I found this article on the Moodys Tax Weekly:
Life Expectancy, Retirement Planning?
It seems to me that any effective, responsible retirement / estate planning, leaving something behind for our families, can drastically change when taking into account US citizenship-based taxation, excessive penalties (vs actual taxes owed to the US). If we have been able to do any careful planning with our countries’ savings incentives (such as Canada’s RRSPs, RRIFs, TFSAs, RDSPs), certain mutual fund investments, etc. it all now has a different face. Some are already there, into retirement, out of the work force and with limited choices to change course.
Your question is:
” Just how do US Persons Abroad now effectively plan and save for their retirement?”
Simple: You cease being a US person – meaning you Renouce Your U.S. Citizenship.
We are used to talking about “citizenship-based taxation” as the problem. Not exactly. It’s the specific application of citizenship-based taxation.
The U.S. has a tax system that punishes tax deferral. Many other countries of which Canada is one, have systems that operate on the principle of tax deferral. (“American Exceptionalism” conflicts with the world.) Examples include the TFSA, and other kinds of tax deferral plans. Furthermore, for many Canadians their best investment is their principal residence because it is a tax free gain. As you know in the U.S., a principal residence is, except for a small exemption, subject to capital gains tax. What about a Canadian Controlled Private Corporation? Nope your are subject to Subpart F (assuming investment income), and in many case, it is also a PFIC. Speaking of PFICs, (aka mutual funds), the tax (which is really a penalty to protect the domestic mutual fund industry from competition) can easily exceed the amount of the gain (and if it is paired with the attribution rules of Subpart F) can come close to confiscating the value of the investment.
So, to answer your question:
You renounce US citizenship. If there is a huge “sell off” in the stock markets, you get rid of your mutual funds. When it comes to mutual funds, the greater the profit, the longer the holding period, the greater the punishment. You do NOT want to get caught holding any profits.
If you have children, who are US citizens, you do them the great service of explaining why they need to renounce NOW.
It’s that simple.
I suppose I could add that, if want to invest in mutual funds (God knows why you would), invest in US ones. They can’t by definition be a PFIC.
Other things to look out for:
Certain pension plans.
Avoid any kind of life insurance product that is not term insurance.
These rules are nothing more than “American Exceptionalism” at its most “Exceptionally Stupid.”
Other life style things:
I notice that the Forbes article you are referring to suggested that married people live longer. Well, you should also know that a U.S. spouse cannot, under certain circumstances, leave the non-US spouse the estate tax free. Also, if you are a US citizen abroad and have a child who is not a US citizen, you can’t claim that child as a dependent. (Although, I think there is a possible argument that these last two examples might violate the equal protection clause of the 14th amendment – citizenship is a “suspect classification”.)
And I haven’t even mentioned the other big tax on being a U.S. citizen abroad. It’s the horrible, horrible, compliance costs (even if you can even find somebody to help you). It is a huge, huge additional tax (both financial and in terms of LCUs.)
But, honestly the best, most reasonable, rational, best and simplest return on your investment is to renounce U.S. citizenship.
Congratulations on your Nov. 14 appointment. It will be the single best investment – guaranteed return – in your financial security!
There is only one other option:
Move back to the United States – you will then not be treated as harshly. U.S. citizens abroad are subject to far more rules than “Homelanders”. But, then you have to live in the Homeland!
I would concur with what Renounceuscitizenship has said. Life abroad as an U.S. person is financially an impossibility and the U.S. is incapable of in any way caring about it this issue.
Things will never change for U.S. persons abroad until the U.S. psyche is brought into the modern era and is no longer in love with its own image. In other words American Exceptionalism is really nothing more than the old vice of narcissism wrapped in the U.S. Flag.
Fully agree, that’s why I am 100% committed to relinquishing as soon as I get a real 1st world passport.
Thanks, renounce, for the very clear kind of financial advice that we all should think about in trying to be responsible for our later years. You have made very clear the best of our options (nix on the final thought you give us!).
