How to Claim Social Security, Pay Taxes When Retiring Overseas
With the coronavirus pandemic declining, a lust for travel and even a yearning to retire to a far-off land have reemerged.
Russia’s invasion of Ukraine need not deter you from a retirement plan to live abroad, argues Kathleen Peddicord, founder of the Live and Invest Overseas publishing group, in an interview with ThinkAdvisor.
She has traveled to more than 75 countries, established businesses in seven of them, and has covered the ins and outs of overseas living for more than 30 years.
“The crisis playing out between Ukraine and Russia needn’t affect your thinking about making a move overseas,” Peddicord says. “You do not need to put your retirement dreams on hold.”
While retiring abroad generally remains within reach despite the war in Eastern Europe, financial advisors might want to suggest that pre-retiree clients “shift their focus from Europe, depending on country, to another point on the globe,” Peddicord advises.
Europe should not be written off, however.
Portugal, for instance, “remains one of the world’s safest havens,” she points out.
Further, “[because] the dollar is in near-record territory against the euro, Europe is more affordable” at this time, Peddicord says.
Also: “This is an opportunity to invest your relatively strong dollars in a euro-denominated hard asset — a piece of property in Portugal, France or Spain, for example,” she adds.
Peddicord also stresses that Central American countries such as Panama and Belize “stand out in the current climate as top-tier leave-the-troubles-of-the-world-behind options.”
In our Feb. 10 phone interview and a Feb. 24 email follow-up exchange (above), Peddicord and Lief Simon, a global property investment expert who is married to Peddicord, discuss the finer points that advisors need to know concerning the financial aspects of retiring overseas.
Right now, the couple live in Panama and Paris.
Our Feb. 10 conversation covers investing, banking, Social Security, Medicare, health care abroad, income tax planning (“You aren’t going to pay double tax on any of [your] income,” Peddicord informs), renting versus buying a residence — and perhaps the biggest pitfall of all:
“Currency exchange rates can go with you or against you,” Simon emphasizes.
Former publisher and editor-in-chief of the International Living Group, Peddicord left in 2007, after 23 years, to start her own firm. The next year, she debuted Live and Invest Overseas.
In an enlightening side note, Simon says that the trend of the full-time digital nomad — people in their 20s and 30s working remotely country by country — has caused “the age of people moving overseas to drop tremendously.”
Here are highlights of the interviews:
THINKADVISOR (Feb. 24): Is now a good time to move overseas?
KATHLEEN PEDDICORD: The crisis playing out between Ukraine and Russia needn’t affect your thinking about making a move overseas. You do not need to put your retirement dreams on hold.
[Because] the dollar is in near-record territory against the euro, Europe is more affordable.
(Feb. 10): Let’s talk about some specific issues pertinent to retirees living overseas. Say you’ve been collecting Social Security. What do you need to do to continue receiving payments?
LIEF SIMON: Hopefully, you’re already having them direct-deposited into your U.S. bank account.
But there are a lot of countries where, if you’re residing there, you can have your checks direct-deposited into a bank in that country. It would make it easier because the money would just show up in your local bank account each month.
Is there a drawback to that?
SIMON: The currency exchange rate and the timing of the deposit. When the check comes in, you’ll get whatever exchange rate your bank is giving on dollars — which could be good or bad.
What’s the best alternative?
If you keep having your check deposited into your U.S. bank account, you can decide when to transfer the funds and manage the exchange rate that way.
We recommend a foreign exchange account with Moneycorps, which we personally use, for doing that.
Suppose you decide that you want to claim Social Security while you’re living abroad. How do you go about it?
PEDDICORD: It doesn‘t matter that you’re outside the U.S. You can sign up as if you were living in the States.
There’s a list on the Social Security website of the many countries where you can have your payments direct-deposited every month.
SIMON: You do have to think of the currency implications. But Panama and Ecuador, for example, use the U.S. dollar, so there’s no exchange risk depositing the checks in those countries.
You can initiate your Social Security online. Or else, you can apply at the local embassy. Just tell them where you want the payments sent and to which account.
What do advisors need to know about income tax planning for clients who move overseas?
SIMON: Taxes do get complicated. It depends on the country. All countries of Central America — Mexico, Nicaragua, Panama, Belize and Costa Rica — are on jurisdictional taxation, which means you’re not taxed on any [income] that isn’t earned in those countries.
Other countries have tax incentives to attract new residents. Some have a non-habitual resident program: If you haven’t been a resident in the previous five years, you can apply for what amounts to a 10-year tax benefit for reduced taxes.
But the bottom line is that you shouldn’t pick a country to move to based on taxes.
PEDDICORD: For a retiree moving overseas, it should be a tax-neutral event. You may be subject to paying taxes in the country you retire to and reside, and you may be subject to paying taxes in the U.S. on some of the income.
But you’re not going to pay double tax on any of the income.
What does it mean if the country has a tax treaty with the U.S.?
SIMON: Most European countries have those. Most of them say that Social Security will be taxed by the U.S. The one exception is Italy. If you’re a resident there, Social Security is taxed in Italy.
The tax treaties dictate who gets first bite of the income. If you’ve received income outside of Social Security, the first bite of income tax is [taken by] the country where the income is earned.
Suppose you’re a high-income earner. What then?
SIMON: If you’re getting lots of investment income, like dividends from owning stocks, your total income is in a much higher bracket.
So depending on the tax bands [brackets] of the country you’re residing in, you may end up paying more in taxes. The threshold determines when you move into the next tax band.
Last year, you ranked the 15 top places in the world to retire in 2022. Why did you give Belize an A-plus on its income tax policy?
SIMON: They have jurisdictional taxation; so you’re taxed only on the income earned in Belize. If you’re a foreigner who moves there and makes no income in Belize, you’ll pay no income tax in Belize.
When is the right time to tell your U.S. financial advisor that you intend to move overseas?
SIMON: After you’ve moved overseas! Many financial advisors, CPAs and attorneys say you can’t live in another country legally or that it’s illegal to own property overseas. They just don’t have any idea. Those things are wrong.
Financial advisors try to talk people out of moving mostly because they want to keep [the client’s assets] under their control.
But is part of why they tell them not to move simply out of ignorance about living overseas?
SIMON: Mostly. The tax guys, especially, have never dealt with this, so they don’t know how to respond and would rather do it on the side of conservatism. So they tell their clients that it’s a bad idea to move, or it’s illegal to invest overseas.
Back to the question of when’s the best time to tell your advisor you’re moving abroad.
SIMON: When you start your budgeting process and then have a solid budget for your living expenses and capital costs of moving.
