Ep 35: Guided By The Stars No More: A Roadmap To Retiring Abroad! Part 2
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In Part 1 of this podcast, we discussed figuring out your "why", for wanting to retire abroad, the residency/visa requirements, and the practical aspects of moving overseas.
In Part 2 of this episode, we answer specific tax and financial questions. Some examples of the questions (amongst others) that we answer here are:-
Do I still need to file U.S. taxes when overseas, and what does that entail? What about State taxes?
How do I access my retirement income from overseas? How do I get my RMDs?
Will my custodian allow a foreign address? How do I transfer my funds from the U.S.?
Should I roll over my 401k to a rollover IRA before I leave the U.S.?
Will I have enough SS credits to claim social security from abroad?
Should I buy a home overseas?
What about healthcare expenses? How do I deal with that?
Are there other countries you should consider besides the usual?
Episode Links & Resources
Ep 23: Receiving Social Security From Overseas: Answering FAQs
Are you Tax-compliant With Your Overseas Assets? - Free Guide - Scroll to the bottom of the page.
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The speakers' views and opinions discussed in this episode should not be considered financial, tax, or legal advice. Consult your advisor for any legal, cross-border tax, and financial advice.
Be sure to join the conversation by visiting our page The International Money Cafe
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Speaker 1 (00:06):
Welcome to the International Money Cafe Podcast, the show where we filter out the noise on cross-border taxes, finances, and life in the us. I'm your host Jen, me from Certified Financial Planner, founder and owner of Elgon Financial Advisors,
Speaker 2 (00:21):
And I'm your host, man, Nadi, enrolled agent, owner and founder of M and Tax and Business Services. Join us on this journey as we explore the unique challenges faced by inbound outbound families and businesses on taxes, compliance, and financial planning. Let's get to the show.
Speaker 1 (00:43):
We are back with another episode of the International Money Cafe podcast. In today's episode, which is we're calling Exit the US part two, we are going to revisit a topic that we started on a few weeks ago where we talked a lot about what it takes to retire abroad. One of the things man and I talked a lot about after the elections was that the search for how do I retire abroad went up by something like 1500%. This seems to be a topic that a lot of people are interested in. So a quick recap of episode one or part one of this show, of this episode we talked about, talked about the three groups of people retiring abroad. We talked about people like us, man, Sinai, who grew up elsewhere. We've now lived in the US for a long time, and now we are ready to retire back home, whatever home is.
Recapping Roadmap to Retiring Part 1
Speaker 1 (01:52):
We also talked about people who may be whacked overseas at some point, and of course we're talking about US tax residents. Now they want to go back to that country. And then there was the third group, which is people that just visited this country as a tourist and now they want to actually move back. Now for each one of those groups, we did address the fact that there are a lot of things you need to take into consideration. One, what's your motivation for wanting to retire abroad? That's going to be so key because that's what's going to make you stay on the path even when you run into different challenges. And there's going to be many. Two, we talked about how do you choose the country that you end up retiring to? Part of this is what kind of a visa do you need? What are the residency requirements? What kind of income do you need? And then we talked about the practical steps needed to prepare for the move. In today's episode, we're going to talk about taxes, retirement income accounts in the US and that type of thing. And we figured the best way to address this is actually take all the questions we've been getting back from all our listeners, and there's a lot of questions and dive into some of those questions. Mana, what question do you want to answer first?
Do You Continue to File Taxes in the US if you Retire Abroad?
Speaker 2 (03:32):
I know, so the first one that I'm going to answer, the big one, which is, do you have to continue to file taxes in the US even if you retire abroad? And the answer to that is yes, if you are a US citizen or a green card holder, and if you remember we talk about this on our other episodes, the US has a citizenship based taxation system. No matter where you live, as long as you are a US citizen or a green card holder, you need to file your US taxes. And this means your tax obligations don't end and some of your fbar and FATCA reporting obligations also do not end. One thing about filing taxes is if you live abroad, your filing deadline is different from if you lived in the US you get two more months, which is June 15th is your new deadline.
