According to CNBC, more than half a million retirees have elected to retire out of the country and the number is rising. Some may be fulfilling a lifelong dream while others are looking for ways to stretch the value of their retirement savings that may have fallen short due to recent investment market headwinds. (For more, read
5 Things To Consider When Choosing Where To Retire.)
TUTORIAL: Retirement Planning
If you have plans to join the growing number of seniors retiring abroad, there are financial implications that you have to understand before packing your bags for this new adventure.
Terminology
If you temporarily or permanently live outside of the country where you spent most of your life as a citizen you're known as an expatriate or expat. This comes from the Latin "ex" meaning "out of" and patria meaning "fatherland or country." Financial literature, including
IRS publications, often use the term expat to describe those who live abroad.
Foreign Earned Income Exclusion
For an expat that is still a resident of the United States, he or she still has to pay taxes on all money he or she earns, regardless of where in the world it was earned. The IRS allows qualifying individuals to exclude all, or part, of their incomes from U.S. income tax by using the
Foreign Earned Income Exclusion (FEIE). For those who qualify, they can exclude up to $91,500 of income earned abroad. The maximum amount changes from time to time to allow for
inflationary adjustments.
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Most people qualify for the FEIE, but understanding the qualifying criteria is essential. For example, you must be outside of the country for at least 330 days in a 12-month period, or an entire calendar year. Read
IRS Publication 54 to see if you qualify for the FEIE and other deductions such as the
Foreign Housing Exclusion. (For more, read
Give Your Taxes Some Credit.)
IRAs
Contributing to your
individual retirement account (IRA) once you move out of the country may not be possible. In order to contribute to an IRA, your income has to be taxable. If you earned $85,000 in another country and claimed the FEIE exclusion for all of it, you wouldn't have any
taxable income and this would make you ineligible to make a contribution. This rule applies to most retirement vehicles.
Social Security
The U.S. is not permitted to send funds to some countries. For those who permit it, foreign banks may put a hold on
Social Security checks for up to four weeks to wait for it to clear. Expats get around these problems by keeping a U.S. bank account and having checks deposited there. They later use their ATM cards to access the funds. If you continue to earn income outside of the U.S., you probably won't have to pay Social Security or
Medicare taxes on those funds but they may affect future payouts.
The Bottom Line
Maintaining a U.S. bank account while living in a foreign country is the best way to simplify the process of receiving funds from U.S. sources. Although ATM fees in other countries are considerably higher than in the U.S., the higher fee more than makes up for the hassle of trying to process U.S. checks in a foreign country. (To learn more, check out
How To Make Social Security Work.)
