How to Prepare for Financial Challenges When Retiring Overseas

Personal Finance June 28, 2023 News Team

Federal employees undoubtedly face the challenge of choosing when to retire once they have met the requirements to retire. But those employees who have chosen to retire overseas face additional financial challenges.

This column discusses the financial challenge of a federal employee retiring overseas with respect to maintaining bank and retirement accounts, potential foreign and federal tax liabilities, health care options, and estate planning.

Arranging a move overseas to spend one’s retirement years requires navigating financial rules applicable in both the US and in the foreign country an employee plans to move to. Mistakes are easy to make and can be costly. It is important therefore for employees planning to retire overseas to research the following financial related issues before they retire abroad.

Bank and Retirement Accounts

Many financial advisors recommend that Americans who retire abroad should generally keep most of their money in the US. Federal employees who retire abroad are advised to at least initially keep their bank and credit union accounts, brokerage accounts, any annuities held at insurance companies, the Thrift Savings Plan (TSP) and other qualified retirement plans like 401(k) plans, and traditional IRAs and Roth IRAs in the US.

It should be noted that some US banks and brokerage firms in fact drop account holders with foreign addresses. Therefore, employees who intend to retire overseas should contact their financial institutions and acquire about their policies regarding account holders who move overseas.

When opening a bank account in a foreign county, a retiree is advised to compare fees for wire transfers and ATM transactions. It is also important that the retiree check to make sure he or she is getting competitive currency conversion/exchange rates. Services including Wise (formerly TransferWise) (https://wise.com/us) and Moneycorp (https://www.moneycorpbank.com) have low markups for currency exchanges.

Before moving abroad, a retiree is also advised to shop for credit cards with no or minimum foreign transaction fees. Credit card foreign transaction fees can amount to as much as two percent of a transaction’s value.

Foreign and Federal Income Taxes

Under the Internal Revenue Code, an American citizen’s worldwide income is subject to US income tax, regardless of where the individual lives, in the US or outside the US. If an American citizen living overseas does not file a federal income tax return, the individual could face penalties and interest, and even criminal prosecution.

Expatriates may owe tax both to the US and to the foreign country they live in. Consider the example of an expatriate who sells an investment asset (stock, bonds, mutual fund, ETF, etc.) for a $50,000 capital gain. Assuming the expatriate’s new home foreign country has a 10 percent capital gain tax rate, the individual would have to pay $5,000 tax to the foreign country.

The expatriate can claim a $5,000 foreign tax credit on his or her federal income tax return, assuming the US has a foreign tax treaty with that country. However, since the US has a top statutory maximum long-term capital gains tax rate of 20 percent, even with the foreign tax credit the expatriate could still owe the IRS another $5,000.

The US has tax treaties with more than 60 countries. But these tax treaties may not completely protect expatriates from taxes that can arise as a result of differences between their new country’s tax system and that of the US. For example, the tax-free status of Roth retirement accounts in which some foreign tax treaties protect the tax-free status while other foreign tax treaties do not.

Most expatriates also have to submit a report to the Treasury Department called the Foreign Bank and Financial Accounts (FBAR). The FBAR is required to be filed in years in which the cumulative balance of a US citizen’s foreign-based financial accounts exceeds $10,000 at any time during the year. The penalties for willfully failing to declare this amount on an FBAR are the greater of $100,000 or half of the account value for every year an individual failed to file.

US citizens with more than $200,000 and couples with more than $400,000 in foreign financial assets on the last day of the year, or more than a respective $300,000 or $600,000 at any time during the year must report these accounts to the IRS via IRS Form 8938 (Statement of Specified Foreign Financial Assets).

With respect to state income taxes, a US citizen who retires overseas must “break his or her domicile” in order to not being liable for any state and local income taxes. This means that the individual has no intention of returning to his or her state. To satisfy that requirement, an individual should sell his or her home, cancel his or her driver’s licenses and voter registration.

Health Care Options

Medicare generally does not cover health care services outside the US. Federal employees who retire overseas must therefore look into other options to pay for their health care.

Those federal employees who are eligible to keep their Federal Employees Health Benefits (FEHB) program health insurance coverage in retirement are advised to check with their FEHB program health insurance carrier to find out whether the carrier will pay for medical services performed overseas.

The carriers should be of the “fee-for-service” type rather than a health maintenance organization (HMO). There is a strong possibility that in the event a federal retiree and/or family member living overseas needs medical care, the retiree will likely have to pay a doctor for the medical services provided and then submit a claim for reimbursement with the FEHB insurance carrier.

Many foreign countries with public healthcare systems allow expatriates to join the public healthcare system after a waiting period at little or no cost. Some countries with public healthcare systems also have private hospitals. In order to help cover private healthcare services, retirees who live overseas may want to consider purchasing an international health insurance policy.

In spite of the fact that Medicare does not cover medical services overseas, Federal employees who retire overseas are highly encouraged to enroll in both Medicare Part A (Hospital Insurance) (no monthly premium cost) and Medicare Part B (Medical Insurance) in which an enrollee pays a monthly premium. They should still enroll in Medicare Part B (paying the monthly premium) even though Medicare Part B will not pay for medical services overseas. Otherwise, they will be subject to a hefty late enrollment penalty if they return to the US and want to enroll in Medicare Part B at that time.

Estate Planning

Employees planning to retire overseas should make plans to have a new estate plan created. Included in making a new estate plan are a new will or living trust, a living will, financial power of attorney, and a health care power of attorney.

Currently under US estate tax laws, US citizens with a gross estate exceeding $12.92 million ($25.84 million for married couples) are liable for US estate tax above those thresholds, even if they live in another country. Individuals who are above those thresholds are allowed to gift money and other financial assets each year during their lifetime, up to certain amounts without incurring any gift tax. But they must be aware of the gift tax rules regarding the gifting of money and other financial assets to non-US citizens. They are advised to contact an estate attorney about these gift tax rules.

Most foreign countries impose an inheritance tax instead of an estate tax on their citizens, often at far lower threshold levels compared to the US estate tax threshold levels. For example, in France each child can receive from a parent about $108,000 inheritance tax-free. Any inheritance amount above $108,000 will be subject to an inheritance tax of up to 45 percent. The inheritance tax imposed in foreign countries is due even if the individual’s money is held in US-based accounts and the individual’s heirs live in the US.

It is therefore important when an individual moves overseas, he or she meet with an estate attorney in that country in order to re-establish a proper estate plan. It should also be noted that many European countries do not recognize US trusts.

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