Planning IRAs And 401(k)s: A Comfortable Retirement As A US Expat

Nathalie Goldstein, MyExpatTaxes‘ CEO, helps Americans stay tax-compliant while living abroad with her user-friendly US expat tax software.

Planning for retirement when living abroad is essential for financial security. Being abroad means learning to navigate two tax systems in two countries. From currency fluctuations to international regulations, it is the hope that your savings will grow and be accessible while living abroad. By understanding U.S. retirement plans like individual retirement accounts(IRAs) and 401(k)s, U.S. expats can build a strategy that works best for their financial position.

The Basics Of IRAs And 401(k)s

For U.S. citizens, there are two common retirement accounts: IRAs and 401(k)s. The differences stem from how contributions are made: 401(k)s are employer-sponsored plans, and IRAs are individually managed accounts.

Both IRAs and 401(k)s can receive pre-tax income (traditional) or after-tax income (Roth). There are also options for having multiple retirement accounts; it is all about what is best for your finances.

Balancing Dual Tax Obligations

With dual taxes, IRAs and 401(k)s can become complicated, but the use of the Foreign Tax Credit can reduce U.S. taxable income.

Two common options for reducing dual taxation are the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC). The FEIE is an excellent option for expats to reduce their tax liability, but it can disqualify them from contributing to U.S. retirement accounts. As for the FTC, it is a dollar-to-dollar credit on foreign-paid taxes that allows your income to remain taxable, qualifying you for U.S. retirement contributions.

Another potential challenge could be how the host country views U.S. retirement accounts. Unfortunately, not all countries recognize IRAs and 401(k)s as having a tax-advantaged status. This can result in the immediate taxation of the accounts. Therefore, researching both the U.S. and the foreign country can help avoid double taxation on your retirement accounts.

The Role Of Tax Treaties

Tax treaties are significant for U.S. expats looking to retire abroad. With a tax treaty, it will minimize tax burdens on retirement savings. U.S. tax treaties determine whether U.S. citizens can receive payouts from their IRA or 401(k) accounts in the host country. It can also affect how the growth is taxed.

Without a tax treaty between the host country and the U.S., there could be problems enjoying your retirement savings abroad.

Mitigating Currency Risks

Currency fluctuation can play a significant role in expat retirement savings. Your income as a U.S. expat will likely be in another currency, leaving your retirement contributions to face exchange rates. This can influence how much retirement savings are being contributed (monthly).

A good balance for mitigating this risk could be to diversify retirement savings with retirement funds in U.S. dollars and foreign currency. Depending on the currency, some investments allow currency hedging, helping to remove exchange rates.

It cannot be emphasized enough that creating a thought-out strategy will help all aspects of investing in a retirement account.

Compliance With FATCA And FBAR

Due to U.S. laws like the Foreign Account Tax Compliance Act (FATCA) or Foreign Bank Account Report (FBAR), foreign retirement accounts must be reported if they exceed a certain threshold. Both have specific details and retirements for filing. Ensure that foreign pension and investment plans are not overlooked, as they may need to be reported on an FBAR.

Noncompliance can result in severe penalties. Therefore, if U.S. expats need clarification about their responsibilities when reporting foreign retirement accounts, talk with an expert about expat regulations and requirements.

Required Minimum Distributions And Rollovers

One of the distinct differences between traditional IRAs and 401(k)s is the required minimum distribution (RMDs). For these retirement accounts, beginning at age 73, there is an RMD, which means savings will need to be taxed and distributed. This can be problematic for expats if there is no tax treaty, as the savings could be double taxed.

As for rollovers, they can be an excellent option for combating the RMDs. Often, individuals choose to roll over their 401(k) to an IRA after switching employers. However, Roth IRAs still require you to pay taxes up front for the conversion.

Planning For The Future

In order to start secure and comfortable during retirement, U.S. expats are advised to consult a financial advisor for the best strategy. It all starts by researching the options available in certain countries, partnered with an understanding of U.S. tax implications. With the use of tax treaties and the FTC, U.S. expats can help reduce double taxation while remaining tax-complaint.

Build a strategy that works for you and your finances!

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

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