Looking west from the shores of Portugal, over the vast expanse of the Atlantic Ocean, it’s humbling to realise that the next major landmass you would encounter in that direction is North America.
Like looking at a full moon on a clear night, the sense of scale in relation to ourselves is truly mind boggling. Nothing like the grandeur of Mother Nature to give us a sense of perspective and of our relative place in the grand scheme of things. And in this expansive frame of mind, it’s good to contemplate our life and take stock of where we are versus where we want to be in the future. Our friends over in the United States are increasingly looking East over that same stretch of water and coming to the conclusion that Portugal might be a good place to spend their retirement years. With all the benefits that come of close proximity to the rest of Europe and some generous incentives by way of tax and residency regulations, expat traffic from the US is on the rise.
Bravo I say, and bem-vindo; but before you bid farewell to the dollar entirely, it’s perhaps wise to look into how you will make the most of your savings and pensions in the Euro zone.
The first thing to bear in mind is that, whatever your situation, as a US citizen you will still be required to complete an annual tax return even though you live abroad. Any taxable income including traditional IRA and 401k withdrawals, taxable pensions or income derived from property rentals and business must be declared. Further to this, different states in the US have different tax requirements and not all honour US tax treaties; it’s worth taking advice from a financial professional who can help you to work out what your tax responsibilities will be.
You will also be required to submit a tax return in your new country of residence. The good news here is that Portugal has a number of double tax treaties (DTTs) with other countries, and the United States is among these. If you are earning any money at all in Portugal, it may be possible that you qualify for ‘Foreign Earned income Exclusion’ which would mean you wouldn’t have to pay tax on income of up to $108,700 (as of 2021).
The question of what to do about your pension once you are resident here is somewhat more complicated. Essentially pensions are investment products which allow you to invest for your retirement and benefit from certain tax advantages while doing so – if there’s no parity between the types of products available in your home country and your new country of residence, it becomes very difficult to transfer a pension fund between the two locations. In order to do so, you would be forced to transfer the fund as a lump sum and it would be necessary to pay income tax on the full amount once received in Portugal. On top of this, due to your tax liability in the US as previously mentioned, you would then be subject to further tax incurred after the money is reinvested in a Portuguese pension product – not very tax efficient.
So, it would seem clear that keeping your pension in the US and drawing an income from there is the way to go for tax efficiency. And that would be the case were it not for the fact that some pension custodians in the states can make it difficult for non-residents to maintain their IRA/401k’s once they are resident elsewhere. Typically, they will retract all investment privileges which will prevent you from making any changes to your investment strategy or selling your assets should it be necessary. In the most extreme cases, they can issue a 60-day deadline asking you to find a new custodian for your IRA, with failure to do so resulting in them sending a cheque for the full amount along with the taxes due.
To avoid these kinds of nightmare scenarios, Blacktower has secured terms of business with providers in the US which allow non-residents to transfer funds to another pension product, without loss of their investment privileges. As such, clients can continue to access their money from Portugal in the most tax efficient way, and receive continuity of service and advice between the two countries, due to Blacktower’s physical presence in both.
Blacktower Financial Management has been providing expert, localised, wealth management advice in Portugal for the last 20 years. We can help with specialist, independent advice on securing your financial future. Get in touch with us on: (+351) 289 355 685 or email us at firstname.lastname@example.org.
This communication is based on our understanding of current legislation and practices which is subject to change and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice form a professional adviser before embarking on any financial planning activity.