Retiring To Overseas Spot Can Create Taxing Situation
By Janet Kidd Stewart
Your Money - ChicagoTribune.com

Live better for less in Thailand! Retire to Costa Rica!

Breeze through magazines aimed at retirees and you'll find headlines just like these, urging regular folks, not just the very wealthy, to consider foreign residences.

The allure is clear: lower living costs and warm climates. And as Baby Boomers retire with more foreign travel experience under their belt, they already may have acquired assets, homes or even spouses overseas.

But all that globetrotting can come with a steep price when retirees factor in the reality of the U.S. tax system, currency differences and estate challenges, experts say.

For many people, the appeal of international assets means much more than simply stashing 20 percent of a retirement portfolio in foreign stocks, said Edmond Walters, chief executive of eMoney Advisor Inc., a unit of Commerce Bancorp that offers online planning tools for investors and advisers.

"A lot of executives today have relocated overseas, and they're falling in love with places outside of the U.S. and considering them as places to retire," said Walters, whose company offers planning software to advisers that tracks assets in multiple currencies.

And it's not just ultrawealthy executives.

Retired foreign service worker Barbara Bevell Jacquin, 67, grew up in Virginia but lives in France to be closer to her two adult sons from a marriage there that ended in divorce.

She spent the bulk of her career in Europe, retiring as a diplomatic courier in Frankfurt, Germany. Now she has U.S. Social Security and pension income, French alimony and property and is considering part-time work.

Jacquin wouldn't trade her expatriate lifestyle but admits it makes for a confusing array of retirement challenges, from tax planning to health-care issues.

"There's really no magic solution except to plan ahead," she said, noting, for example, that some countries have lengthy residency requirements to get into the health-care system.

Having lived in France for almost 20 years prior to her divorce, Jacquin met that requirement. Her local banking accounts also helped her financial situation.

"Since I was known to the bank for those years, they offered me a loan at a good rate to help pay for the retirement house I wanted," she said.

She also found Internet sites and organizations were helpful. Among the organizations she leaned on heavily was the Association of Americans Resident Overseas (www.aaro.org), a Paris-based group that estimates 4.1 million Americans are living and working abroad today.

Other sources of information on the financial end of working and retiring abroad include Web sites TaxMeLess.com and EscapeArtist.com and books such as "The New American Expat: Thriving and Surviving in the Post-9/11 World," by William Russell Melton.

The Financial Planning Association recently added a Global Forum section to its Web site (www.fpanet.org).

For expatriates, tax issues are crucial, said Robert Keats, a certified financial planner in Phoenix, with credentials in the United States and Canada, who specializes in cross-border finances.

"Americans working abroad can generate surplus tax credits, for example, that can be used to offset taxes on foreign bond income" in certain circumstances, he said.

Meanwhile, changes in U.S. tax laws are taking away some of the best benefits to American expats.

Under tax legislation signed into law in the spring, foreign earned income of up to $82,400 can be excluded from reported income this year. But under so-called stacking provisions of the law, excluded foreign income will be counted when calculating a taxpayer's overall rate.

Say, for example, a person retires from a U.S. job, moves overseas and does some paid work in the new foreign country. Under the old system, any income under the threshold was excluded from overall taxable income, and any subsequent Social Security or pension income would be taxed as if it was the worker's first dollar, at lower tax rates.

Now, any foreign income under the $82,400 is excluded from direct taxation, but additional income from Social Security, pensions and investments can be bumped to higher rates, said Scott Bakal, a tax and securities law attorney with Neal, Gerber & Eisenberg LLP, a Chicago law firm.

All these complexities aside, the key thing to remember when contemplating a global retirement is to realize you'll be subject to two tax systems, not substituting one for another, said Bob Hudson, a senior tax partner in Miami with the Baker & McKenzie law firm.

"It really comes down to needing some sophisticated planning and advice," he said.

That, of course, comes at a price, so be sure your portfolio can handle the shocks.