Expat retirement planning for Americans

Expat retirement planning for Americans

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When I was a kid at boarding school in England I remember one day a group of kids (not me) took the handbrake off a Land Rover belonging to the Chemistry teacher, Mr. Curtis and free-wheeled it down onto the cricket pitch, abandoning it on the pristine bowling surface.

The next morning at Assembly, the headmaster asked for information leading to the apprehension of the culprits and one was duly forthcoming. The next day said ‘snitch’ appeared in class having clearly had a serious beating, but when asked what happened he replied, “ fell down the stairs Sir” Lesson learned. School was horrible back then but at least we didn’t actually go around shooting each other.

These days, whistle-blowing is all the rage with one rather high profile individual passing almost 5,000 UBS accounts over to the IRS and after a short stint in jail collected $104 million in rewards.

As of July 1st, 2014, pretty much all financial institutions including banks and insurance companies will report either directly to the US government or indirectly via their own government, all accounts in the name of US Persons over US$50,000. There are estimated to be about 7 million US citizens residing abroad and it is a criminal offence not to file an annual tax return even if you owe nothing. One estimate is that only 7% of these are filing. That’s 6.5 million non compliant!

There’s an annual income exemption limit so earnings up to $99,000 are not taxable but you still have to file. Short and long-term capital gains are still taxable and death duties still apply.

If you invest in any non US Investment Fund or offshore insurance bond or regular savings plan, then that will qualify as a Passive Foreign Investment Company (PFIC) and these are taxed hideously with mountains of paperwork for reporting and whilst in the past, you might have hidden it, not anymore will that be possible unless it’s below $50,000 and even then, some financial institutions will just play safe and report every dollar.

The new rules Foreign Account Tax Compliance Act (FATCA) will generate gazillions of TB of data for the IRS to sift through and given the glacial speed of that department you might consider yourself rather unfortunate to get a knock on the door for an audit anytime soon. Since currently the IRS only goes back 6 years on audit, you could take this a warning sign and get your act together now.

What can you do? First, take advantage of the 401k and IRA facilities that exist; if they apply to you. If you have a US employer you probably can but otherwise choices are very limited.

The maximum amount of contributions a person can make to his or her 401(k) plan is set each year by the IRS. For 2014, you can contribute up to $17,500, slightly more if you are age 50 or older. Matching contributions from the employer are limited to 25% of your salary (or 20% of your net self-employment income if you are self-employed).

The total of your elective salary deferral plus employer matching contributions is limited to $52,000 for the year 2014.

The bad news: A recent survey from American Investment Planners reported that the number of employer 401(k) matching programs has decreased by 7 percent. And another recent survey by consultant Towers Watson reported that 18 percent of 334 companies surveyed have suspended or reduced contributions to conserve cash. And 23 percent of companies that reinstated matches offered less generous contributions than before the recession

What’s more alarming to workers is the growing number of companies cutting 401(k) plans altogether.

Since 2009 approximately 6 percent of 401(k) plans have been terminated. To make matters worse, the number of traditional defined-benefit pension plans decreased by 15 percent in 2011.

How much can you contribute to an IRA or ROTH IRA for the 2014 tax year?

  • $5,500 for those age 49 and under.
  • $6,500 for those age 50 and older.

According to a recent report I read somewhere on the internet, US based retirement assets total 4.2 trillion bucks. Sounds like a lot, right?

There are around 320 million people in the good ‘ole US of A. In 2012, 66.73% of the population was aged between 15 and 64

  • For 320 million people, retirement assets of 4.2 trillion gives, on average, $13,125 each, IN TOTAL
  • For 213 million people, (the 66.73% between 15 and 64), retirement assets of 4.2 trillion gives, on average, $19,718 each.

Hmmmm, not looking so good now, huh?

If you are mid 30’s now, retiring at 65 and contributing the absolute maximum to US tax-advantaged retirement plans, (let’s round it up to $60,000), then at a net rate of growth of 8% per annum you might be looking at a pension starting at around $25,000 per year, (assuming current interest/annuity rates and a 5% annual increase in that pension)

The problem is that almost every other option to add to your wealth so that you are more comfortable in retirement is taxed either as short-term of long-term capital gains at 20% and 39.6% respectively.

The good news: We have access to a retirement plan that is uncapped, can invest in assets outside the US and at retirement age you can take 30% tax free with income tax only on the portion that represents growth within the plan, which by the way, does not pay any taxes while it is invested within the plan.

So, no tax on growth of assets while invested in the plan, ability to invest in PFIC’s with minimal reporting and no penalties, 30% available at retirement without tax and an income for life on tax advantageous terms AND no cap on contributions.

The catch? It’s a retirement plan so no access until age 55.

 

Author: Mark Plummer
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Mark Plummer is currently a Wealth manager with Acuma Hong Kong Limited & founder of the experienced investor website Invest Offshore Direct

This is not an offer to invest. Nothing here should be construed as investment advice. If you want specific advice then you should consult a financial advisor.
The opinions expressed herein are mine and do not necessarily reflect the opinions of Acuma Hong Kong Limited or the deVere Group.