Retirement Planning for Expats Abroad

Retirement Planning for Expats Abroad

One option many Americans overlook is the possibility of spending their retirement years abroad. Moving to a new country is the beginning of a new adventure for some retirees. It is also an affordable alternative for those wanting to stretch their savings. However, there are some serious questions you must ask yourself about retirement planning for expats abroad. Which country best suits your needs? How do you ensure access to your retirement funds and draw your social security benefits? What financial policies and tax laws apply to U.S. citizens abroad?

If you already have a destination in mind, relocation guides such as this one can give you all the information you will need. If not, here is some basic information for any expat planning to retire abroad.

Social Security Benefits

Social security benefits provide financial support to the retired, disabled, and dependents or beneficiaries of a deceased worker. They should not be the sole source of income when retirement planning for expats. Instead, your monthly benefits replace a portion of your wages based on your pre-retirement income.

The amount you receive is determined from your indexed monthly earnings over the 35 years. If you worked more than 35 years, they will use the years when you earned the highest income. This can become more problematic for expats, such as myself. Since I have lived and worked outside the U.S. since my early 20s, it is going to be more difficult to accrue 35 qualifying years. In order to receive any benefits, you must have ten years of employment (40 credits) to be eligible.

The federal government uses different formulas and factors to calculate your social security benefits. This means monthly amounts will vary from person to person. The good news is that you are able claim your Social Security benefits from anywhere in the world. As long as you have access to your domestic accounts that receive your checks, you should have no trouble getting your money. Many international banks also accept direct deposit into foreign accounts as well.

IRA Contributions

Traditional and ROTH IRAs are a key component of any investment portfolio. Unfortunately, there are tight restrictions on any contributions you make if you claim the Foreign Earned Income Exclusion. The FEIE is an exclusion credit which reduces your taxable income. Any amount over the yearly adjusted threshold is subject to double taxation.

For my particular case, all my foreign income is excluded. I fall below the qualified amount of $107,600 for 2020. Therefore, none of my foreign income is eligible for IRA contributions. However, the IRS taxes any foreign income above this threshold so it is eligible. Unfortunately, all my contributions must be generated domestically and filed accordingly.

Due to financial policies for foreign banking institutions, there are severe penalties for any violations. Not only must I be careful how I fund my IRA, but I cannot legally make any portfolio changes while I am outside the U.S. This carries heavy fines and legal repercussions no one would want to face.

Online Banking

Probably the most important tool at your disposal is online banking. Before moving abroad, make sure you put all your accounts online and notify your bank. It is also a good idea to switch to digital correspondence. This is especially important if you have monthly bills to pay or Social Security checks to collect.

Moving abroad and retirement planning for expats can seem overwhelming at first. If you are uncertain whether it is the right decision, read through this checklist to see what it would require. You may be closer than you think.

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Should You Roll Over A Retirement Plan Distribution

retirement plan redistribution

Different circumstances arise that call for one to rollover their retirement plan. You may be left with little time and tough decisions to make. The decisions you make on whether you rollover your retirement plan and how you rollover your retirement plan distribution can have profound effects on several areas of your life, including how much you are taxed. Whether or not you rollover your distribution is not a decision to be taken lightly.  Continue reading

2019 Roth IRA Contribution Limits

Fall is quickly approaching.  Every October the IRS (Internal Revenue Service) releases their updated retirement limits for a number of accounts.  The Roth IRA is one particular account that many will be looking at.

For 2018, the contribution limit for a Roth IRA is $5,500 with an additional $1,000 catch-up for individuals over the age of 50.  The 2019 Roth IRA contribution limits will be announced by the IRS in less than two months.

Image result for 2019 roth ira contribution limits

The government uses inflation numbers to determine when and by how much to raise retirement limits.  When it comes to IRA’s, any annual increase in contribution limits will be in $500 increments.  Meaning that there are only two possibilities when it comes to the 2019 Roth IRA contribution limits.

Either the limits remain the same at $5,500 ($6,500 for individuals 50 or older) or it is increased to $6,000 ($7,000 for individuals 50 or older).  It is expected that the 2019 Roth IRA contribution limits will increase to the latter amount.

