Working alongside locals to immerse in the culture of your newly adopted country is an exciting and attractive prospect, but it’s also the employment option more difficult to achieve for trailing spouses. We are often constrained by the duration of our spouse’s assignment and the type of visa that we entered the country with. Therefore I really want to congratulate you if you are one of those who have successfully taken up this challenge!
(If you are still looking and evaluating your options, you may be interested in this article: 5 Things to Think about Before Accepting Job Offer Overseas.
However, being employed overseas makes your retirement planning slightly more complicated. Your retirement savings are subject to the local tax laws and regulations, and can be difficult to keep track of once you move back to the U.S. Therefore I recommend maintaining contact with a local tax professional that can help you understand the issues surrounding retirement savings in that country.
In addition, here are a few things to consider regarding retirement savings from overseas employment:
#1: You may have to contribute without ever getting it back
Certain retirement savings, such as social security income at retirement, come in the form of taxes. Just as people on work visas in the US need to pay payroll tax but relinquish their share of social security payments, you might be subject to similar treatment in another country. Although this might be out of your control, you should explore further if you may be exempt from such tax, either due to your visa status or some type of tax treaty between your host country and the US.
In addition, you forego the opportunity to contribute to the US social security system when you work for foreign employers overseas. If you plan to work overseas for a long period of time but retire in the US, this may result in a lack of enough credits to qualify you for full social security payment when you retire. And if your spouse’s career brings you to multiple countries for relatively short amount of time, you may not eligible for public pensions in any of the countries. Take a look at this page to find out if you can contribute to the US system for the sake of continuity while working overseas.
#2: Your foreign pension or employer contribution may be immediately taxable
In the U.S., contributions from your employer to “qualified plans”, such as company pensions and 401 (k) plans, enjoy tax-deferred treatment until distribution. It means that you do not have to count the contribution as taxable income, even though it’s already deposited in your account. You simply pay taxes when you start taking the money out for retirement, most likely after you turn 59 and a half.
Since foreign pension plans are not considered qualified plans by the IRS, any compensation you receive from your employment is currently taxable, even though you may not be able to access it until retirement. To make matters worse, you may be taxed again by the foreign government, either when you receive contributions to, or payments from, these foreign plans.
There are exceptions, though. Certain countries have tax treaties with the US that give foreign pension plans favorable treatment. Therefore it is beneficial to work with a local tax professional familiar with bilateral agreements between the US and your host country. Even if you cannot avoid taxation, you are able to utilize Foreign Tax Credit to offset some of the tax liability in the US. Moreover, getting retirement contributions and being taxed for them is better than not getting retirement contributions at all, don’t you think?
#3: You can still save in the US
You can still save in your Traditional or Roth IRA in the US, as long as you are reporting taxable compensation on your federal tax return. (Your total foreign compensation, including retirement contributions mentioned in #2, could still be under the limit of claiming Foreign Earned Income Exclusion. In this case, you do not have to pay US taxes now, but you also cannot save in tax advantaged retirement accounts.)
Without transferring your savings in the foreign country back to the US, you can simply appropriate your current savings in taxable accounts into the tax advantaged accounts. For example, you may have an emergency fund in US dollars sitting in a checking account in the US. After you have accumulated enough emergency funds in the local currency, which may be more useful depending on your living arrangement, you can consider funding your IRA accounts with your US checking account balance. Or, if your spouse is paid in US dollars, you can spend local currency from your pay check and save in the US accounts, which might save you the hassle of #4.
#4: You may have to report your foreign accounts
Unfortunately, in an effort to fight criminal activities involving offshore accounts, the Treasury Department now requires any US person who has a financial interest in, or signature authority over, a foreign financial account exceeding certain thresholds to report the account yearly online. It is separate from reporting your income and filing taxes, and does not increase your tax liability. You are required to report if the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year; however, certain accounts are exempt from the reporting requirement. Take a look here if you think you may need to report.
So far we’ve covered some technical issues you may encounter when you save from local employment income. I will cover another critical aspect that has to do with saving in foreign currency and investing in foreign entities in Part II.