How to Prepare for Financial Challenges When Retiring Overseas


Once they have satisfied the conditions for retirement, federal employees will surely confront the issue of deciding when to retire. However, those who have made the decision to retire abroad confront additional financial difficulties.

The financial difficulties of a federal employee retiring abroad are covered in this article, including how to preserve bank and retirement accounts, prospective federal and foreign tax liabilities, health care possibilities, and inheritance preparation.

Organizing a move abroad to live out one's golden years requires understanding financial regulations that apply to both the US and the foreign nation the employee wishes to go to. Making mistakes is simple, but they can be expensive. Therefore, it's crucial for workers who intend to retire abroad to do their homework before leaving for their foreign retirement.

Bank and Retirement Accounts

Numerous financial consultants advise Americans retiring abroad to generally preserve the majority of their assets in the US. The Thrift Savings Plan (TSP) and other qualified retirement plans, like 401(k) plans, traditional IRAs, and Roth IRAs, are advised to be kept in the US at least initially for federal employees who retire abroad. These accounts also include brokerage accounts, annuities held at insurance companies, bank and credit union accounts, traditional IRAs, and Roth IRAs.

It should be mentioned that a few US banks and brokerage companies actually terminate accounts for account holders with international addresses. In order to learn more about their policies regarding account holders who migrate abroad, financial institutions should be contacted by employees who intend to retire abroad.

A retiree is urged to check ATM and wire transfer fees before opening a bank account in a foreign nation. Additionally, it is crucial for retirees to ensure that they are receiving competitive currency exchange/conversion rates. Low markups are offered for currency swaps by services like Wise (previously TransferWise) (/uploads/allimg/20230719/3-230G916304Y49.jpeg"/>

Foreign and Federal Income Taxes

No matter whether an American citizen lives in the US or abroad, their worldwide income is liable to US income tax under the Internal Revenue Code. An American citizen who resides abroad and fails to file a federal income tax return may be subject to fines, interest, and potentially criminal prosecution.

Those who live abroad may have tax obligations to both the US and the nation in which they reside. Think about the scenario when a foreigner sells a financial asset (stocks, bonds, mutual funds, ETFs, etc.) for a capital gain of $50,000. If the new home country of the expatriate had a capital gains tax rate of 10%, the person would be required to pay $5,000 in taxes to that nation.

If the US has a foreign tax treaty with that nation, the ex-pat may claim a $5,000 foreign tax credit on his or her federal income tax return. Even with the foreign tax credit, the ex-pat might still owe the IRS an additional $5,000 because the US has a top statutory maximum long-term capital gains tax rate of 20%.

More than 60 nations and the US have tax treaties. However, due to variations between the tax systems of their new nation and the US, these tax treaties might not fully shield expatriates from taxation.

The majority of ex-pats must also submit an FBAR report to the Treasury Department detailing their foreign bank and financial accounts. When a US person has cumulative foreign-based financial account balances that total more than $10,000 at any point in the year, the FBAR must be reported. For each year that an individual fails to file, they are subject to fines of $100,000 or half of the account value, whichever is greater.

A US citizen or couple must file IRS Form 8938, "Statement of Specified Foreign Financial Assets," if they have more than $200,000 or $400,000 in foreign financial assets as of December 31 or, respectively, $300,000 or $600,000 at any time during the year.

A US citizen retiring abroad must "break his or her domicile" with regard to state income taxes in order to avoid paying any state and local taxes. This indicates that the person has no plans to move back to their home state. An individual must sell their property, revoke their driver's license, and stop voting in order to fulfill the fulfill condition.

Health Care Options

Health care services provided outside of the US are typically not covered by Medicare. Therefore, retirees from the federal government who live abroad must consider their other health insurance options.

Federal employees who qualify to maintain their Federal Employees Health Benefits (FEHB) program health insurance coverage after retirement are urged to inquire with their FEHB program health insurance provider about whether the provider will cover medical services received abroad.

The insurance providers should not be health maintenance organizations (HMOs), but rather "fee-for-service" types. If a federal retiree or a member of their family who lives abroad needs medical attention, there's a good chance the retiree will have to pay the doctor directly before submitting a claim for reimbursement to the FEHB insurance provider.

After a waiting period and at little or no cost, many foreign nations with public healthcare systems allow expatriates to join the system. There are certain nations that have both public and private hospitals. Retirees who reside abroad might wish to think about getting international health insurance coverage to assist pay for private healthcare services.

Federal employees who retire abroad are strongly advised to sign up for both Medicare Part A (Hospital Insurance), which has no monthly premium cost, and Medicare Part B (Medical Insurance), which has a monthly premium. This is despite the fact that Medicare does not cover medical services abroad. Even though Medicare Part B does not cover medical services received abroad, they should still sign up for it and pay the monthly payment. If they return to the US and decide to enroll in Medicare Part B at that time, they will otherwise be charged a steep late enrollment fee.

Estate Planning

Employees who intend to retire abroad should arrange for the creation of a new estate plan. A new will or living trust, a living will, a financial power of attorney, and a health care power of attorney are all parts of creating a new estate plan.

Even if they reside abroad, US persons who have a gross estate worth more than $12.92 million ($25.84 million for married couples) are now subject to US estate tax over those limits. People who exceed those limits are permitted to give away up to a specific amount of money and other financial assets each year during their lifetime without being subject to gift taxes. The restrictions governing the donation of cash and other financial assets to non-US citizens, however, must be understood by them. Regarding these gift tax regulations, they are encouraged to speak with an estate lawyer.

Instead of an estate tax, the majority of foreign nations impose an inheritance tax on their residents, frequently with far lower threshold levels than the US estate tax threshold levels. For instance, each child in France is permitted to inherit from a father approximately $108,000 tax-free. A 45 percent inheritance tax may be applied to any inheritance value over $108,000. Even if the deceased person's assets are kept in US-based accounts and the deceased person's heirs reside in the US, the foreign country's inheritance tax is still required.

Therefore, it is crucial that a person consults with an estate lawyer there when moving abroad in order to reestablish a suitable estate plan. Several European nations do not recognize US trusts; this should be emphasized.