So what does an increase in $500 a year for a Roth IRA account mean?  Well, for starters, instead of being able to contribute an awkward $458.33 per month to the account, you will now be able to contribute an even $500.  Of course this only applies to individuals under the age of 50.  Contributing on a consistent basis has proven time and again the best way to invest.  You can take advantage of the market when it hits various highs and lows.

Are you worried that you won’t have the additional funds to contribute an extra $500 a year to a Roth IRA?  Then now is as good of a time as ever to go and create your very own free budget.  The best way to see where you are spending your money every month is to track it.  Although it might seem like a challenge at first, you will most likely be able to find a way to contribute the additional $41.67 per month to your Roth IRA.

Why choose a Roth IRA?  There are many benefits to having one.  First and foremost, the money you put into it will grow and compound tax free through the years.  Additionally, when you do decide to withdraw from the account, you will not be required to pay any income taxes on the withdrawals.  It’s an especially good account to have in order to help offset tax burdens brought on by 401k’s and social security.

With the official numbers for the 2019 Roth IRA contribution limits less than two months away, we will have to wait a little longer, but we can predict that more than likely the amounts will increase.

Budget Smart, Invest Wise

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2018 Roth IRA Contribution Limits

2018 Roth IRA Contribution Limits

We all know that we should be saving for retirement.  Whether you have a 401k, a pension, or an IRA, retirement accounts give individuals great tax breaks to help them prepare for their golden years.  It is often reported that people misjudge how much they will need in retirement.  The rule of thumb for a long time has been you need your retirement income to supplement 80% of your income when you were working; however, this number is different for everyone based on a number of factors.  One thing is certain.  Maxing out your retirement accounts never hurts.  For 2017, the IRA contribution limits stayed the same as they were in 2016.  You could contribute up to $5,500 towards your IRA, and if you were 50 or older you can contribute an additional $1,000 bringing your total yearly contribution limit to $6,500.  The 2018 Roth IRA contribution limits won’t be released until October of this year, but we can speculate what they might be.

Each year, the Internal Revenue Service (IRS) sets the income and contribution limits for IRA’s.  The last year that the IRS raise the contribution limit was for the tax year of 2013.  The contribution amounts for traditional and Roth IRA’s are the same each year.  They are evaluated and raised based on inflation.  The IRS will raise contribution limits in increments of $500.  This means that the next time they are raised, people under the age of 50 will be able to contribute a maximum of $6,000 a year to their IRA, while people over the age of 50 will be able to most likely contribute $7,000 a year.  In order for this raise in contribution limits to take place, inflation would need to be around 9% over a period of time for this to occur.

9% of $5,500 = $495

This would be near the $500 increment level the IRS would like to see to raise the contribution limits.

Since the last time the IRS raised contribution limits in 2013, inflation has risen by about 6.5% based on data tables.  This means that another 2.5% increase in inflation would be needed for the IRS to raise the contribution limits for traditional and Roth IRA’s.  With all of this being said, the most likely scenario is that 2018 Roth IRA contribution limits will remain unchanged.  A more likely scenario would be a raise in the contribution limits for 2019.

Despite the fact that the 2018 Roth IRA contribution limits won’t change, the IRS will still probably change some limits.  The limit they will change, and almost always do, is the income limits associated with eligibility for participation in IRA’s.  For 2017, the IRS raised the income phase-out limit to $118,000 for single earners and $186,000 for married, joint filling earners, raises of $1,000 and $2,000 respectively.

There are still many months to wait until the IRS reveals their 2018 Roth IRA contribution limits.  An increase in the limit would allow individuals to save an additional $500 a year in a tax-advantaged account.  Although an increase is doubtful, we can still remain hopeful.

Budget Smart, Invest Wise

The Retirement Crisis and How to Avoid It

retirement crisis

There is a retirement crisis currently underway.  Why is this?  Because people don’t save during their working years to fund their golden years.  The Economic Policy Institute recently released is a startling report about American’s retirement savings.

The Retirement Revolution That Failed: Why the 401(k) Isn’t Working

The graph above shows the median account values of retirement savings for a given age group.  The overall median among all age groups is a meager $5,000 while the median value for those closest to retirement, 56-61 age group, have only $17,000 saved up.

To put this in perspective, I am 26 years old and have been employed full time for less than 4 years.  In my retirement accounts, which include a company 401k, a rollover IRA and a Roth IRA, I have $47,589 saved.

