- Chris Chen, CFP®, has worked with expatriate clients and has lived abroad himself.
- He said one of the biggest problems expats face is filing income tax.
- Chen also shares considerations for IRAs and credit cards for expats.
Whether you’re moving abroad to save money, advance your career, or just to explore new landscapes, it’s important to know how your financial responsibilities will change when you arrive.
While moving to a new country can be a great opportunity, it also comes with inherent risks and complications. Read below to see what a financial planner wants everyone to know before they get on the plane.
Taxes get complicated
Chris Chen, CFP® at Insight Financial Strategists has helped several clients make the transition to living overseas and has lived overseas himself. He said one of the biggest problems expats face is filing income tax.
Many expats forget that they are still required to file a US tax return even when living abroad. If you owe taxes and you don’t file your U.S. taxes by the April 15 deadline, you could face a penalty of up to 25%. If you are entitled to a tax refund, you will only receive it if you file your taxes.
You’ll also likely have to file and pay taxes in your new country, and Chen recommends hiring both a U.S.-based tax preparer and a local tax preparer who can help you with foreign taxes.
“It’s hard enough to do taxes in the United States,” he said. “Learning about a foreign tax system can also be a chore.”
Understand the investment rules
If you’re financially savvy, you probably know that an IRA is one of the best places to invest for retirement if your workplace doesn’t offer a 401 (k) or something else. To be eligible to contribute to an IRA, you must contribute to “earned income,” income from traditional employment or self-employment. It’s easy for most of the working people.
However, you might not be eligible to contribute to an IRA when you are an expat. When you live abroad, you can deduct up to $ 108,700 of foreign income on your taxes. If you earn less than this amount, your taxes will show that you have no income. While this will help you save on taxes, it can also make you ineligible to contribute to an IRA.
If you pay money into an IRA when you don’t qualify, the IRS will impose a 6% excess tax penalty on you.
On the bright side, Chen said that if you already have a traditional IRA, you can convert it to a Roth IRA while you live abroad if your income is less than excluding foreign tax. This will allow you to convert the traditional IRA to a Roth without paying taxes on the conversion.
Talk to a trained financial planner who can help you decide on the best type of investment account to open, how much you can contribute, and where to invest. The XY Planning Network, a group of paid financial planners, has a roster of advisers specializing in helping expatriates.
Keep your American bank
Whether you plan to live overseas just for a year or the rest of your life, Chen says you should keep your US-based bank. You can use this bank account to accept US-based deposits without paying any additional fees. One option is to open an account with the State Department Federal Credit Union, which caters to US citizens who currently live abroad.
If you need to transfer money between your US bank and your foreign bank, find the cheapest way to transfer money between the two accounts. This may include the use of applications such as TransferWise or PayPal.
Open the correct credit card
Using a credit card abroad can be helpful, especially if you want to continue earning reward points for your travel and other activities. But be sure to use a card with no foreign transaction fees.
Many basic credit cards charge an overseas transaction fee of 3%, which can add up over time. For example, if you spend $ 1,000 with the card each month, you will pay $ 360 in avoidable charges.