Speaker 2 (04:42):
Extensions are still available, but only up until October 15th, so it's not six months from June 15th, it's still six months from April 15th. So you can extend your returns, but you need to file it by October 15th. You can possibly extend it further to December 15th, but only under very special circumstances. And remember, you also may have to file taxes in the country that now you live in and are a resident of. So be aware of that. Having said that, that was one of the big questions that we got.
What if I Go Back to Work After I Move Abroad?
And then the other one was, what if I get back to work after I move abroad? Remember, when you are retiring abroad, if you are on a so-called retirement visa from the country where you've moved, there may be clauses in the visa about your ability to work. So you may have to keep that in mind. And also, we did address double taxation in another episode of ours, which was, I think it was episode 13 between a rock and a hard place. So there are ways to mitigate double taxation if you happen to work abroad. So we'll definitely link that episode in our show notes. Those were the two big questions, Jane, that we had from our listeners, and I hope we answered that one.
Speaker 1 (06:17):
I think you have. And what's so cool is I keep saying you're the tax person in this relationship, so I'm very happy to let you deal with the tax questions. So okay, I'm going to answer more of a financial question that I've seen.
How Do I access Retirement Income From Abroad?
So the question goes something like this, okay, I've retired, I'm now living abroad, how do I access my retirement income? And here's my answer. One, as a US tax resident, nothing has changed. And what I mean by nothing has changed, you still own the same account. If there are any RMDs, this is required. Minimum distributions, they still apply. You still have beneficiaries on this account. We'll probably talk a little bit more about that in another episode. You still have access to your funds, you still own them. The thing that's going to change and that we want everybody to be very careful about is some custodians or some brokerages in the US put restrictions on having folks with outside addresses.
Speaker 1 (07:34):
If you have a foreign address, putting it on some of these custodian's accounts means they're likely to restrict the account. Some of them will even go ahead and close the account. So what we want to say is, before you leave the country, before you retire overseas, let's make sure that your money is at a custodian. And I know for example, show up or interactive brokers, custodians that allow you to have a foreign address on the account. And then as far as transferring the money, so let's assume now it's time for your RMDs, you're taking the money. The easiest way we find to do that is you take it out of, let's say your retirement account, your IRA, your 401k, put it into your brokerage account, like a taxable account or your US bank account. And then from there you can transfer the money to wherever you are.
Transferring Finances
Speaker 1 (08:32):
And in terms of transfer, this is probably one of the easier ones. You can use services like wise or you can use let's say an FX currency broker. If you're taking a whole lot of money, you can do a bank to bank transfer or you can use other apps. So yes, you will be able to transfer your money from the US to wherever you are again, because remember, you're still a US tax resident. None of that cycle is broken right now. If you have other income sources, let's say for example, rental income, interest dividends, that sort of thing, again, you'd be able to get the money, but remember the question man answered at the beginning, you still need to file your US taxes. Another question along the same line that I've been asked is, before I retire, before I move overseas, should I roll over my 401k into let's say a rollover IRA?
If I Retire Overseas, Should I roll over my 401K?
Speaker 1 (09:37):
This is one where the answer is, it depends. Okay? The things you want to think about is one, are you going to roll that over to a custodian who's not going to allow you to have an account? Does that make sense? So you're at X, Y, Z, you decide I'm going to roll the money out of the X, Y, Z custodian into another custodian check on that. The other thing would be this same custodian by law, if you have a 401k and it's over a certain amount of money, they're not going to close that account as long as it's a 401k. But if it's a brokerage account or an IRA or a Roth, they may close that account. So check on that before you decide to roll it over. And then if you have, let's say a government pension, we know you can roll some of this into rollover IRAs, but this is where we warn you before you make the rollover talk to somebody who deals with cross border taxes and finances, because by doing that, you could actually lose some tax treaty benefits, some taxation protection.