Retirees are relying on Social Security by larger percentages these days.  Nearly 2 out of every 3 retirees rely on Social Security for at least 90% of their retirement income.  No matter your current age, there are ways to ensure that you are setting yourself up for success in your later years.  Here are the steps I followed to have my current retirement savings:

  1. Fund a Company 401k and get a full employer match.  This should be a no brainer.  Fund your company’s 401k plan at least to the amount that will maximize your employer’s match.  It’s FREE MONEY.
  2. Start an IRA.  I prefer a Roth IRA because it is money you will never be taxed on again, and is a good complement to a 401k (which you will pay income tax on in the future).  Go to Vanguard’s website and get one started in a matter of minutes.
  3. Maximize out your 401k.  If you are under 50, you can contribute up to $18,000 of your pre-tax pay to a 401k.  If you are over 50, you can contribute an additional $6,000.  See if you can contribute an additional 1 or 2 percent each year until you reach the maximum.

Planning for retirement is now more important than ever.  Many don’t have pensions to rely on anymore, so the responsibility is now on YOU to determine your retirement destiny.

Budget Smart, Invest Wise

Should I Save or Invest?

save or invest

Why not do both?

Whether you save or invest your money really depends on the financial objectives you are trying to accomplish.  Saving usually refers to putting money away from where it can be accessed quickly and easily for an impending purchase.  On the other hand, investing should tie up your money for a length of time, but it will also produce better returns.

TIAA-CREF’s video below breaks down the difference between the two.  After watching, decide what financial goals you are trying to achieve in both the short term and long term.

https://www.youtube.com/watch?v=PvKXr_mkF5s

 

Budget Smart, Invest Wise

Student Loans: Grace Period, Waste Period

I spoke with my sister who just recently graduated with student loan debt.  She asked me, “How do I start paying back my loans?”  I told her, I don’t know.

If you have recently graduated from college then chance are you have student loans to pay back.  There is student loan exiting counselling you must go through and then it seems like you’re all finished.

This is exactly what I did.  After I graduated I went through loan counselling sometime during the late summer of 2012.  And then… Nothing.  I don’t even believe I received an email until almost six months later when it was time to start paying back my loans.  My grace period was coming to an end.

If you take out a student loan through your college or university you will most likely have a grace period of six months.  This is so you can have time to “Get your finances in order”.  I assume these loan company figure if you were this easy to get into debt it was the least they could do.

The bad part about this “Grace Period” is that interest is accruing during the six months you aren’t paying back your loans.  The loan companies try their best to hide this from you and make it as difficult as possible to figure out how to pay back your loans before the period is over.

Step 1: Log on to https://studentaid.ed.gov/sa/?login=true and find out who your student loan provider is.

Step 2: Create an online account with your provider(s) and set up your account information.

Step 3: Begin paying back your loans before the grace period ends to limit the amount of interest you will pay over the life of the loan.

 

Budget Smart, Invest Wise

Thinking Outside the Retirement Box

Retirement Box

Having a company 401k is a beautiful thing.  A company match is the biggest way to get a free return on your retirement savings.  But don’t let a company sponsored retirement plan to be the end all be all to your future savings.  When it comes to your financial future, I’m a big believer in having multiple sources.  IRA’s, taxable brokerage accounts, real estate.  There are many ways you can put your money to work.

Working at a company for 40 years and having a retirement plan coupled with social security might lead to a decent retirement future.  Decent is not what I’m seeking and neither should you.  You need your company retirement savings plan, but you also need an IRA, and other investments to fund an excellent life during your golden years.

The following article presents additional ways to save for those future years.  It is possible to save too little, but you can never save too much.  Check out ways to expand your retirement portfolio and ensure you make the choices now for a great financial future.

http://finance.yahoo.com/news/ve-maxed-401-k-where-205207623.html

Budget Smart, Invest Wise

 

 

Video Series: Setting Up a Roth IRA

In Part II of the video series, we will talk about just how one should start a Roth IRA.  Roth IRA’s are an essential tool to have when it comes to retirement planning.  The money you place into your Roth IRA and the earnings that accumulate over time are never taxed.  When you reach your retirement years, 401k’s, pensions and social security are all taxed.  This is why it is important to have a non-taxed account to supplement your retirement years.  Ramit explains Roth IRA’s below and where you can begin funding your very own account.

Budget Smart, Invest Wise