As I sit down to write this, I just got off the phone with my mom, who moved to Australia almost 10 years ago—long before I became interested in global financial planning. She was venting about a minor oversight from a decade ago that is still causing her frustration.
She was updating me on the latest developments in the saga of the aftermath of a tax reporting mistake they made when she first moved from the US to Australia. Here we are, 10 years later and she is STILL trying to sort it all out.
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From a young age, I came to learn that moving abroad is an exciting, albeit complicated, endeavor. I watched my mom navigate it when we moved to the US from South Africa when I was in high school, and now I’ve watched her do it again as she has relocated to Australia.
If you’re moving abroad in the near future, how can you make sure you avoid a long, drawn-out tax reporting mistake (or something else)?
Today, we’re going to look at a few of the most common financial pain points of moving abroad, and how you can set yourself up for success.
Should I Use a Bank in the States or in My New Home Country?
The first question to sort out is where you’ll do your banking. The advent of online banking has made it possible in many cases to access your bank no matter where you go, but taxes and exchange rates may leave you wanting a local bank after you move.
Setting up a bank account may be difficult in your new home country until you have established residency. In some cases, you may just need to show your passport.
If you are moving overseas permanently, you will need to eventually set up an account with a local bank. But if you are only there temporarily (which can still mean several years) and you are maintaining a US address, you may be able to get by using your stateside bank, depending on your banking needs.
One thing to keep in mind is the exchange rate. Some online services exist that allow you to transfer money from your US bank account to pay bills, and many will even provide you with a debit card for international use. The exchange rates using these services, such as Wise or OFX, tend to be better than what you would see if you just used your regular US bank card.
Lastly, pay careful attention to reporting requirements when moving abroad from America. Anyone with foreign bank accounts with aggregate balances over $10,000 must report them to the US when you file your taxes.
What Should I Do with My Investments?
According to a Morningstar report on investor experiences around the world, the US ranks #1 in nearly every criteria, including regulation, disclosures, fees and expenses, sales and customer experience.
In short, if you can keep your investment accounts in the US, then you probably should. Of course, the final decision depends on the specifics of your situation.
After you move abroad, be wary of Passive Foreign Investments Corporations (PFICs) as investing in them can trigger additional taxes and reporting requirements. You’re probably better off leaving these alone entirely.
What About My 401(k), IRA, etc.?
401(k)
The most important point here is that under no circumstances should you cash out these accounts, especially if you haven’t reached retirement age (59.5) and your 401(k) is over $500,000. If you cash out in those circumstances, your tax hit could skyrocket to 50% or more.
One option (and likely the better one if you plan to return to the US permanently at some point) is to leave it in the US. As we said above, the American investment environment can’t be beat, so if you can leave your accounts here, then that’s likely your best bet.
That being said, if your expat status will be permanent, then you will probably want to roll your accounts into a retirement plan in your new home country. This option will depend on whether there is a tax treaty between the two countries or not.
For example, if you are moving to Australia, you can roll your retirement plan into your superannuation fund, and there may be some significant tax advantages for doing so. But if you are moving somewhere like Croatia or Belize or anywhere in South America, then you will likely need to figure out another option.
If you are moving permanently and you have a Roth IRA, consider making a full distribution from this account while you are still a US tax resident in order to take full tax advantage of this account.
The best approach for you depends on several factors, including your age, the size of your accounts, where you’re moving and whether your move is temporary or permanent. As in all cases, we recommend consulting with your financial advisor, preferably someone with expertise on the country to which you’re moving.
How Should I File My Taxes?
For the purposes of taxation, the IRS has two classifications of people:
- United States Persons – This is defined as a US citizen, US green card holder or anyone currently in the US who has been here for more than 183 days.
- Foreign Persons – This is a nonresident person who is not a citizen, does not hold a green card and has been here fewer than 183 days.
If you are classified as a US Person, you need to file US taxes, even after you move abroad.
You may be subject to additional filing requirements when moving internationally depending on the types of assets you have and your tax filing status. For example, foreign bank accounts with an aggregate balance over US$10,000, require that you file the FBAR (FinCEN 114).
Make sure to review your accounts with a professional before filing taxes as any oversights could be very costly. Failure to file penalties can easily exceed $10,000.
Should I Get a Financial Advisor in My New Country?
If you don’t have one, consider getting a financial advisor to at least help you navigate the transition between countries.
People moving across countries often wonder if they will need two financial advisors—one in their old country and one in the new. The rise of cross-border planning specialists can often solve this issue.
Ideally, you can find an advisor that specializes in cross-border planning between the US and the country to which you are moving. In some situations you may need an advisor in both countries.
Click here to download our ebook, “The Expat’s Guide to Financial Planning.”
What Else Do I Need to Be Aware Of?
Real Estate
Depending on how long you’re moving away, it may be best to sell your US real estate holdings once you move away. Again, several factors go into this decision but unless the real estate investment is very cash positive, it usually does not make sense to hold.
Life Insurance
The cost of term life insurance tends to be lower in the US than elsewhere, especially Australia. The death benefit is usually tax free, which can be especially beneficial for US persons.
529
If you will have tuition expense at a school that is covered by 529 accounts, consider paying tuition before you move. That will make it clear that you were a US tax resident when you made the payment, thus allowing you to optimize the tax advantage of the account.
Mind the Details
It may seem like a lot of details to remember, but it’s important that you understand the potential pitfalls of financial planning when moving between countries. Otherwise, you could end up with big financial penalties—or annoying little issues you’re still dealing with 10 years later.
If you want help thinking through the financial aspects of your international move, regardless of where you’re moving, click here to schedule a complimentary consultation with me.
