7 money matters to consider if retiring overseas


Tax, Social Security issues to address when retiring abroad

By Robert Powell, MarketWatch

Last Update: 12:01 AM ET Jul 26, 2012

BOSTON (MarketWatch)For whatever the reasonpolitics, taxes, the cost of living, you name it)more Americans on the verge of or in retirement want to love it and leave it. They want to keep their U.S. citizenship and retire abroad.

More and more people are considering it since their investments have taken a hit the last few years, said Joseph Hearn, a vice president with Teckmeyer Financial Services. Rather than delaying retirement theyre looking for a place where their dollar will go further.

But those who fancy a less expensive or more exotic place to live in their golden years must address a good many financial planning issues, including taxes, insurance, investments and estate plans, before leaving the shores of America.

Heres the laundry list of things to consider.

1. Expert advice

Step one requires that you seek out experts who can help you with the questions you have as well as the questions you should ask.

Its well worth your while to talk with somebody who has expertise in tax and estate planning for expatriatesahead of your move, said Jennifer Stevens, executive editor of InternationalLiving.com. I can just about guarantee that your regular-old accountant isnt going to cut it.

Others agree. Taxes can be complicated so I advise people to meet with a tax adviser who has experience in foreign tax issues, said Hearn. This is especially true if the person plans on working part time and has a potential tax liability both in the U.S. and their new country of residence. Hearn penned a piece on the subject here.

2. Taxes

If you retire abroad, and assuming you havent renounced your U.S. citizenship, there will still be two certainties in your lifedeath and taxes, said Michael Kitces, publisher of the KitcesReport. As long as youre still a U.S. citizen, even though youre living aboard, you still owe income taxes as a U.S. citizen on all income earned, worldwide, he said.

If youre living full time in another country, but havent fully renounced your U.S. citizenship, which Kitces said has tax and legal consequences of its own, dont forget to file your annual tax return, and pay your estimated taxes along the way.

In addition, youll likely have to file tax forms in the foreign country in which you reside, according to Eric Lin, a certified financial planner, assistant professor of finance and director of the financial planning program at California State University, Sacramento (a CFP Board registered program).

Although certain tax treaties and foreign earned-income exclusions and deductions are available, it could be difficult for retirees to fully understand the codes and utilize the exclusion/deductions correctly, Lin said. (See IRS Publication 54.)

Kitces agreed. In addition, youll likely owe income taxes in your country of residence, too, although the U.S. provides a foreign tax credit to at least partially mitigate the double-taxation burden of paying taxes to a foreign government and the U.S., too, he said.

Check also whether interest paid on a foreign property is tax-deductible in the U.S. Its probably not, said John Grable, a certified financial planner and professor at the University of Georgia.

And dont forget about state taxes. Even though you retire abroad, you may still owe these, said Stevens. But if youve established a residence in a no-tax state ahead of your overseas move, you could position yourself to save thousands.

Even though you might be moving abroad to cut costs, theres likely to be one cost thats twice as expensive, Lin said. Retirees need to consider the expense of professional tax services in both countries, he said.

3. Health care and insurance

You also need to think about how to pay for your health care.

For instance, Medicare won't provide coverage for U.S. citizens living abroad, according to Hearn. And most employer-provided retiree health plans don't have or have very limited overseas coverage, Lin said.

That means you will need to self-insure, buy coverage in your new country, or buy an international policy.

The good news on this front: In lots of destinations, you can buy health insurance as good asor betterthan what you have now for a fraction of what you currently pay, Stevens said.

For instance, , Stevens said Americans have access to excellent health care, delivered by physicians trained in the U.S. and Europe.

This, too, can cost half, or less, than what you pay today, she said. In fact, its so affordable, many expats choose to simply go without health insurance overseas and pay out-of-pocket for care. In a place such as Ecuador or Panama, for instance, where a doctors visit might cost $25 to $50, you can do that.

For his part, though, Lin warned that quality of care is an issue to consider if you relocate to a less-developed country.

4. Social Security

In most cases, you can get your Social Security forwarded overseas, so that shouldnt be a problem, Hearn said. But there are some costs.

Expats are eligible for Social Security benefits which can be directly deposited to an U.S. bank account, said Lin. However, retirees may incur certain fees for transferring money to a foreign bank account and converting U.S. dollars to local currency.

5. Investments

According to Lin, some countries limit or even prohibit ownership by foreign nationals.

Retirees planning to invest in properties or securities in a foreign country need to consider working with a reputable local attorney and other financial professionals, Lin said. Taxation on investments can be complicated in a foreign country as well.

Keep this in mind if you plan to invest in the country in which you reside: Most countries do not have strong regulatory agencies such as Financial Industry Regulatory Authority and the Securities & Exchange Commission, said Allan Katz, a certified financial planner and president of Comprehensive Wealth Management Group.

6. Real estate

One issue that seems to catch many Americans off guard is the different property ownership rules in foreign countries, said Grable.

Sometimes, and I am not sure exactly why, Americans assume that the right to own property is the same elsewhere as in the U.S. he said. That is not true.

In Central America, for example, what people may think of as real property may be shares in a corporation, said Grable. In that case, no real property ownership exists, so if the corporation fails, the entire investment may be lost, he said.

Grable recommends that those who want to retire abroad determine whether its easy it is for an American to sell a property overseas.

Some governments have restrictions on the transfer of cash and other assets from the country, Grable said. That is, these governments are happy to have Americans invest, but they are unhappy to allow profits to be exported.

Basically, said Grable, it comes down to knowing the rules, laws, and regulations of the foreign country. Investing overseas can be an enjoyable experience, but often finding something in the U.S. provides better asset protection, income-tax advantages, and safety.

7. Estate planning

U.S. courts generally don't have jurisdiction over the transferfor example, the passing down to the next generationof a foreign asset owned by a U.S. citizen, according to Lin.

Trusts drafted in the U.S. usually cannot contain foreign assets, he said.

Related items are existing wills, durable powers of attorney and advance health-care directives. Are they recognized by the foreign government? asked Lin Retirees need to consider working with a local estate attorney for the proper transfer of the assets as well as the estate planning documents mentioned.

Indeed, Kitces recommends updating your wills, especially if you own real estate there, to provide for the distribution of both any U.S. property, and your foreign property.

Depending on the country you live in, Kitces said you may need a foreign will to handle your foreign assets, or simply to adjust your U.S. will to provide for the disposition of your foreign property.

For his part, Hearn recommended that you have powers of attorney checked out by a local attorney, especially since it will be the local hospital that will be looking at the medical power of attorney if you become incapacitated.

There are alternatives

For those who want to move somewhere exotic but not deal with the tax issues or the potential estate-planning problems, Lin recommends a have-your-cake-and-eat-it-too solution.

Things are less complicated for people who plan to retire outside the U.S. but live in one of the three jurisdictionsGuam, Puerto Rico and the U.S. Virgin Islands, Lin said.

Robert Powell is editor of Retirement Weekly, published by MarketWatch. Follow his tweets at RJPIII.

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