Retiring abroad? Here’s how U.S. taxes work in an expat retirement
So, you want to retire abroad. We don’t blame you! Retirement is all about living your best life, and many Americans spend years dreaming of an idyllic expat retirement sipping wine in the Italian countryside or taking daily strolls down a picture-perfect tropical beach.
It’s easy to get caught up planning for all the exciting bits of retiring abroad and forget about the more mundane aspects of retiring abroad—like taxes. Whether you’ve just hatched the idea to spend your golden years overseas or are a seasoned expat, it’s important to understand that even expats pay U.S. taxes when retiring abroad.
Yes, you read that right—if you are an expat enjoying retirement abroad, U.S. taxes may still be a reality. Regardless where in the world you live, you are still responsible for your U.S. tax obligations if you are still a U.S. citizen. The experts here at H&R Block are here to help, so below we’ve summarized the basics of what you should know about taxes in an expat retirement.
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Retirement taxes for U.S. citizens abroad
Once you retire abroad, you’ll still have the same fundamental U.S. retirement tax implications as you would if you’d retired stateside. Since leaving the U.S. makes it a bit more complicated, it’s important to understand the basics of how different retirement vehicles are taxed in the U.S. Here’s a (very) quick rundown:
- Traditional 401(k)s and IRAs: Traditional 401(k)s and IRAs are the bread and butter of the average American’s nest egg, favored for their ability to reduce taxable income. Contributions to your 401(k) are tax-deferred, meaning you’ll pay taxes on withdrawals once it’s matured. Contributions to Traditional IRAs are tax-deductible, and withdrawals are taxed as income.
- Roth IRAs: Roth IRAs aren’t tax deductible, but once you’ve had the account for five years withdrawals are tax-free.
- Social Security benefits: You may or may not have to pay taxes on Social Security benefits, depending on your provisional income ( to find your provisional income, you’d take your modified adjusted gross income, add half of your Social Security benefits, and add your total tax-exempt interest). If your provisional income is:
- Less than $25,000 ($32,000 for joint filers), then your benefits will be tax-free
- Between $25,000 and $34,000 ($32,000 and $44,000 for joint filers), then up to 50% of your benefits are taxable
- More than $34,000 ($44,000 for joint filers), then up to 85% of your benefits are taxable.
- Dividends: In general, you can assume dividends you receive are considered income and are taxed as income.
- Annuities: Distributions from annuities you bought with post-tax money will likely have a part that’s tax-free. In general, you can assume at least some income received from annuities is taxable.
- Sales from stocks, mutual funds, and bonds: If you’ve owned the asset longer than a year, gains from stock, fund, or bond sales are taxed at the current long-term capital gains rates. If they’ve been held under a year, they’re taxed as ordinary income.
It’s safe to assume that even if you’re retiring abroad, taxes on retirement income will follow the same rules as retirement taxes stateside. However, there are a few major and important differences between taxes when you retire stateside vs. taxes when you retire abroad.
Below, we’ll highlight some other major differences and things to consider about taxes when retiring abroad.
How retiring abroad affects your 401(k) or IRA taxes
Distributions from your 401(k) and pensions are still taxed as income, albeit they’re treated as unearned income—meaning you won’t be able to claim them under the Foreign Earned Income Exclusion. If you’re wanting to transfer your 401(k) to an overseas plan, we recommend you consider all the implications first—transferring funds from a qualified plan won’t be tax-free and won’t count as a rollover. In the end, you may end up owing taxes on the transfers, getting hit with an early withdrawal penalty, and unintentionally walking away with a foreign mutual fund (PFIC) you now have to report.
Expat retirement taxes on foreign pensions
If you have a foreign pension, it will most likely not qualify for the same retirement vehicle tax benefits as a U.S.-based 401(k) or IRA. Your contributions aren’t typically tax-deductible on your U.S. income taxes, and you may actually be taxed on the plan’s annual growth regardless if you’re taking distributions or not. Additionally, employer contributions for foreign pension plans may also be considered taxable in contribution years.
The U.S. does have tax treaties with specific countries that have special rules on foreign pension taxes. For example, if you’re a U.S. citizen with a foreign pension in the U.K., Canada, Germany, the Netherlands, or Belgium, you’ve got a tax treaty that basically allows your foreign pension to be taxed the same as a U.S. retirement plan.
Other retiring abroad tax implications to consider
What else should you know about taxes when retiring overseas? One is major thing expat retirees forget about is that if you receive income from a foreign retirement plan and pay foreign tax on that income, you may be eligible for U.S. tax credits. For example, the Foreign Tax Credit lets you claim those taxes paid dollar-for-dollar on your U.S. tax filing.
Another question we hear a lot is about spouses and Social Security when you live abroad. For example, if you have a foreign spouse, are they eligible for spousal and survivor Social Security benefits?
You’ll be happy to know that yes, there are ways a foreign spouse may qualify to receive Social Security benefits. One way is if their country of residence has a tax treaty or bilateral social security agreement. Because the rules change from country to country, you should check the rules pertaining to your resident country.
While we’ve covered the most common tax situations you might find yourself in when retiring abroad, there are millions of other situations expat retirees may find themselves in when it comes tax time. Navigating the tax implications of retiring overseas is tricky, and that’s why our expat Tax Advisors are here to guide you every step of the way.
Need help with expat retirement planning? Confused on the tax implications for retiring abroad? H&R Block Expat Tax Services is here to help.
Ready to file? We’ve got a tax solution for you—whether you want to be in the driver’s seat with our DIY online expat tax service designed for U.S. citizens abroad or want to let one of our experienced tax advisors take the wheel. Head on over to our Ways to File page to choose your journey and get started.