Retiring Overseas? Great—But Don’t Forget About Your Taxes

Brian Dunhill is the co-founder and portfolio manager at Dunhill Financial.

If you look at graphs showing the number of people renouncing U.S. citizenship, you’ll notice that there’s a spike to around 5,000 every four years, before those numbers drop back to 2,000 to 3,000 in between. Those four-year bumps coincide with election cycles. It doesn’t matter who wins the White House—one side always says, “I’m leaving because of the Democrats,” while the other says, “I’m leaving because of the Republicans.”

But even with this confluence, politics are not the main driver of overseas moves. The real cause is something we’ve been discussing for 20 years: the aging Baby Boomer generation. With 76 million Boomers in the U.S., this cohort is hitting peak retirement season, with record-breaking numbers turning 65 this year. As more and more Boomers retire over the next 5 to 7 years, many will realize they’re no longer tied down by work or kids at home. And simply retiring to Florida may not offer a high enough quality of life or seem exciting enough for the first generation that gained the capacity to travel widely, for leisure, during their youth. So why not move to France, Italy, United Kingdom or New Zealand? The possibilities are endless—but, then, so are the potential tax complications.

The key is for American expats to carefully plan their investment and tax strategies before moving abroad, work with advisors who specialize in cross-border planning and take advantage of tax treaties and credits to minimize their overall tax burden.

All-Too-Common Pitfalls

Unfortunately, there are a host of mistakes American expats make when retiring abroad, which can cause a lot of trouble (and lost income). Here are some of the ones we often see:

1. Failing To Plan Ahead: Too many American expats wait until after they’ve moved abroad to start planning their financial and tax strategies, rather than doing so beforehand. This can lead to unanticipated complications. Say you’re retiring to France, for example. It’s great for quality of life but has high estate and gift taxes. While the U.S. allows tax-free gifting up to $13.99 million, France caps tax-free gifts at €150,000 per decade. If a high-net-worth individual moves to France without prior planning, they face significant tax burdens on wealth transfers. A smarter strategy is to gift assets while still in the U.S., where exemptions are much higher, and then continue smaller gifts after relocating.

2. Not Leveraging Optimization Strategies: Due mostly to a lack of knowledge, many retirees fail to take advantage of tax treaties between the U.S. and their foreign country. For example, clients in the U.K. can maximize their U.K. pension contributions (up to £60,000) while also making a backdoor Roth contribution in the U.S., effectively gaining exemptions in both countries. However, a frequent misstep is making an IRA contribution in the U.S. while using the foreign earned income exclusion (FEIE), which eliminates their taxable U.S. income, making the IRA contribution ineligible. Instead, they should use the foreign tax credit system (FTCS), which accounts for the higher U.K. taxes, allowing them to claim U.S. tax credits rather than exempting income.

3. Missing Opportunities For Tax Credits: Using the foreign earned income exclusion instead of the foreign tax credit system can prevent expats from building up tax credits that can be carried over for 10 years—a major advantage. This can be crucial when approaching retirement, especially for large transactions like lump-sum withdrawals or asset sales. Those relying solely on the FEIE miss the opportunity to accumulate these credits, opting for short-term simplicity over long-term tax benefits.

4. Utilizing Poorly Understood Investment Instruments: Many expats will purchase local investment instruments, such as mutual funds, ETFs or insurance products (assurance vie in France) in Europe, which can turn them into passive foreign investment companies (PFICs). These create all manner of tax problems, which are a massive headache to sort out.

Avoiding Tax Headaches

To avoid these problems, retirees must make careful investment plans before they move overseas. One of the most impactful steps they can take to protect their savings is gifting money while still in the United States, which helps avoid other countries’ estate or gift taxes.

It’s also important to consider how your retirement account distributions will be taxed in your new country. Each country has different rules—some countries will tax retirement income based on where the account was originally built, while others will tax it based on where it’s distributed. For example, in France, regardless of whether you have a traditional or Roth IRA, withdrawals are tax-free. Belgium, on the other hand, applies Belgian taxes, which can be beneficial if you take a lump-sum distribution. If you withdraw your entire IRA in Belgium, you’d pay a flat 16.5% tax—only to Belgium. But if you were in the U.S., you might be able to spread the withdrawals over several years and reduce your tax burden.

Ultimately, your retirement should be pleasant and stress-free, a reward for a life spent working hard. When it gets snarled by confusion and anxiety about double taxation agreements, or how different countries handle retirement income, that can throw a wrench in the entire situation. This is why consulting with a tax professional who is familiar with these agreements and regulations is of paramount importance.

How you pay your taxes can either protect or significantly erode your savings. The choice is yours—and proper planning is essential to creating a positive, stress-free and comfortable outcome, wherever you ultimately plant your feet.

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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