Recalcitrant, thanks for the visual image of American exceptionalism — being in love with its own image in the mirror. It could be so different and gain back some respect the USA has lost, not because it is the best but because it was at one time and could be again a humane, caring nation. All nations; all of the nations’ peoples have their own beauties and their own flaws.
We are all human beings; our situation could be much different by accident of birth. Citzenship-based taxation has been given a trial run — it is not fair for the US or for US Persons Abroad, in so many ways.
CHF forever, hope that process is well underway for you getting an other than US passport! (and please let us record your experience here).
*As people here already know, I have grappled with many conflicting emotions regarding whether to keep or renounce my US citizenship. I agree that its current tax laws make planning for retirement difficult. I am not fully at ease knowing that I’m currently having to rely on my accounting firm’s strong but still grey argument regarding how it’s treating my pension fund. It’s making me dependent on them, as a result. I fear that if I moved to someone less expensive that they wouldn’t be able to effectively defend me if the IRS decided that I should have been filing the foreign grantor trust forms, for instance.
I would thus be easily paying at least 10% of my net income which I think is quite high, given that I’m not wealthy.
If in a few years it’s still obvious that things aren’t going to be made any easier for expats, I will probably then take steps to renounce. It breaks my heart but I agree with everyone here how onerous it’s all becoming.
I agree with Calgary that the US is not how it used to be. While I believe that many of the draconian fines are largely bluff as a means of scaring us into compliance, it’s nonetheless very unpleasant and frightening to have such ominous threats hanging over us. Though I should no longer face heavy double taxation after the 2012 tax year, I will indeed face the further tax on tax that my ongoing compliance costs will entail, not to mention the higher administrative fees that my US-compliant investment has compared to how I was invested before.
The accounting firm and my advisor don’t want me to renounce because they want to retain me as a client, which is understandable enough. It’s obviously in the tax preparation industry’s vested interests for the status quo to remain so they continue to get their ‘protection money’.
I wish so much that common sense and decency could prevail but perhaps a caged desperate hungry bear can’t help but lash out when feeling threatened. Looking back, I regret that I hadn’t relinquished as soon as I’d realized way back in the late 1990s that I loved my life in England and never wanted to move back to the states. I regret that I hadn’t got my UK citizenship way back then instead of waiting till five years ago. I subsequently voted in the US election and renewed my American passport so relinquishing is now an impossibility. I could have also simply avoided investing and opening a pension plan too, but obviously had had no idea at the time about the complications I was creating…plus, of course, had had no inkling of how draconian the US was going to become towards us.
I fear that gruesome laws may be passed retroactively making renouncing that much harder and more expensive. I fear that they make life difficult, especially for those who’ll want to continue being able to visit their families in the US. I dread getting hassled at the border if I try to enter with a CLN. I know my parents will understand if I went through with it but don’t know how my brothers or my niece and nephews would view me; as one of my brothers is high up in the Navy, he could well regard me as a traitor because he is very patriotic. All so difficult and heart-wrenching… :'(
Money is not everything, of course, and sometimes I feel that sacrifices are necessary; after all, we’re in unprecedented times and we all have to help out. I do partially agree with the notion of being willing to pay my fair share because I did after all grow up there and all the rest of it. But there comes a point when it’s no longer reasonable or fair, the demands that are being placed upon us!!
If a particular citizenship becomes an obstacle to living a normal life, does one really have any other choice other than cutting it loose?
“Money is not everything, of course, and sometimes I feel that
sacrifices are necessary; after all, we’re in unprecedented times and we
all have to help out. I do partially agree with the notion of being
willing to pay my fair share because I did after all grow up there and
all the rest of it. But there comes a point when it’s no longer
reasonable or fair, the demands that are being placed upon us!!”
I don’t think that very people renounce for money. They renounce because the rules that apply to US citizens abroad are so onerous, the threat of fines is so real, the amount of time spent worrying about this is so great, and the social and business disadvantages to US citizenship abroad are so real, that: we feel we have to renounce. In short, we renounce so that we can have a life. This is a reality that can be understood only by somebody who has lived it. Against, that ask: what has the US done for me lately?
