Michael and Janine D. from Thousand Oaks, CA ask: Hi Mitch, my wife and I are strongly considering spending part of our retirement abroad, perhaps even investing in an apartment or a timeshare. Are there financial implications, whether they be banking, Social Security, taxes, or anything else, that we should be aware of?
Mitch’s Response:
It’s great to hear that you’re retiring. And it also sounds like you’re in planning mode for how to spend your time. Living abroad for part of the year sounds exciting.
There are a few very important factors and rules to be aware of, and I’ll share what I know below.
But my first piece of advice is to consult a tax professional about your specific situation and your plans – before you commit to them. The U.S. has tax treaties with some countries but not others, and the nature of the treaties can vary widely and change often. As the old saying goes, the two certainties in life are death and taxes, and moving abroad is not going to exempt you from filing U.S. tax returns or paying taxes in a foreign country. In some cases, you’ll have to pay both.1
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I’ll share some tax insights below, but let’s start with banking. It’s generally a smart idea to keep your assets in the U.S., in my view. It will allow you to maintain relationships with your existing bankers and advisors, and also to continue receiving the benefits that come with retirement accounts like 401(k)s and IRAs, which of course grow tax-deferred. In some cases, banks will drop customers that only have foreign addresses, so be sure to talk with your financial institutions about their rules and procedures.
If you decide to have bank accounts in both the U.S. and abroad, be sure to research fees for transactions you may use regularly, like ATM fees or wires. You should also check currency conversion rates, to make sure your dollars are going as far as they should abroad. And finally, you should consider credit cards that do not charge foreign transaction fees, which can sometimes be as high as 2%.
On the tax front, I want to be clear that I’m not a tax advisor or a tax specialist, and that you should consult a tax professional as you dig further. But some general things to know are that you will almost certainly be responsible for filing a U.S. tax return every year and that not doing so could result in penalties or worse. Filing a U.S. return does not mean that you’re free and clear in your new home country, though. You would need to check tax treaties between the foreign country and the U.S. and could need to file a return and pay taxes in the foreign country as well. These rules may surprise you as you research further, as there are scenarios where you could end up paying double taxes.
The final factor to consider is healthcare. Medicare generally does not cover foreign healthcare services, so moving abroad may mean having to obtain health insurance or some type of coverage in your new home country. Many developed countries have nationalized healthcare and will allow expats to sign on after time spent in the country. Or there may be private options to consider, depending on your needs.
The bottom line is that retiring abroad – while exciting in theory and likely in practice for those who love to travel – also comes with a great deal of planning. It can be easy to overlook important details about how to set up your banking relationships, healthcare coverage, and how to file taxes. Mistakes can be costly, so hiring professionals to help is probably a wise move.
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Disclosure
1 Wall Street Journal. May 23, 2023. https://www.wsj.com/articles/retirement-in-paradise-isnt-without-financial-headaches-98f06313?mod=djem10point
2 ZIM may amend or rescind the “8 Steps Towards a Stress-Free Retirement” guide for any reason and at ZIM’s discretion.
3 ZIM may amend or rescind the “8 Steps Towards a Stress-Free Retirement” guide for any reason and at ZIM’s discretion.
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