Personal Finance

I'm in my 50s and am planning for early retirement abroad - how do I reduce my taxes on the $9 million in my retirement accounts?

John Seetoo

Published: December 1, 2024 11:11 am

Adherence to a F.I.R.E. (Financial Independence Retire Early) strategy can help a substantial retirement nest egg grow to a target amount of as much as a decade or more before one reaches age 65. However, taking early retirement when one is still in their highest earning level and tax bracket can create a substantial tax bite from the IRS and municipal government, depending on one’s state of residence. Additionally, deciding to become an expat in another country during retirement can trigger other tax issues unless careful planning is conducted beforehand.

You Can Run, But You Can’t Hide – From the IRS

Unlike other nations, US citizens are taxed no matter where they may live on the planet.  Additionally, the IRS will continue to add late penalties and pursue unpaid taxes for up to 10 years. This can pose problems for those who have romantic notions about retiring overseas without a plan to satisfy the IRS getting its cut off the top.

A Reddit poster in his 50s who has accumulated $9 million between a pair of IRAs, 2 Roth IRAs and a 401-K wants to retire soon. In addition to $1.5 million in post-tax, non-retirement funds, he plans to travel abroad with the possibility of relocating to another nation to live as an expat. Using the 72t rule to avoid early withdrawal penalties, he intends to withdraw $300,000 per year for a minimum of 5 years, but wants to mitigate the tax hit liability in his plans as much as possible, since he is in the 24% bracket. 

Among the questions he posted on Reddit to solicit advice were:

• Does anyone have any knowledge or experience if you can lessen your IRA taxes by moving out of the US?
• Are there any tax advantages to simply traveling abroad extensively?
• Are there any examples of countries that would be best to consider for tax purposes?
• Do you have to move your money to another country or can you keep it in a US bank?
• If money stays in a US bank do you simply use a CC for expenses or do you move some yearly cash to the bank of the country you are in?
• Any other ideas on how to reduce the tax burden on IRA accounts?

Some Strategy Suggestions

While a tax professional with all of the details about the poster’s finances should definitely be consulted, there are some tactical steps that can be taken as part of a more comprehensive strategy.

One strategy the poster should look into is to create a side hustle gig (perhaps with part of the $1.5 million) from a hobby or interest that generates income, even if it amounts to a net loss. As long as it makes a profit in 2 out of 5 years, the IRS will accept it. This creates the following benefits for future retirement account withdrawals: 

• If the investment is in real estate, mortgage deductions can reduce the taxable base and potentially lower his tax bracket. The rental income can also be a good source of passive income in the future.
• Any expenses that can be justified as associated with the other business are deductible and may be pooled against other passive income, such as withdrawals.
• Quitting the high-paying job a year or so after establishing the side hustle and declaring it now the main source of income will likely place the poster in a lower tax bracket.

Living the Expat Life

• Many retirees with US dollars can often live very well in other countries with a lower cost of living and a favorable exchange rate. Countries such as the Philippines, Vietnam, Thailand, Indonesia, Portugal, Spain, Argentina, and Greece are some of the more popular locales.

• Assuming the poster plans to keep US citizenship, he should research the Foreign Income Earned Exclusion, which prevents double taxation up to $120,000. 

• Extended travel abroad can, in fact, trigger additional tax liabilities from other countries if one stays beyond a certain period of time.

• Once a withdrawal from a tax-deferred retirement account is made, the IRS doesn’t care where it is kept as long as the tax due is paid. So a bank location doesn’t affect the tax situation. However, moving a substantial sum into a foreign country can offer some benefits, depending on its national laws, for residency and citizenship, i.e., a passport.