On the issue of Patriotism: Patriotism is NOT blind allegiance and servitude to the government of the day. Patriotism is allegiance to an idea or values. Because the US government is no longer loyal to the values of freedom and democracy, the US government is very unpatriotic. The US has lost its moral compass. The US no longer even pays lip service, to the values enshrined in its seminal documents.
On this note, I remind you that for a good part of his life Ronald Reagen was a Democrat. Years later he became a Republican. When somebody asked him, why he had left the Democratic Party, he replied:
“I never left the Democratic Party. They left me.”
I can certainly say in my case:
“I never left the United States, but the United States very clearly left me.”
Ask you brother the following question:
Is the United States that he is serving today the United States that he was serving at the start of his career?
@monalisa1776- you can’t let what a family member may think of you, no matter what government job that person may have. In the end when you are old and living off a pension who’s benefits have been reduced by U.S. taxation, he/she won’t be there to replace the benefit that has been lost to U.S. taxation.
We all know that you can’t live off of love and you certainly can’t live off of loyalty to family or country. The U.S. is very pragmatic when it comes to establishing policy and you have to be equally pragmatic when it comes to which citizenship you will hold on to.
‘….The U.S. government is no longer loyal to the values of freedom and democracy…’. So well said. I certainly believe they have lost sight of those values. It might have started prior to 9/11, but I believe that terrible event has only worsened things.
monalisa1776, the US doesn’t appreciate us or value us, except as it ‘values’ us as a source of revenues – by underhanded raising of funds through levying penalties. I believe that it will not change course. The latest guidelines demonstrate that. We can see that the penalty structures and requirements remain out of all proportion to any assessed or actual tax loss to the US – which in most cases is a big fat ZERO. We can see that not satisfied with what is already incredibly unjust and oppressive for those of us living ordinary lives ‘abroad’, the US and IRS intends to go even further – with FATCA.
All indications are that they know exactly the effect of their actions so far. That hasn’t changed the course they’re on, only added a few decorative frills to the pitfalls. Only imaginary creatures can use what they’ve offered up after 8 months of behind the scenes deliberation.
When threatened with danger, it is only rational to move to safety. Only getting rid of US citizenship can make us safe and protect our families. The US and IRS recognize no limits and apparently answer to no-one. Congress has chosen not to rein in the IRS, and itself, regularly issues threats that would make our lives needlessly harder. Neither presidential candidate gives a fig for those living abroad – except for grasping at donations.
Save yourself. Give your allegiance to the country where you want to live, and forget about the US. There is no hope that we will suddenly be welcomed with open arms. I predict that the US will not even pretend to care, and won’t vote to allocate the million or so to even pretend to ‘study’ the situation that we face. I thank Carolyn Maloney, but I don’t think we’ll get any support whatsoever – and even if they do study it, they won’t actually do anything with the results.
The US won’t help any of us when we need help, in old age or disability, or even just let us save for our children’s education, or future. So you don’t owe it any allegiance.
The American Dream is live and well, just not in America.
From the article:
Polls show that even after a withering recession, most Americans still believe that their nation provides unique opportunities to get ahead for people willing to work hard. But the EPI data suggests that’s wishful thinking left over from the past. “While faith in the American Dream is deep,” the report says, “there is considerably more mobility in most other developed economies.”
A debate on revising Swiss Naturalisation Laws, which was initially proposed as a blueprint early 2011, is currently underway in the Swiss National Council (Lower House of Parliament) to reduce the residency requirement from 12 years to 8 years and to possibly speed the process up. It may be subject to a National Referendum and many of the key contents seem to be getting a favourable response from civil society and key political parties (especially the point that showing one’s integration in society should be more important than residency requirement of any set amount of time).
