For those who want to retire abroad or move back to the U.S. after years working overseas, making the move is one thing — but figuring out how it will affect your finances is a much bigger challenge. Financial planning would require taking into account varying tax rules, currency fluctuations and even political instability.
The good news is that a new kind of financial planning is emerging to help people navigate the potential pitfalls: Cross-border planning can help you keep as much money as possible securely in your pocket as you move from country to country.
Americans who have financial interests outside of the U.S., live abroad or have dual citizenship; foreign citizens moving to the U.S.; or the foreign children or spouses of American citizens may all benefit from cross-border planning. If you are in one of these situations, seek out professional help to make sure you protect your financial interests.
Cross-border planning topic areas
The global financial and legal landscape is complex and ever-changing. Immigration, tax, labor and real estate laws, securities regulations and a host of other factors come into play when your money is active internationally. The potential pitfalls associated with cross-border financial transactions can range from severe penalties for failing to pay taxes properly to banks simply refusing to move money between domestic and foreign accounts without draconian levels of verification.
Some of the most essential elements of cross-border planning that you’ll need to consider include:
- Cash management: Failure to take into consideration disclosure requirements and regulations governing the movement of funds in and out of a country could lead to penalties. If U.S. citizens fail to disclose accounts overseas on the annual Report of Foreign Bank and Financial Accounts form, they may be liable for penalties of up to $10,000 per violation or higher. Additionally, currency exchange rates can affect the value of your money.
- Income taxes: American citizens living abroad must pay U.S. income tax, in addition to any taxes levied on their income in the country where they live and work. Tax codes in your country of origin and country of residence may both apply to your income. Traditional tax minimization strategies in the U.S. (like the use of municipal bonds for higher income earners) may not help reduce your global income if you are in one of a long list of residential tax system countries. Knowing down to the number of days you plan to spend working in the country in question will be important to income tax consideration.
- Retirement planning: Different countries have varying rules regarding taxation of retirement savings. Ignoring such rules may result in your overpaying taxes on retirement funds, underpaying and facing penalties, or missing out on government benefits you’re eligible for. Without proper planning, a worker looking to roll over a U.S.-based retirement plan such as a 401(k) to Canada, for example, could find those accounts becoming immediately taxable. But with careful coordination and understanding of the tax laws of both countries, it should be possible to handle such a transfer mostly tax-free.
- Estate planning: Foreign jurisdictions may not recognize and honor an estate plan formulated in the United States. Inheritance tax regulations and tax treaties vary among countries, and money heirs might inherit tax-free in one jurisdiction may be heavily taxed in another. For example, because of U.S. estate-tax laws, a Mexican citizen residing temporarily in the U.S. could face a major estate tax liability by buying a U.S. property, such as a home, outright. Seeking expert legal counsel before making such a purchase could save the decedent’s survivors huge estate tax bills.
- Investing: Again, tax and income liabilities and regulatory requirements come into play when dealing with the investment income generated or moved internationally. How global income is taxed in the country you are residing in is something you should know before you move.
- Insurance: Some forms of insurance benefits may not be wholly transferable from country to country. For instance, your U.S.-based health insurance policy may not pay your benefits in a foreign country, and a foreign country may not allow your heirs to receive a U.S.-based life insurance payout free of taxes. Proper advance planning could help you uncover and prepare for such issues.
Proceed with caution
It’s incredibly difficult to become an expert in all the many international regulations that affect money when it crosses borders. In fact, most cross border tax and estate professionals specialize in just a handful of countries or regions. To find a financial, legal or tax planner well versed in the cross-border issues in the country you are relocating to or from, consider resources such as the National Association of Personal Financial Advisors and the Financial Planning Association.
The world is truly evolving into a global society, but it’s one with complicated rules about how people make, save, invest and transfer their money. If you or your money needs to move into or outside of the U.S., proceed with caution and make sure you do some cross-border planning before you make the move.
Private Ocean is a West Coast-based wealth management firm deliberately structured to give clients the intimate experience of a small firm while harnessing the power, depth and discipline of a much larger one. Formed in 2009, the firm has locations in San Rafael, San Francisco, and Seattle.
Steve Branton, CFP, CPCC is a financial advisor, an Accredited Domestic Partner Advisor (ADPA), specially trained to advise on various financial issues including marriage planning, wealth transfers, federal taxation, retirement planning, and medical end-of-life needs for domestic partners and non-traditional clients, and a Certified Co-Active Coach (CPCC).
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