Retirement plans are ever a difficult issue. For expats, it becomes more complicated by the minute. It’s not rocket science but significant planning and brainstorming is needed.
With the rise of digital nomadism and more and more Americans relocating abroad to establish a business, retirement plans get a new dimension.
Let’s start with the essentials.
Qualified Retirement Plans
There is a number of beneficial expat retirement plans. Depending on your circumstances, you may want to consider investing and saving when you’re younger.
For the majority of expats, the matter of taxes comes first. We’ll take a look at this complicated issue below, so read on.
For starters, let’s list the applicable expat retirement plans.
- IRAs — Expats younger than 50 may choose to make a maximum contribution of $5,500 per annum. Expats older than 50 may make a maximum contribution of $6,500 per annum.
- 401ks — Expats working for a US-based company abroad may benefit from this plan. The employee limit is $19,500 per annum but expats over 50 may add an additional $6,500.
- 403b — A retirement plan offered by public schools and certain charities. As such, it is not applicable to all expats.
- Defined benefit plans — As per IRS’ definition, defined benefit plans provide a “fixed, pre-established benefit for employees at retirement.” Employers may contribute more than defined by the plan. Because there are many options available, it is recommended to seek financial advice.
- Offshore pension plans — Intended for expats sent abroad as labor mobility.
Offshore Pension Plans
Offshore pension plans (OPS) may prove more beneficial than any of the IRS’ plans. Let’s take a look at the advantages and disadvantages first.
Advantages of Offshore Pension Plans
Typically, OPS advantages include:
- Both standard and sub-standard (“open architecture”) investment options
- Access to multiple investment funds worldwide
- The plan can be adjusted to take into account the favorable tax treatment offered to investors in the target tax jurisdiction
- Contributions can be made from anywhere in the world
- Contributions are flexible (can be increased, decreased, stopped altogether, or restarted)
- Premiums can be paid in multiple currencies as of 2023
- The savings sum can be paid out at once or in installments (your choice)
Disadvantages of Offshore Pension Plans
Investments can be risky, especially if you’re not versed in this type of savings. By far the biggest risk is associated with the fact that you’re investing directly on the world stock-markets. There’s no guaranteed value of the plan; it’s entirely dependent on the investment performance.
OPP risks are related to regulatory and tax changes and stock market volatility. Tax relief contributions are usually missing, too.
Types of Retail Schemes
Depending on where the retirement fund of your choice is based, there may be different retail-type schemes available.
Typically, there are authorized schemes (funds subject to regulation), regulated schemes (funds subject to host jurisdiction rules), specialist funds (have minimum investment criteria), and qualifying funds (assets are sold via qualified intermediaries).
Lastly, there are private schemes, which may be exempt or closed-ended. The first are private funds not marketed to the public, and the latter is considered collective investment schemes.
Transfer of Domestic Pension Plans
It is possible to transfer a domestic pension plan abroad. However, keep in mind that different countries have different laws governing pension funds and taxation.
In particular, pay attention to the currency offered as to avoid your fund being exposed to currency exchange rate risks.
Finally, if you are contributing to the retirement plan in a workplace abroad, keep in mind that IRS doesn’t treat foreign retirement plans like domestic ones.
There are a couple of steps an expat needs to undertake in this case, as follows:
Filing form 1040, which reports the wages from the foreign company
Filing Form 1040 Schedule B (Interest and Ordinary dividends) to disclose the location of the foreign savings account
Filing Form 2555 to claim the foreign earned income exclusion
Reporting the interest income from the foreign savings account
Filling an annual FinCEN form 114 (electronically) to notify the IRS about the foreign savings account
How to Plan for Retirement
As you can see, there are so many options available that sometimes it may be difficult to pick a single solution.
The best way to go about things, as ever, is to plan well ahead and stay in the know. If you’re uncertain how a scheme you’re considering may benefit you, always ask for financial advice from credible sources.
As for the planning part, the factors to consider include:
- Retirement destination — before retiring abroad, you should absolutely make certain to familiarize yourself with the costs of living, legislation, local language & customs, and political climate.
- Future major expenses — calculate your future major expenses. Basically, these include home purchases, medical bills, and children (education and similar).
As you can see, there’s a lot to ponder here, so take your time learning the ropes. Always keep in mind that there are multiple options available. Sometimes, living in one country and investing in another may be a better option than using domestic or foreign retirement plans.
It all depends on your specific circumstances, so plan well ahead as circumstances are known to be a fickle category.