I have been filing US taxes and FBARs every year since I left the US and intend to do so as long as I possess a US passport. My hope is that if the new Swiss law passes, I will be eligible to apply end of 2013. I’m still in my early 30s and I fear I won’t be able to do proper and burden-free planning for my future years with a US passport since my intent is to establish Switzerland as my permanent home.
Just renouncing is for many people not such an easy way out in term of retirements. What if you’re still stuck with financial interest in the US such as IRA (Individual Retirement Account) and US social security retirement?
As a non US citizen, you get hit by an automatic 30% tax withholding (unless you live in a country that has a treaty lower rate).
@popol, these are good observations.
I live in the UK and am not a US citizen, but still have a US IRA that I’m too young to draw on efficiently. The UK/US treaty is good — retirement funds are taxed only on withdrawal, and then only by your “state of residence” — but I’ve considered what would happen if I retire to a third country and the result could be ugly. I also wonder if the “blowback” from FATCA may force my IRA custodian into a lot of expensive tax reporting for me as a foreigner. Tax reporting that they might want to avoid by pulling a “reverse-Swiss” and simply closing my account.
I’m more sanguine about social security than about my personal retirement savings, for two main reasons. One, I’ve set my expectation of any government living up to its current social security promises by the time I retire to zero. It might not be that bleak, but I’m treating anything I might get as a bonus, not as a requirement. And two, there is nothing one can do about social security at this point anyway. Governments will do what they always do, which is to chisel away at it for as long as they can get away with, while claiming otherwise.
CHFforever – I don’t think a “First World” passport is sooo necessary nowadays. It’s not like it used to be 30 years ago. (True, a Swiss passport is very good!). For me, when I finally get my 3rd world passport, I can go to the UK or the rest of Europe no problem. That’s all I care about. I would only need a visa for the US and a few other countries that think they are still The Greatest Countries on the Planet. Just NOT having a US passport is all I want.
Move back to the United States – you will then not be treated as
harshly. U.S. citizens abroad are subject to far more rules than
“Homelanders”. But, then you have to live in the Homeland!
Well said. I bet most people here are in my situation: I’ve crossed the point of no return, when your whole life (job, kids, house, toys, money) is in another country. There is no way I could manage my affairs from the US. What you said also furthers my opinion that these rules amount to nothing more than spiteful punishment for contributing to an economy outside of the US.
@geez, re moving ‘back’ to the US as a non-option;
The US ‘homelanders’, IRS and Congress just don’t get it. For many of us, the US is a ‘foreign’ country, and our non-US families would never consider living there – they have no reason to. And although the US is just next door, if we were born duals, or lived outside it our entire lives, it is not our home and has never been.
As IBS readers here know, many of us were born duals, or ‘accidentals’ outside the US, or have lived elsewhere permanently for most/all of our lives, and have non-US spouses and families. Living in the US, or moving there has never been an option. Others who gave up US citizenship decades ago never intended to return to the US – and that is why they naturalized elsewhere when it was automatic to lose the US status – as was the case with many of the Canadians on IBS. They never sought or gained anything from the US other than the ability to visit family members there when necessary.
This *research by Amanda Klekowski von Koppenfels http://www.kent.ac.uk/brussels/BSIS/staff/vonKoppenfels.html underscores that most of us live abroad for reasons of marriage and family:
“In *surveys of nearly 1,000 Americans living primarily in Western Europe,
Amanda Klekowski von Koppenfels, director of migration studies for the
University of Kent in Brussels, found that the largest single group —
nearly one-quarter — were overseas because of marriage to foreigners. Only 10 to 15 percent had been sent abroad by their company or had
accompanied a transferred spouse.” http://www.nytimes.com/2012/08/27/us/politics/votes-from-expatriates-could-play-crucial-role-in-election.html
“former DA International Secretary, Amanda Klekowski von
Koppenfels, a scholar in the field of politics and demographics, has compiled a *detailed stratification of Americans abroad, which clearly refutes any imputation of tax evasion as a general motive for living overseas. The statistical breakdown has been of great interest to the Senate Finance Committee, and may figure prominently as supporting
material to our upcoming requests and submissions.” (this excerpt as quoted from Democrats Canada Abroad posted on http://isaacbrocksociety.ca/2012/04/13/update-democrats-abroad-canada-annual-general-meeting-reports-on-fbarfatca-task-force-15/ )
Agree that many 3rd world passports today are quite good. I also possess one of these 3rd world passport (my country of birth), however I haven’t lived there since childhood and relocating back from Switzerland would be a massive shock for me.
