (FTC) – avoid getting double taxed
A commonly-used provision, the Foreign Tax Credit allows you to subtract what you have paid in taxes to a foreign government from what you owe the US government. This can often completely eliminate any tax liability you have associated with foreign-taxed income, or even provide you with leftover credits that can be applied to a future tax year.
The Foreign Earned Income Exclusion (FEIE) – know how much you can exclude
The FEIE allows qualified expats to exclude a certain amount of their income from taxation. The amount increases a little bit each year due to inflation, but for the 2022 tax year (aka the taxes you’ll pay in 2023), it’s $112,000 per person. A couple of things worth noting:
- You can’t apply the FTC and FEIE to the same income
- If you use the FEIE to exclude all of your income from taxation for one year, you can’t contribute any of that income toward an IRA
The right strategy for you will depend heavily on your unique circumstances, so when in doubt, consult with a tax professional.
Streamlined Filing Compliance Procedures – catch up on tax filing with $0 in penalties
If you unknowingly fell behind on your US taxes while abroad, you may be able to catch up penalty-free through an IRS amnesty program called the Streamlined Procedure. This requires you to file your last three tax returns and six FBARs (if/as required), pay any back taxes due, and self-certify that your previous non-compliance was unintentional.
Retire abroad confidently with Bright!Tax
Whether you’re based in the US and planning a future move across the pond or already living in another country, Bright!Tax is here to help you with the tax implications of retiring abroad. We’ll do the heavy lifting when it comes to minimizing your tax liability and preparing your return so that you can focus on what matters most — planning your next big adventure.
Reach out now to speak with one of our CPAs!