I’ve got $10.5 million net worth – are there any tax advantages if I chose to live abroad?

So I was scrolling Reddit the other day, catching up on missed posts, and one post just jumped right out at me. Someone, let’s call him “Thurston Howell, III” or “Mr. Howell” for short, was looking to retire abroad and wondering if there might be some way to reduce his tax liability on a retirement nest egg of $10.5 million.

Mr. Howell notes that his “net worth” includes about $9 million spread amongst two Individual Retirement Accounts (IRAs), two Roth IRAs, and a single 401(k) retirement account. The remaining $1.5 million is presumably invested in property and taxable bank and brokerage accounts. But according to his post, Mr. Howell actually possesses $50 million in assets. The reason his net worth is “only” $10.5 million is presumably because he has mortgages, loans, and other liabilities attaching to his various properties.

Still, Mr. Howell is one very wealthy fellow. So you can see why this got my attention:

What is this multimillionaire doing asking for free tax advice on Reddit?

Still, the question has been asked and I’ll attempt to answer it. Mind you, I’m not a tax lawyer or any kind of registered investment advisor. Also, tax laws, and international tax laws especially, are complicated business, and there are a lot of variables to juggle in this hypothetical, so take this advice for what it’s worth (and what it’s worth is free).

What Mr. Howell wants

Mr. Howell puts his age at about 49.5, but he wants to retire “soon.” He notes correctly that he could not ordinarily take withdrawals from his IRA and Roth IRA accounts penalty-free until he reaches age 59.5. But he needs $300,000 per year in income to support his retirement, and he’s using IRS Rule 72(t) to sidestep the penalty currently. (Rule 72(t) is complex, but basically, it permits Mr. Howell to avoid the penalty by making withdrawals in five equal installments between now and age 59.5, so basically one chunk of money every two years).

So let’s assume this particular problem is solved, and consider the math without accounting for any penalties.  

U.S. taxes

We’ll begin with the basics. Mr. Howell notes that “almost all” of his money is in his IRA accounts. So let’s assume he has $2 million in each IRA account, $2 million in each Roth IRA account, and $1 million in the 401(k). Let’s further assume that Mr. Howell will follow the retirement rule of thumb, and withdraw no more than 4% of his savings annually, to help ensure they last him through retirement.

And let’s leave his remaining $1.5 million in net worth alone. We’ll consider that an emergency fund that won’t be touched unless the retirement funds fall short. (Especially because, as we’ll see, the retirement funds will not, in fact, fall short).

Withdrawals from the Roth IRA are tax-free. Withdrawing 4% of $4 million is $160,000, so that gives Mr. Howell more than half the money he needs right from the get-go.

Withdrawals from ordinary IRA and 401(k) accounts are taxed, and Mr. Howell says his tax bracket is 24% in retirement. 4% of the $5 million in those accounts is $200,000. Times 76% that produces another $152,000 in annual after-tax income.

Voila: Mr. Howell has $312,000 in after-tax retirement income. Mission accomplished.

International taxes

Admittedly, we’ve discussed only U.S. taxes so far. Depending on where Mr. Howell decides to retire abroad, he may have to pay local tax rates either higher or lower than what the U.S. charges. Still, many countries have double-taxation treaties with the U.S., permitting Mr. Howell to deduct taxes paid in his new country from his U.S. tax bill.

So long as Mr. Howell picks the right country to retire in, he should be fine.

The specifics of retiring abroad

One final benefit of retiring aboard deserves to be highlighted.

Mr.  Howell must pay U.S. income tax on his IRA, Roth IRA, and 401(k) withdrawals, even living outside the U.S. But so long as Mr. Howell lives outside the U.S. for 330 days per year, he should be able to deduct at least the cost of his housing abroad (i.e. the foreign housing deduction) from this “U.S. income”. That’s a deduction of up to $37,950 in tax year 2024 and, at a 24% income tax rate, could reduce his tax bill by more than $28,000.

Long story short, with more than $340,000 in annual retirement income versus the $300,000 he says he needs, multimillionaire Thurston Howell, III, is going to be just fine. We should all be so lucky.