Speaker 1 (10:55):
So this is probably one manasa that I think I want us to come back to and really talk about the whole idea of rollovers, exactly what do we do when we leave the US with our account? Yeah, I think it's going to make a great episode. And then finally, if you are of qualifying age, you can apply for social security benefits. The social security website offers a tool that will allow you to check for eligibility while living overseas. And lucky you, we've talked a lot about this episode 23 applying for social security as an American abroad. Anything else you want to add to that? Mana?
Applying for Social Security
Speaker 2 (11:40):
Yeah, no, no. The episode 23 actually covers quite a bit about applying for social security. I think that covers that. So yeah, moving on to the next frequently asked question that we saw on our list was again, coming back to taxes, will I have to continue to file taxes for the state where I lived before I left this question? Typical accountant fashion will have to have a, it depends answer to it. Your previous US state of residence might still require you to file tax returns. So there's a whole lot of factors that go into this. And to Jane's point earlier, we may have to do a totally in other new episode on that, but happy to do it. But to answer it here today in terms of being retired and living abroad, what about your state taxes based on the state where you lived and whether you still have domicile in that state, you may still be required to file taxes for that state.
Speaker 2 (12:51):
For example, we had a client who was domiciled in California and they were looking to move to a non-tax state like Texas, but California came back and they did want to tax them on certain income because it was earned while they were residents of California. That's just one example of why you might end up continuing to file taxes for a state. And then also a lot of states in the US will continue to tax you on the income that is sourced to that state. So let's say you retired abroad, but you left behind a rental property, say in the state of Virginia or California or New York or wherever, Michigan, they will continue to look for taxing that income because it is now sourced to that state. So even though you are a non-resident, you may still have taxes that you owe.
Speaker 1 (13:59):
Maybe explain this a little bit more. So I live in Texas right now. I have a property I'm renting out in California. I move abroad, I will be filing taxes for Texas State. But what you're saying is I will need to do California state taxes as well. Is that accurate?
Speaker 2 (14:23):
Yes, that's right. Okay.
Speaker 1 (14:25):
Okay.
Speaker 2 (14:25):
And thanks for asking that. If anybody has the same question now you know that you may have moved out to a non-tax state before you moved abroad, but because now you have income from that other state, you still have a filing obligation. Okay? Also, many states do not recognize the federal level foreign tax credits and the treaty benefits that Jane was talking about earlier. If you are domiciled in a certain state where you may have to file taxes or you continue to file taxes, so these states may not give you that foreign tax credit that you are paying on the same income to the country where you live now. So be aware of that and you may have to plan for it, especially if the state is a high taxing state. That's that. Consider establishing residents in a nont taxing state where we just gave you an example of it before moving abroad, and that could be something that could help you out if let's say you did not have any more income from any state or sourced in from the US anymore. But those examples are few and far in between. So yeah, that was a question about continuing to file state taxes even if you live abroad. Jane,
Speaker 1 (15:51):
I think what I'm hearing you say is, and we've sort of talked about this, don't wake up tomorrow and decide to go, we need to plan. You need to bring the right people into your planning and that's going to help you have an easier, smoother transition.
Speaker 2 (16:11):
Yes,
Tax Treaties Abroad
Speaker 1 (16:12):
Definitely. Okay, let me take the next one. You've already alluded to this. You mentioned tax treaties. As soon as we start talking about moving abroad, the question of tax treaties come up, double tax avoidance agreements. And in fact, the question somebody asked last week is, okay, what's the objective of the tax treaties if I'm moving overseas? Okay, the US has tax treaties with many countries, I think maybe around 70, 80 or something like that. And the whole idea of these tax treaties is to help you avoid double taxation. What basically means is you have income in x, y, Z country and then you're living in a b, C country. Both countries want to tax you on that income, the double tax avoidance treaty, and it's kind of un mouthful. So the tax treaty ensures that you don't get taxed twice on that same income. One of the things that I find interesting is, for example, Kenya does not have a tax treaty with the us, but it does have a tax treaty with other countries.
