How to Retire Abroad: Understanding 401(k) Changes and Tax Liability

The number of Americans looking to retire abroad has tripled over the past three decades — and more than 760,000 retirees living internationally will receive Social Security payments in 2022. Many retirees are looking for greener pastures and lower costs of living for their years of gold.

Families and retirees are looking for the European lifestyle, promoting a lower cost of living, a much more relaxed way of life and a safe environment, mainly due to the lack of gun violence in Europe. As the cost of living rises exponentially in the US, potential retirees are increasingly considering moving abroad to further stretch their savings and 401(k) balances.

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Historically, Portugal has been the most popular destination for American retirees due to the ease of obtaining visas. However, Spain, Italy, Greece and France have become increasingly popular as Portugal has become an overly competitive retirement destination.

Most UK and EU countries have tax and social security agreements with the US, allowing US pensioners to continue receiving social security payments while living internationally.

TheStreet sat down with Alex Ingrim, a financial advisor at Chase Buchannan, who helps Americans aspiring to move abroad navigate the financial nuances of relocating to Europe.

How to identify the best country to retire in based on tax policy, social security and cost of living

Ingrim identifies the prohibitive cost of living as the catalyst driving Americans to move abroad for retirement.

“It’s definitely easier to live on a fixed income in Europe,” he said. “It depends on the tax regime you have — tax holidays in Portugal, Italy or Greece and double taxation agreements like in France — they can be very advantageous.”

“Europe is still dealing with inflation and rising costs in the EU, but prices are starting from a lower base, so it’s less visible,” explained Ingrim. “We work with retirees frequently, and many of them have considerable money at the end of the month. They get the luxurious European beach lifestyle on a budget they can afford.”

While there are additional taxes, Ingrim notes that American retirees don’t have the same worries about health insurance or making sure their Social Security payments cover the skyrocketing cost of living. There is a much more robust safety net for older retirees in most European countries than in the US

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Portugal has typically been the most favorable destination for American retirees due to its low cost of living, pleasant weather and relaxed visa process.

“The most popular countries to move to have come in different waves,” noted Ingrim.

“Portugal has had the highest number of inquiries as there are several different visa options and things like the Golden Visa have been extremely well publicised. It has become widely known as a cheap place to retire in terms of housing, food and general cost of living.”

“They had this tax holiday scheme called the non-habitual residence (NHR) scheme which was very attractive to retirees,” Ingrim continued. “You used to pay a 10% tax on Social Security and IRA distributions, but it was repealed at the end of 2023. Portugal essentially became too popular and too expensive, so now we’re seeing more interest in Spain and France as well.”

“Italy has always been the dream of many Americans – if all factors were equal and if Italy were as easy to move to in terms of visa requirements and cost, most people would be interested in moving to Italy.”

Creating a Roadmap for Retirement Abroad:

While it can be easy to get caught up in the big picture of an international move, Ingirm warns of the importance of consulting professionals and understanding the logistics.

“There are a few people to talk to and important factors to prioritize when moving abroad. First, you need to talk to an immigration attorney – you need to understand if you meet the eligibility requirements to live in the country you would like. to live in and every country has different requirements.”

Ingrim notes that housing is an equally important aspect.

“You’ll also need to find a home and figure out how it will fit into your budget,” he said. “You usually need to have a lease or mortgage to be eligible for most visa categories, so talking to a real estate agent should also be a priority.”

A couple enjoys a sunset on a beach.

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Understanding the tax implications of 401(k) and IRA withdrawals can be confusing enough for US retirees. Adding international tax policy and currency conversion to the equation requires professional consultation.

“Depending on whether you’re retired or working, you’ll need to understand the tax implications,” he explained. “There can be serious tax consequences if you don’t plan things properly. So we recommend that you talk to a tax professional and prepare a plan to understand the implications of how these tax policies will affect your finances in the long run.”

“Finally, you need to identify how you will need to adjust your retirement plan – mainly how to change your investment portfolio based on the rules and regulations that are in place between the EU and the US. It’s a multi-step process.”

Understanding how international tax policy and financial regulation will affect your finances

There are many moving parts when moving abroad. Allowing yourself enough time to sort out the financial logistics, tax agreements and red tape is the best way to ensure success.

“We recommend that people interested in moving to Europe start about two fiscal years before your move,” Ingrim said. “Give yourself two tax years to plan and understand what the tax liability will be before you start putting the other wheels in motion. .”

“We get a lot of inquiries for Spain – once people see what their tax liability would be to Spain, they immediately stop moving. However, France has a wonderful double taxation agreement with the US. If you are an American citizen, France should be your first choice for retirement.”

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“We often tell clients that their tax obligations will not change if they move to France – it is the best tax jurisdiction for a retired person. Once you understand your tax liability, you have room to adjust your plan accordingly. It’s really beneficial.”

If you’re thinking of moving to another EU country, understanding international tax liability can be a bit more complicated. Ingrim helps eliminate the ambiguity of paying taxes as a US citizen living abroad.

“When you are a US citizen, you always have a tax liability to the US. You don’t always have to pay the US, but you always have to file your taxes and play by the US rules,” he explained. become a tax resident of a new jurisdiction – Spain, for example – and meet the requirements to be a Spanish tax resident, then you have dual liability to Spain and the US”

“You have to use the Double Taxation Agreement between Spain and the US to determine who you pay taxes to, and it doesn’t always exhaust your tax liability,” he said. “For social security, you have to pay Spain. Your tax liability is to Spain, not the US, which would be disappointing because Spain has higher income tax rates.”

“If you owe 25% of your taxes to Spain and 15% to the US, you have to pay Spain. Because that’s the larger amount, you don’t owe anything to the U.S. — it extinguishes your liability,” Ingrim explained.

“You are not taxed twice; the higher of the two countries is the effective tax rate. In general, it means that you pay taxes to the European country”.

Moving Abroad Checklist: To ensure you are properly prepared for an international move, follow the steps below.

• Talk to an immigration attorney to understand visa eligibility and requirements.
• Talk to a tax professional to understand the tax liability you’re comfortable with, which helps you determine which country best suits your needs.
• Find a home and get a lease or mortgage.
• Apply and get a visa.
• Talk to a financial advisor about adjustments to your investment portfolio, 401(k) distributions, and Social Security payments.

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