Retiring Abroad: Pitfalls of Paradise
Moving to a tropical island or a mountaintop village is a retirement plan shared by many adventurous baby boomers.
More than half a million retirees have moved out of the country, and the number is growing. Some may be fulfilling a lifelong dream, while others are looking for ways to stretch the value of their nest eggs.
But be careful when you purchase your one-way ticket to paradise. Some places are better for visiting than for living long-term. Hidden costs and lifestyle trials can be a drag for those retiring abroad. And being older does not make it easier.
Frustrations abound for ex-pats who face challenges that include a weakening dollar, taxes at home and abroad, and the difficulty of moving money across borders. Health-care benefits can also vary widely and often become the biggest drawback abroad.
“I wouldn’t be surprised to find that many people return after living their early retirement abroad. … Once you get to your 80s and 90s, things become tougher,” says David Kuenzi of Thun Financial, an investment management firm.
Glossy magazines and websites, sometimes sponsored by countries wanting to entice wealthy Americans, do a good job of selling destination retirements, especially to baby boomers. To avoid boomeranging from a way-too-costly vacation, here are some things to consider.
Paying Your Taxes
Expats who are still U.S. citizens are subject to most of the same income tax requirements as folks back home, and they must still file a return form annually with the Internal Revenue Service on all money earned in the U.S. and worldwide, income taken from retirement accounts included.
There are ways to claim creditfor taxes paid overseas, but complicated tax laws in each country make the process difficult. Be prepared to spend time and money to get financial advice in both the United States and your destination site.
While there are about 50 countries that limit this "double taxation" under existing tax treaties with the United States, you can incur taxes in the country where you reside and from back home. And, as long as you are a U.S. citizen, you will still need to file tax forms. A list of countries with such tax treaties is available at IRS.gov; search tax treaties A to Z.
The Foreign Earned Income Exclusion (FEIE), allows individuals to exclude up to $92,900 of income earned in their new home country. The maximum amount changes from time to time to allow for inflationary adjustments. While most people living abroad qualify for these deductions, mastering the code can be a challenge. Read IRS Publication 54 to see if your income might be covered under this and other deductions.
Renouncing American citizenship is an option for people who want to escape U.S. taxes altogether. But the downside is that you also strip yourself of Social Security.
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