Speaker 1 (17:30):
You just need to look at the two countries, the payer to see who has the tax treaty and exactly what does that tax three DC can happen in one of the other countries. But the whole idea is really you wouldn't get taxed on the same income twice, but it's a really good idea to probably get somebody to walk you through what all these documentations meet. And then the other one that we've seen along with the tax treaty question is are there countries where your social security is exempt from US tax treaties? I think what I'm going to do on this, let's take a quick short break for a special announcement and then when we come back, we'll jump you to that particular question, actually have you take that and the next question that comes along with the social security,
Speaker 2 (18:25):
Hey, dear, I am C listener, let me tell you a little story. So coincidentally, when I started my practice, it was the same year in which FATCA was passed into law. So if you don't know this, FATCA stands for Foreign Account Tax Compliance Act. This is when the government started to crack down on those who had financial assets overseas and were not compliant in disclosing these funds to the US government. The fencing fbar filing requirement has been around since 1970, since the Bank Secrecy Act was passed. But well, even though it has been more than 10 years since FATCA was passed and definitely a few decades since the BSA, we still have many, many US taxpayers who may have a filing requirement but are completely unaware of it. I'm talking about that joint account with your dad with a Wolf 10 K back home. So this is in fact our most frequently asked question.
Speaker 2 (19:44):
And for this reason, Jane and I put together this comprehensive free ebook, which goes over the most important compliance requirements for overseas financial assets. We want you, dear IMC listener, to have this ebook completely free. All you need to do is go to our website, www.theimcafe.com, scroll to the bottom of our homepage, enter your first name and email address, and you will be able to download this really handy ebook. And while you're on our brand new website, feel free to look around and let us know what you think of it. Share our lovely, cool new website with your friends and family. Now what are you waiting for? Go get your free and fabulous download. Welcome back. We are answering frequently asked questions about and financial implications for US citizens or green card holders if they have decided to retire outside the us. Coming back to our mailbag, where we left off earlier was this question, will I have enough social security credits to claim social security benefits if I worked overseas at some point?
International Social Security Agreement
Speaker 2 (21:17):
This is kind of alluding to what Jane was talking about earlier, which was the International Social Security Agreements and if social securities exempt from US taxes, if you had worked in a country which has a totalization agreement with the us, then we look at this question in one way, but let's stop here and quickly take a look at what a totalization agreement is. So a totalization agreement is the International Social Security Agreement, which a country has with the us and basically this agreement helps fill gaps in benefit protection for those people who may have divided their careers between the US and another country. The social security taxes paid in the other country will be counted towards your US Social Security benefit calculation. Now, we are getting into this territory where of course this gets really complex. Under this agreement, those workers who may qualify for partial US and or foreign benefits, they are able to combine or what is called totalize coverage credits from both the countries.
What If I Don’t Have enough Social Security Coverage to Qualify for benefits?
Speaker 2 (22:58):
Most or almost all of these totalization agreements require that you at least have six quarters of credits in order to be able to totalize. Another question that comes up is, what if I do not have enough Social Security coverage to qualify for these benefits? Social Security Administration will count periods of coverage that the worker has earned under the Social Security Program of this country with which the US has an agreement. This will hold true even for those who are self-employed and who have paid social security taxes to that country. And quickly here, if you remember, even if you live abroad and you have self-employment income, most of the times you do all self-employment tax, which is social security and Medicare tax to the us. That's what happens if you're self-employed. Documentation is very, very important in these cases and this should have already happened now that you're looking at retiring and drawing social security benefits.
