Retiring abroad is a dream for lots of people, and rightly so. The world is a vast, beautiful place, so why not spend your well-earned retirement wherever you see fit?
With all the good things that can come from living abroad, it's important to know that your tax situation could become more complex if you decide to retire abroad, mainly because you'll be dealing with U.S. tax laws and the tax laws of your new country of residence.
As a U.S. citizen, you're subjected to U.S. tax laws regardless of your country of residence. This is called citizen-based taxation, and the U.S. is one of two countries to follow this policy. Outside of that, here are four tax implications you should know about for retiring abroad.
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1. How Social Security benefits may be taxed
For many people, Social Security accounts for a large part of their retirement income. The U.S. has Social Security agreements with 30 countries that address how Social Security benefits will be taxed if you live there in retirement.
In many cases, they state that Social Security benefits will only be taxed in your country of residence. In other cases, they state that benefits are only taxed in the U.S. If the U.S. has a Social Security agreement with the country you plan to retire in, you'll need to check the specifics of it to understand how your benefits will be taxed.
For example, the treaty between the U.S. and Canada states that Social Security benefits are only taxable in the U.S. for American citizens living in Canada. The opposite is also true. Benefits are only taxable in Canada for Canadian citizens living in the U.S.
These Social Security agreements are on Social Security's International Agreement webpage.
2. How investments may be taxed
If you keep your brokerage account and continue owning U.S.-based stocks (which you probably should), you'll still be responsible for taxes on capital gains or dividend income. The same rules apply: If you've held the investments for a year or longer, it'll be taxed at your capital gains rate. You'll pay your regular income tax rate if you've held the investments for less than a year.
How you're taxed for investments in foreign stocks or assets will vary based on the country. Some countries with tax treaties with the U.S. prevent you from being taxed twice, but this isn't a guarantee for every country. In fact, most countries don't have a tax treaty with the U.S.
The U.K., for example, has a tax treaty with the U.S. that prevents double taxation on investments, but many African and Asian countries don't.
3. Retirement account rules could differ
The main benefit of various retirement accounts is the tax benefits that come with them. However, how taxes affect different retirement accounts can become more complex when you retire abroad (shocker).
Let's take a 401(k) and traditional IRA as examples. In the U.S., withdrawals from a 401(k) and traditional IRA are taxed as regular income, but Roth IRA withdrawals are tax-free. Unfortunately, your new country of residence may not recognize the tax advantage of a Roth IRA and may treat it as taxable income.
Since you contributed after-tax money to a Roth IRA, this could form a situation where you're essentially double-taxed.
4. The Foreign Earned Income Exclusion and Foreign Tax Credit
Many people retire but continue to earn income in various ways. The Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC) can help reduce (or eliminate) how much tax U.S. citizens owe on income earned abroad.
The FEIE allows you to exclude a certain amount of your foreign-earned income from U.S. taxes, while the FTC provides a dollar-for-dollar tax credit for taxes paid abroad.
For tax year 2023, the amount you can exclude under the FEIE is $120,000. The FEIE only applies to foreign earned income from work; it won't apply to your investment income or Social Security benefits.
The FTC can help prevent double taxation by allowing you a credit for taxes paid on income that doesn't qualify for the FEIE. Generally, you can only use the FTC to reduce how much you owe in U.S. taxes, not generate a tax refund. For example, if you have $1,000 that qualified and owe $5,000 in U.S. taxes, you'd now owe $4,000. If you were going to get a $2,000 refund, it wouldn't add on top of it.
Always know the implications
Knowing the tax implications of retiring abroad in different countries is critical because it could have tangible effects on how much you receive in retirement. Consulting with a tax professional specializing in international tax law can help you navigate the complexities to remain compliant with all relevant tax laws.
Proper planning ensures you can focus on what matters most: Enjoying your retirement.
