If you’d like to retire abroad or move back to the U.S. after working overseas, you’ll need to calculate how it will impact your finances. Financial planning means considering tax rules, currency fluctuations and political instability.
A new kind of financial planning is emerging to help people navigate the potential pitfalls of living outside the United States. If you are or plan to be:
- An American with financial interests outside of the U.S.,
- An American who lives abroad,
- An American who has dual citizenship,
- A foreign citizen moving to the U.S., or
- The foreign children or spouses of American citizens,
…you can definitely benefit from cross-border planning. You need to make sure you protect your financial interests.
Financial and legal issues around the world can be very complex and change frequently. When you’re talking about money internationally, there are questions of immigration, taxes, labor, real estate, securities and other topics of concern. Problems can pop up in cross-border financial transactions such as penalties for failing to pay taxes or financial institutions refusing to transfer your money between domestic and foreign accounts. That said, here are some of the most important components of cross-border planning to consider:
Cash management: Remember there are disclosure requirements and regulations governing the movement of funds in and out of a country that can tie up your money, and if a U.S. citizen doesn’t disclose accounts overseas on the annual Report of Foreign Bank and Financial Accounts form, he or she could get hit with a $10,000 per violation penalty (or more!). Plus, currency exchange rates can really affect the value of your money.
Income taxes: American citizens living abroad still have to pay U.S. income taxes—plus any taxes from the income they earn in the country where they live and work.
Retirement planning: Every country is different as to their laws on the taxation of retirement savings. Failing to adhere to the rules may mean overpaying taxes on retirement funds, underpaying and being subject to penalties, or missing out on the government benefits for which you’re eligible. For instance, an employee who wants to rollover a U.S.-based retirement plan such as a 401(k) to Canada could find those accounts becoming taxable as soon as they are rolled over! However, if you do your homework and understand the tax laws of both countries, you should be able to handle the transfer mostly tax-free.
Estate planning: Foreign countries may not recognize and honor an estate plan created in the U.S. Inheritance tax regulations and tax treaties are different with every country. Heirs might inherit tax-free in one place and be hit hard with taxes in another. Talk with an estate planning attorney and make sure that your plan will work effectively if you will be retiring abroad.
Investing: There will be taxes and regulations to contend with when looking at investment income generated or moved internationally.
Insurance: Some insurance benefits may not be 100% transferable from country to country—like your U.S.-based health insurance policy may not pay your benefits in a foreign country. Also, a foreign country may not let your heirs receive a U.S.-based life insurance payout without some taxes. Sound planning may help you avoid these issues.
If you or your money will be moving in or out of the U.S., be careful and make sure you speak with a qualified attorney about cross-border planning before you make the move.
Reference: Nasdaq (July 27, 2016) “Money Crossing Borders Requires Special Planning”