Speaker 2 (24:14):
If you are planning on doing that down the road, then definitely keep in mind that documentation is important and this is a certificate of coverage that you can apply for yourself if you're self-employed or your employer can provide to you. And this is usually obtained from the Social Security Administration. The next question you may ask based on this is what if I worked in a country which does not have a totalization agreement with the us? In that case, unfortunately, you should have earned enough work credits in the US to be able to qualify for social security benefits, which is usually 40 calendar quarters. Those are some of the questions about social security benefits and totalization agreements. Jane,
Speaker 1 (25:09):
I love the complexity of that. I know
Speaker 2 (25:13):
Nerds
Challenges of Retiring Overseas
Speaker 1 (25:13):
That are, I know. Let's do this for the next couple questions. Let's make it, well, I dunno if it's going to get easier, but anyway, let's address a few other questions that we've seen. So this one is around and for this jumping at any point, what are the challenges that might likely to face as I move overseas to retire? I'm just going to continue with the money theme and I'll think of two challenges. And you can think of other challenges as I talk.
Overseas Reporting of Assets
One of them is what we call overseas reporting of assets. So fatca, which is Foreign Accounts Tax Compliance Act, a lot of people are already aware of this. The issue is it can complicate dealings with financial institutions in your new country. So when it comes to fatca, what it means is, for example, I think people are familiar with FBA because we've talked a lot about them.
Speaker 1 (26:14):
If you have many overseas, your balance is 10 K or more. You need to report that if you have other financial assets, you need to report them to IRS. But what happens, and this is where the complication comes in, the US or the Treasury via FATCA, requires foreign beings to report assets by US citizens to the IRS. I've had a conversation with CID and they said, oh, how will I know? What I've realized is when you go to open an account, a new smell, that's the only way I can think of it. Even a little bit like you are a US citizen or you associated with you as the local banks, just assume you are plain US tax resident. We don't want to deal with this. We just want to make sure we are going to report you. And the reason why some of them don't want to deal with it, if they don't report to IRS, for example, on the fba, there could be a penalty of up to 30% on the foreign institution.
Speaker 1 (27:25):
If they don't want to have to deal with it, they may be like, you smell, you sound like an American, we don't want to deal with you. The other thing we've realized is there's some countries that simply don't want to open accounts for US citizens in their country, again, because they don't want to have to deal with the complexities that comes with having us tax residents within their ecosystem.
Opening Accounts and Restricted Access
And then the other thing you may find, and that's a whole different thing, it may require a lot of investigation to figure out what banks will agree to open the accounts for you. The other issue we've seen is there are some US financial institutions that will restrict access from abroad. I think we already alluded to that when we talked about custodians. So it's a big challenge. And so what you want to do is really investigate some of this. This is where it does help sometimes to be a member of all these expat groups that you see online because some of them have already dealt with that. Let's see, what other challenge do you want to address? We still have some time.
Speaker 2 (28:38):
Of course. Absolutely Jane. But before we go on to the next question, especially with the access to the US funds and the bank and all of that, some of these visas or the country to even get residency in that country, you may have to open a bank account. So that kind of is a double-edged sword there, right?
Difficulties You’ll Face When Moving Aborad
The next question that we were looking at was somebody said, how many difficulties do I have to face if I decided to move abroad? Now of course, that is something very unique to the country where you're planning to go and your mindset and all that, which we are not going to get into because this, we are focusing on tax and financial implications. So from that point of view, a couple of things that I want to reference is a home. You have to have a place of stay.
Buying or Renting a Home Abroad
Speaker 2 (29:34):
So the dilemma there is should you buy or should you rent a home. Now, honestly, that's a huge commitment if you are going to buy a house in a foreign country. I know if I went to Jane and I asked her, I totally trust her with my financial planning and I said, Jane, what should I do? Then I know that she would probably say, Hey, think about all of these expenses that will go into maintaining that house. How much money will you need to buy that house? How will you be able to sell it and how will you be able to sell it? And in some countries we have found out that you may need to hold this real estate through a corporation that has been formed in that country. You may not be able to, or rather, the title of the property cannot be made to you as a person.
