Brian Dunhill is the co-founder and portfolio manager at DF-direct.
When Americans are considering expat life, particularly in their retirement years, there may be an array of factors driving their choice of destination: climate, political leanings, recreation opportunities, lifestyle and proximity to family members. What they often fail to prioritize in their retirement calculus is where exactly they’d be best positioned to achieve a level of financial security that can sustain them for the rest of their lives.
To understand what considerations should be top-of-mind of this planning, it may be helpful to start by defining what financial security really entails. To me, it means doing things because you want to—not because you’re forced to by financial constraints.
The challenge is that once you move to certain countries, your hands may be tied when it comes to financial planning. So while the discussion may begin, “I want to move here,” the inevitable follow-up question must be, “How do I make it work financially?” Not coming up with a well-founded plan in advance can lead to all sorts of financial problems down the road.
Why We Think Everyone Should Retire In France
We sometimes get clients who will come to us and say things like, “I want to retire on the Amalfi Coast,” or “My dream is to be hopping around the Greek Isles.” One way we judge the viability of individual countries for expat retirement is by noting where our clients tend to move and stay put. To that end, we’ve noticed that France tends to work the best of any EU country; most of our clients don’t leave once they’ve decided to retire there. (There are some countries from which we see clients regularly moving after a year or so; the taxation and other bureaucratic hurdles become too expensive and difficult to manage.)
Why is France such a great option for retirees, besides the food, the wine and the climate? It comes down to the double taxation treaty between the U.S. and France, which is unmatched. If all your income comes from the U.S., it’s only taxed in the U.S. So, for example, a typical American retiree might have a 401(k), some personal investments and Social Security—all of which are taxed in the U.S., not France.
Moreover, if you move from a high-tax state like New York to a low- or no-tax state like Florida, then on to France, you can end up paying less overall as a retiree in France than in the U.S. The only French requirement is reporting. Plus, you get free healthcare.
Spain, Italy and Portugal have all been successful in attracting retirees. But France is our top recommendation because of how well it handles U.S. retirement accounts. We also haven’t seen much tweaking of the French taxation rules, unlike those of some other countries. There’s a level of consistency that’s reassuring.
There are some caveats—trusts, for example. In most civil law throughout Europe, trusts can bump you into a much higher tax bracket. Back in the States, a revocable trust helps avoid probate, but in France, it can complicate things. As a result, we always joke: France is a great place to retire—just try to die in Portugal or Italy, where the inheritance tax is lower.
Everything You Ever Wanted To Know About Taxation Treaties
There are some common misunderstandings about double taxation treaties, which we want to clear up here. The most important thing for people to understand is that a double taxation treaty doesn’t eliminate all taxation. It’s meant to reduce the duplication of tax—but not wipe it out completely. And regardless, you still have to report in both countries.
The next question becomes: Where do you actually have to pay the tax? That depends completely on where you are. Take Belgium, for example, which doesn’t currently have a capital gains tax. But the addendum to the U.S.-Belgium tax treaty says that capital gains are to be taxed in the country of residence. Some might think, “Great, I’m living in Belgium—no tax!” But because Belgium has no capital gains tax, the treaty kicks it back to the U.S., so now you’re taxed there.
There are three different types of tax treaties you need to know about:
• Basic Double Taxation Agreements: These cover income tax, capital gains and corporate tax. (We talked about them above.)
• Estate Tax Treaties: The U.S. has an estate tax treaty with the U.K., which helps when someone passes away. But most countries don’t have that kind of treaty with the U.S., and that’s where things get complicated because inheritance rules vary dramatically by country.
• Totalization Agreements: This has to do with Social Security. In the U.S., you need 40 credits to qualify for Social Security (about 10 years of work). Now, let’s say you only earn some of those credits in the U.S. but also work in a country that has a totalization agreement with the U.S. (which most European countries do). You can combine those credits and get a prorated Social Security benefit.
Big Mistakes We Don’t Want Expats To Make
One of the biggest mistakes expats make (besides deciding to retire to places that put them at a disadvantage due to an absence of double-taxation agreements) is not tracking their pension or Social Security eligibility across countries. They retire and realize they never claimed pensions they were entitled to because they didn’t keep records. And in some countries, if you don’t apply when you hit retirement age, they don’t pay back interest—so you lose money just by waiting.
Another classic mistake: Overlooking the specifics of inheritance taxes. This, too, varies by country. For example, in the U.S., you can gift someone $13.99 million without paying any tax. But in France, you can only gift €150,000 every 10 years to a child without being taxed—basically, €15,000 a year. Anything above that gets taxed. Intricacies like this have taken many expats by surprise, costing them significant chunks of their estates in the process.
Lastly, you should always want to keep your investments on the U.S. side—mainly to avoid what are called PFICs: passive foreign investment companies. You wouldn’t let your kids use four-letter words, right? Well, your accountant won’t let you use four-letter acronyms. PFICs are bad news.
There are five main reasons to keep your investments U.S.-based:
1. Easier Tax Treatment: It’s less complicated to do taxes in your native country.
2. No FBAR Reporting: The money stays in U.S. institutions.
3. No FATCA Headaches: No complications with reporting foreign assets.
4. Clearer Protections: U.S. institutions have rules in place—like the FDIC and SIPC. If your bank fails, there’s a plan.
5. Lower Fees: U.S. investment platforms are cheaper.
Ultimately, before retiring in another country, we have one major recommendation: Consult with an expert. You need a strategy that reflects the realities of your unique financial situation, and you simply cannot rely on a one-size-fits-all approach. Getting everything lined up before you head overseas is the best way to achieve the comfortable, stress-free retirement that you’ve worked for your whole life.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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