Does your long-term life goal include retiring overseas? If so, you're not alone.
The prospect, however, raises questions. One of the biggest things people wonder about is how moving outside of the U.S. might impact Social Security benefits. Here's a rundown of the key things to know about how retiring abroad affects your current or future payments.
Social Security benefits may be taxed but generally aren't double-taxed
First and foremost: Yes, with a few exceptions, you can still collect Social Security retirement benefits you're eligible to receive when you're living overseas. There are some important details you'll need to know, though, if retiring abroad is your plan. Chief among them is how these payments are taxed.
The good news is that retired U.S. citizens living in a small handful of countries aren't required to pay any U.S. income tax on their Social Security benefits. As it stands right now, any eligible Social Security beneficiary residing in Canada, Egypt, Germany, Ireland, Israel, Romania, and the United Kingdom can collect U.S. Social Security without any U.S. tax liability. Any expat willing to become a citizen in Italy is also extended the same benefit. You'll need to consult with a tax advisor to find out to what extent the country in which you reside might tax those benefits.
Outside of those countries, things can change. It's possible that a portion of your Social Security benefits will be taxable by the Internal Revenue Service (IRS). Specifically, any single filer with reported total income of more than $25,000 per year or joint filers with reported income of more than $32,000 could pay a reduced amount of U.S. tax on their Social Security benefits, regardless of where they live.
To be clear, the income total in question isn't just Social Security payments. It includes other sources like investment gains, retirement-plan distributions, dividends, and interest payments, all of which still generate income that's taxable at the IRS regular tax rates.
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But what about paying taxes on your Social Security benefits to overseas tax authorities while living in that foreign country?
A handful of countries exempt U.S. citizens' Social Security income from their tax liability calculation altogether. Some of these places currently include Belize, Portugal, Panama, and Costa Rica.
As for other nations in which you may want to retire, the United States maintains so-called totalization agreements with many of them that prevent U.S. expats' income from being taxed by two different governmental tax authorities to the fullest extent possible. Moreover, in countries where income taxes (including taxes on Social Security income) are assessed by overseas tax authorities, those payments generally count as credit toward any U.S. tax bill.
In other words, your net taxes won't necessarily go up just by virtue of moving abroad when you retire. In some cases, they could even go down.
U.S. citizens living overseas should continue filing annual tax returns with the IRS, even if they don't owe any U.S. taxes. The IRS needs regular verification that you remain eligible for tax benefits like the Foreign Tax Credit and/or the Foreign Earned Income Exclusion, which prevent your income from being unnecessarily double-taxed.
Other considerations
While minimizing your tax liability in retirement is an important matter to consider, it's not the only one. Logistics plays a role in the decision, too. Specifically, you'll need a way of accessing your monthly Social Security payments when they're made.
Social Security no longer mails checks. Rather, the only two ways to receive retirement benefits is through electronic deposits into a bank account or by crediting a loadable debit card.
Each option has its pros and cons. For some retirees, bank accounts aren't a convenient way to handle money. For others, debit cards aren't always accepted. These inconveniences can become downright complicated when you're living overseas and your bank -- and bank account -- are still domiciled in the United States.
But that doesn't necessarily make either an impossible option. Most people can find a way to get their payments from here to there, so to speak. For instance, the Social Security Administration can make direct deposits to foreign banks that it has an international direct deposit agreement with. There are just fewer such institutions overseas than there are in the United States. Making these arrangements can take a bit of tinkering.
That being said, there are places where Social Security payments sometimes can't be collected under any circumstances, even if you're a U.S. citizen. Right now, those nations are Cuba and North Korea. If you're living in either one, you'll need to leave those countries to collect your benefits (which are still credited to you, even while you're not collecting).
Social Security also tends not to make payments to people residing in Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan, although some rare exceptions are made.
Perhaps the most important matter for prospective expats to think about, though, is this one: Social Security payments are made in U.S. dollars, which you'll then need to convert to your local currency. Exchange rates could work to your advantage but may also be disadvantageous. If you're living on a budget, this can prove to be a very stressful way to live as you won't be collecting a consistent amount of Social Security income every month.
It's not impossible
If any of these considerations discourage you from at least exploring the possibility of retiring overseas, don't let them! These are only meant to help you plan for the prospect.
Many retirees end up paying less in total taxes abroad than they would have had they remained in the United States. Many of these people also enjoy a lower cost of living and/or higher quality of life. A little planning and thinking now can get you much closer to your future dream retirement.
No matter where you intend to retire, the same mindset should apply -- that is, Social Security alone isn't likely to fund the lifestyle you want in your senior years. You'll want to save for retirement on your own, as well.
Your own savings, by the way, can be readily taken with you should you decide to make the move abroad. They may be enough to offset the Social Security's challenges you'll encounter when you retire overseas.