Healthcare Options Abroad
Speaker 2 (30:33):
So it will be given to that foreign corporation. Think about all of the ramifications of that. So that's the one. And the other one, and again we have alluded to this before in our part one of the series, but the healthcare options when it comes to healthcare options, all of these financial implications come into place. Are you going to just pay those expenses out of pocket? Are you going to buy health insurance in that country? How expensive is that? What are the healthcare costs? And there might be some countries where you can qualify for healthcare just by establishing residency or the visa might require you to have healthcare insurance. And maybe another way of looking at this is, okay, if you are planning for a big procedure and as you're growing older, you may have to come back to the US and retain or rather keep your Medicare and then come back to the US for any major procedures. So those are the two things that I thought were really interesting when we were looking at that question, Jane.
Speaker 1 (31:42):
Yeah. And then on top of that, it's moving to another country is a big deal and we talk about this as people that have actually moved from other countries to the US and what I find is as we kind of move on in time, I think we sometimes forget what a challenge it was. But we are reminded constantly when we talk to people that have just moved to the US and they're talking about all the challenges. So it's a big deal to move to another country, to retire overseas, and it's not something to be taken lightly, but it's something that's exciting. So there's a lot that you need to take into consideration. I think we alluded to some of this in episode in part one, culture, language, bureaucracy, these a lot. The plan is really planned as early as you can, especially when it comes to the Visa's residency, pretty much everything.
Do your Research Ahead of Time
Speaker 1 (32:44):
Do your research ahead of time, and I think we said this, visit the place a couple times as many times as possible and make sure you are addressing everything. One of the challenge I did want to actually point out is the idea that you retire overseas and you are leaving your family back in the US with grandkids or something like that. Take into consideration what it would take to go back and forth between the two countries. We do this with Manasa all the time. To go home to a home country, it takes us, I think it's like over 25 hours, right? It's doable. We just want you to be aware of it, take it into consideration as you make this moves. It is a very rewarding experience to live in another country. And I think it's one that if you get the opportunity, you absolutely should go for it. Okay. One other one, and I dunno if we want to address it right now, maybe we'll do a different episode on this. There was a question about relinquishing your US citizenship. Let's save this one I think for a completely different episode because there's a lot that goes into it. I did want to come to the last one where Cindy said to us, and maybe Mana you'll take this one, are there other countries we should be considering besides the usual European countries that we are hearing about? Do you want to take that one?
Speaker 2 (34:21):
Of course, because I love that question. I was kind of digitally traveling to all these countries when we were looking this up. So the question was what other countries outside of Europe that I can retire to? So yes, there are many countries that would welcome you if you wanted to go there. There was Kenya, there was South Africa, Columbia, Croatia, Costa Rica, Panama, Dominic Republic, Ireland, and Peru. Some of these have really great visas for US citizens. They are retirement visas or long stay visas where your initial investment is not a lot, maybe a little bit of adjustment with language and culture would be needed. But then we looked at Kenya and we got all excited, right? Yes. Yeah, so definitely looking at that one. Yeah,
Speaker 1 (35:24):
Yeah.
Speaker 2 (35:25):
Dear listener, we had so much. We know that there's a lot more here that we have to explore because like Jane said earlier, retiring abroad or moving abroad, which we have done, we came from a different country to the us the mindset that the grass is greener on the other side might lead you to explore retiring abroad, but that might not be true in every case. Having said that, we conclude today's episode. We'll be coming back with a lot more information and a lot more episodes based off of all these questions that we've got. And we do ask you to visit our website. We still have our freebie over there, so please download it, subscribe and share. We've had a steady stream of new subscribers, so thank you. Thank you. If you have subscribed already, you are on our newsletter list now. Having said this, please do find us on social media and come and say hi. We'd love to say hi back and thanks for tuning in. Until next time, bye bye.
Speaker 3 (36:34):
Thank you for listening to the International Money Cafe podcast. The content is for informational and educational purposes only, and should not be used as a substitute for professional advice. Seek the advice of your qualified service provider with any questions you may have regarding your cross border finances and tax needs.