Despite feeling little connection to the US today, I still have people there I would like to visit and I want to ensure I have the means to continue to travel visa-free. Hence I’m reluctant to part ways with my blue little book until I’ve secured that little red book with a white cross.
I think this forum is very interesting and has strongly persuaded me that relinquishment is an issue I would be better off addressing in the immediate future rather than later.
If I ever decide to move back to North America, I can always take the Canadian route by immigrating as a skilled professional and securing a passport in 3 years, which gives me the ability to claim de facto US Green Card rights (TN Status) and to terminate such status whenever I no longer reside in the US.
Any Swiss-Canadian citizens here? I think this is the best combination; with the Canadian you get all the benefits of NAFTA (e.g., US) residency/labor access per TN status but you don’t have the baggage of a US passport or official green card (tax obligations terminate when you leave the country). With Swiss, you have all the benefits of EU/EFTA rights (right to live and work in all 27 EU countries and remaining 3 EFTA countries, but the Swiss don’t have the baggage that EU members today have in this crisis). Plus, Switzerland is one of only two countries in the world (other being Sweden) that have experienced permanent peace and stability for almost 200 straight years.
*@Recalcitrant, I hear you, don’t get me wrong…but my brother is the type of person who would rather start paying my accounting fees for me than have me renounce…I know his mindset well enough, :P, LOL. He is very proud and would rather carry my load than have me leave the team. He is very successful and could easily afford to do this…I would feel humiliated but that’s the sort of person he would be in this situation! He thinks we’re all very anti-American and refuses to believe that the US could do what we fear it could do. He thinks we’re all being hysterical, even kooky.
I’m someone who absolutely hates confrontations. I also need to know I can continue to visit my family over there…so for now, will hold off on the renouncing front. But am still going to have to make a start choice at some point, I realize this…and @Badger, I agree that when it comes down to the crunch, that the US Govt mainly looks upon us a cows to milk, as sources of additional revenue…there is this attitude that we need to be somehow punished for having the gall to prefer life in another country, preferring to contribute primarily to another country’s economy. The US has gone nuts.
I know that I will ultimately have to decide for myself even if i end up falling out with some of my family over it. But it’s of more immediate concern for me now to get through my statute of limitations so that I can truly relax, plus I need to know I can continue to visit my aging parents at least while they’re still alive… so not all my priorities are purely practical or economically motivated.
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it’s time to rip off the bandaid once and for all. Go renounce or else you will be saying in a few months or years “I wish I had done it last year when….
Found this regarding PFICs, dated May 18, 2012
“….You unwittingly invested in a “passive foreign investment company.”
Okay, the name sounds a bit ominous, but is it really that bad?
Passive foreign investment companies (“PFICs”) were created by Congress
in 1986. The Internal Revenue Code sections dealing with PFICs are 20
or so pages long and if you look in the regulations you will only see
about 40 pages of regulations.
However, you need to look further.
In 1991, twenty-one years ago, the I.R.S. published proposed
regulations on PFICs which have never been finalized. The proposed
regulations are not binding on taxpayers. They are considered a body of
informed judgment but accorded no more weight than the I.R.S.’s
litigation position. The proposed regulations are where the bulk of the
rules related to PFICs are located…..”…….
……”Maybe, just maybe, if the I.R.S. agent that you are dealing with is
having a good day, you won’t owe all the penalties. Of course, it is
not the I.R.S.’ fault. They didn’t make these rules — Congress did.
Congress should really make it less onerous for U.S. citizens living
outside the U.S.”
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