Retirement planning is essential for everyone, however Americans living abroad face unique challenges that can require different strategies. In this article, we explore how US expats can secure their financial future by focusing on the 3 pillars of retirement saving, and how retirement saving differs for international Americans.
Pillar 1: Company workplace pension plans
US expat may have the opportunity to leverage both local and US-based retirement accounts. Expats who are employed by a foreign company can benefit from foreign employer-sponsored pension plans, which can provide an additional source of retirement income and may provide local tax benefits. These plans may involve employee and employer contributions, with varying rules on vesting, payout options, and tax treatment. Local tax benefits may not be recognized by the US tax system though, depending on the tax treaty between the US and the particular country. Consult with both a local tax professional with experience working with expats, and a US expat tax professional, to find out how to optimize your contributions and tax situation. Another feature of a local workplace pension plan is that in retirement you’ll receive distributions in local currency, an advantage if you plan to retire in the country as you won’t have to deal with currency conversion and the associated potential losses.
If you have taxable US income, you can still contribute to a US 401(k) or IRA account, regardless of your location, too. However, expats who claim the Foreign Earned Income Exclusion (FEIE) to reduce their US taxable income to zero typically cannot contribute to these accounts. Those who claim the Foreign Tax Credit on the other hand are more likely to be eligible. The tax benefits of US IRAs may not be recognized in the country where you live though – in many cases, they are considered regular taxable brokerage accounts unless a tax treaty explicitly provides favorable treatment for these accounts. Therefore, it’s essential to check how your IRA is treated under the tax treaty between the US and your host country, this is especially important for Roth IRA accounts, which are usually not recognized as pension plans in most tax treaties. If you plan to retire in the US though, it can still make sense, and in any scenario you’ll benefit from the stability, low fees, and security associated with investing through US accounts.
Combining both foreign pension plans and US-based retirement accounts can contribute to a well-rounded retirement strategy. Be sure to review your options, work with a financial advisor familiar with the tax rules for US expats, and ensure your retirement savings are structured to meet your long-term goals.
Pillar 2: Social security and state pension benefits
Social Security and state pensions provide another source of retirement income for US expats. If you have made the necessary contributions to the US Social Security system, you can receive your Social Security payments either in the US or abroad, as long as you’re a US citizen. However, spousal and survivor benefits may be restricted for Americans living overseas. Additionally, depending on the regulations of your host country, you may be eligible for social security benefits from that country if you have contributed to their system.
If you receive Social Security benefits from both the US and another country, the Windfall Elimination Provision (WEP) used to reduce your US benefits. The WEP applied if you were also receiving a pension from a foreign country where you did not pay into the US Social Security system. This provision limited the amount of US Social Security benefits you received. On January 5th, 2025, The Social Security Fairness Act was signed into law; once implemented, it will eliminate the WEP so this will no longer be an issue.
In cases where you have worked in both the US and in another country but have not earned enough credits to qualify for social security payments in either, a Totalization Agreement can be beneficial. These international agreements allow you to combine your contributions from both countries to qualify for, or to top up, benefits in one of them. However, there are only 31 totalization agreements, so far fewer than the number of tax treaties.
Pillar 3: Private income
The third pillar of retirement saving is private income from the investments and assets you’ve accumulated over the years, such as savings, dividends, or rental income from real estate.
For Americans living abroad, managing private income requires careful attention to the types of investments you choose, as some may trigger complex tax issues. For example, foreign ETFs and mutual funds may be classified as Passive Foreign Investment Companies (PFICs) by the IRS, and ownership triggers US reporting and tax liabilities. Note that the US requires reporting of non-US financial assets, and some other countries have similar requirements. Sale of real estate or other assets in the US can also trigger capital gains liabilities in the country where you live, so always seek both local and US advice before buying and selling assets, as cross-border tax implications can reduce your expected returns.
The principle of diversifying your income sources in retirement is good though. Investing in real estate, dividend-paying stocks, or other income-generating assets can provide stability and reduce reliance on a single investment type. Additionally, working with a financial advisor who understands the unique challenges faced by US expats can be invaluable. They can help you align your investments with long-term retirement goals, optimize your tax planning, and minimize currency risk.
By selecting the right assets, structuring your investments wisely, and avoiding tax-inefficient options like PFICs, you can strengthen your income stream and build a solid foundation for retirement.
With thorough research and guidance from experienced professionals, US expats can navigate the challenges of international retirement planning. By utilizing the three key pillars of retirement income, you can create a plan that aligns with your long-term goals for financial stability and prosperity.
If you have any questions about financial planning as an American living abroad, get in touch.
This article is for informational purposes only; it is not intended to offer advice or guidance on legal, tax, or investment matters. Such advice can be given only with full understanding of a person’s specific situation.
