Retiring in Paradise Has Its Financial Problems. Make These Moves First.

This Week's Quote:

“Make each day your masterpiece.”

-John Wooden

Retiring abroad requires a lot of planning and often a good accountant.

When people dream of jetting off to the French countryside or a tropical island to begin a new chapter in retirement, tax and banking policies don’t usually feature prominently in the fantasy. But pulling off a move overseas in retirement requires navigating financial rules in both the U.S. and one’s new home. Mistakes are easy to make and can be costly, financial advisers with international clients say.

Some Americans living abroad inadvertently run afoul of the Internal Revenue Service and get hit with penalties and interest. Others are cut off by their U.S. banks and brokerage firms. Retirees also can run into trouble accessing or paying for healthcare.

“Expats have to be motivated and persistent problem solvers,” said Jonathan Lachowitz, chairman of American Citizens Abroad, a nonprofit focused on tax and other issues that Americans living abroad face.

He recommends joining expat groups and online forums to find people who have already made the move. Banking, immigration and tax policies can change frequently, so double check everything you hear, said Lachowitz, who also is the founder of White Lighthouse Investment Management of Lexington, Mass., and Lausanne, Switzerland.

Here’s what to research before retiring abroad.

Bank and retirement accounts

Americans who retire abroad should generally keep most of their money in the U.S., advisers said.

That way they can continue to take advantage of individual retirement accounts and 401(k)s, which offer tax advantages, Lachowitz said.

Some U.S. banks and brokerage firms drop customers with foreign addresses, so call your financial institutions and ask about their policies. If you have to move your money, do so before leaving the U.S.

When opening a bank account in the country you are relocating to, compare fees for wire transfers and ATM transactions.

Before leaving the U.S., shop for credit cards without foreign transaction fees, which can amount to about 2% of a transaction’s value.

Make sure you are getting competitive currency-conversion rates. Services including Wise and Moneycorp currently have low markups, Lachowitz said.

When abroad, he often uses a debit card from Charles Schwab, which offers competitive exchange rates and refunds his ATM fees.

Taxes

Your income is subject to U.S. income tax regardless of where you live. If you don’t file a U.S. tax return, you could face penalties and interest, and even criminal prosecution.

Expats may owe tax to both the U.S. and the country they live in.

Consider a retired couple who sells stock for a $100,000 profit. Assuming the couple’s new home country has a 10% capital-gains tax rate, they would pay $10,000 to that government.

They can then claim a $10,000 tax credit on their U.S. tax return. But since the U.S. has a top statutory long-term capital-gains tax rate of 20%, even with the credit they could still owe the IRS another $10,000.

Tax treaties the U.S. has with more than 60 countries might not completely protect expats from taxes that can arise as a result of differences between their new home country’s tax system and that of the U.S. For example, some treaties protect the tax-free status of Roth retirement accounts while other treaties don’t, said David Kuenzi, an adviser at Creative Planning International.

Most expats also have to submit a report of Foreign Bank and Financial Accounts, or FBAR, to the Treasury Department. This is required in years in which the cumulative balance of your foreign financial accounts exceeds $10,000 at any time during the year. The penalties for willfully failing to do so can be the greater of $100,000 or half of the account value for every year you failed to file.

Individuals with more than $200,000 and couples with more than $400,000 in foreign financial assets on the last day of the year—or with more than a respective $300,000 or $600,000 at any time during the year—must report them to the IRS with Form 8938.

To owe no state income tax, you must “break your domicile,” said Kuenzi, which means showing you have no intention to return to that state. Clients often sell their homes and cancel their driver’s licenses and voter registrations to satisfy the requirement, he said.

You may need to rewrite your will

Make plans to have a new will and estate plan that conforms to laws of your new home, Kuenzi said.

Under U.S. tax laws, individuals with an estate that exceeds $12.92 million (or $25.84 million for couples) are liable for U.S. estate tax above those thresholds, even if they live in another country.

But most other countries impose an inheritance tax instead, and at far lower levels.

In France, for example, each child can receive from a parent about $108,000 tax-free. Above that, they pay an inheritance tax of up to 45%, depending on the amount.

Inheritance tax is due even if your money is held in U.S.-based accounts and your heirs live in the U.S., said Kuenzi. Many European countries don’t recognize U.S. trusts.

The cost of healthcare

Medicare doesn’t generally cover services outside the U.S., so those moving abroad must secure health insurance elsewhere.

Many countries with public healthcare systems let expatriates join after a waiting period for little to no cost.

Some countries with public healthcare systems also have private hospitals. To help cover private services, Adam Bates, an insurance broker who specializes in international policies, recommends an international health insurance policy.

He often advises clients aged 65 and older who move overseas to pay premiums for Medicare, too. Otherwise, they may get hit with hefty penalties and face monthslong coverage gaps if they return to the U.S. and want to enroll.

Credit goes to Anne Tergesen. Published May 23, 2023 in the Wall Street Journal.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author, Mark Bradstreet

-until next week