Looking to enjoy the perks of living abroad? Don’t overlook these financial mistakes!
ANCHORAGE, AK / ACCESSWIRE / July 2, 2021 / Have you ever dreamed of living and working in a foreign country as an expat? With more and more remote work options becoming available due to the pandemic, this dream is becoming a reality for more and more people. Countries like Dubai and Aruba are opening their borders to those who have remote work positions and would like to live (and work) in a tropical setting or just experience something different.
This isn’t really a new trend, just one that is growing much faster now due to the coronavirus pandemic. First made popular by Tim Ferris’s best-selling book, The 4-Hour Workweek, the idea of working remotely to take advantage of “lifestyle arbitrage” has now become more mainstream. The idea is that your money can go much farther in countries with a lower cost of living, and you get to experience a new culture at the same time! What could be better? What could go wrong?
Well, expats, both foreigners living in the United States and US citizens living overseas, have a more complicated financial life. The tax and investing rules are different for those who consider themselves global citizens and seek out life in another country. The rewards (both professional and personal) from being an expat can be huge, but so can the potential financial pitfalls that many expats make while living abroad.
One of the most common mistakes that American’s living and working overseas make is not realizing that they are still responsible for taxes in America, even if they are not living in America! The United States is the only country in the world that taxes its citizens worldwide, no matter where they live. There is a misperception that if you live in a so-called “tax haven country”, you will not have to pay taxes. You may not have to pay taxes in the new country you reside in, but you will always have tax obligations in the United States as long as you remain a citizen.
Another mistake common to US expats is investing in their new country of residence. Many do this because they believe that they will be able to escape US taxes on their investments by keeping their money overseas. Saving your money in anything that resembles an investment (mutual fund, money marker, ETF, etc) in a foreign country will trigger the PFIC (passive foreign investment company) rules on an expat and will not only become a tax nightmare for them, but the taxes due will almost always make the investment a bad choice for them.
Foreigners that have come to live and work in America also often make financial mistakes. The most common one being their choice inside of their employer’s 401(k) plan. This type of retirement plan is usually something strange and new for a foreign national working in the US. Retirement contributions usually default to the traditional portion of the 401(k) and not into the Roth option. This ends up costing foreign nationals a lot of money in taxes and penalties when their contract in the States is over and they would like to withdraw their money and take it with them back home (usually before they are 59.5 years old and subject to the extra 10% penalty to take their money out of the 401(k) account)! This problem can be (somewhat) avoided by just understanding the difference between a traditional 401(k) and the Roth 401(k) option. Choosing the Roth 401(k) is always a better choice for expats in the USA who plan to return to their home country at some point and not stay permanently in the United States.
If you dream of being a globe trotter and want to make sure that you are not only doing everything (financially) right, but maximizing your finances while living and working overseas, you should seek out specialized help. Most US-based financial advisors have very limited knowledge of rules surrounding being an expat and are not in a position to help, and can sometimes even hurt clients with bad advice. Luckily, there are firms that specialize in helping expats with their financial planning and investment issues. One such firm is Baobab Wealth Abroad, a full-service planning firm dedicated to helping expats with the complications that come with living abroad.
Born in Zambia, married to a German, and having spent most of his life as an expat (currently, as well), James Miller, CRPC, is no stranger to untangling complicated tax issues and helping globally-minded expats and cross-border families with their financial planning and investments. The founder of Baobab Wealth Abroad, James helps Americans and cross-border families around the world create real wealth for themselves and their families in tax-efficient ways so they can maximize their own dreams in life and beyond.
James Miller, CRPC
SOURCE: Baobab Wealth Management
View source version on accesswire.com: