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Creating a Retirement Plan While Living Abroad

One common challenge that Americans face when living abroad is saving for retirement without having access to the type of tax-advantaged savings vehicles available in the U.S.

Here are some tips to help expats keep their nest eggs growing regardless of which foreign country they're living in and despite fluctuations in currency exchange rates.

The Foreign Earned Income Exclusion

Many expatriates try to reduce their taxable income by maxing out their retirement plan contributions while living abroad. But it only works in certain situations.

Because it is tough to predict what currency value will be when it’s time to dip into retirement funds, it may be wise to diversify.

Learn More About Using Online FX

American citizens who are not residents in the U.S. may contribute to an individual retirement account like a Roth IRA, traditional IRA, Simplified Employee Pension IRA (SEP IRA) or a 401(k) plan, but they must have earned income that is not excluded by the Foreign Earned Income Exclusion (FEIE) and the Foreign Housing Exclusion (FHE).

For example, an American living in France who makes $250,000 in foreign earned income and pays U.S. taxes on some or all of that income would be able to contribute to a tax-advantaged account, such as a Roth IRA. But if that expat were employed abroad by a foreign corporation and earned $95,000 - all of which was excluded from U.S. taxation - then she would not be allowed to make contributions to a Roth IRA.

In the event that she can contribute, she could book a bid using a trusted online foreign exchange service for her retirement plan contributions, enabling her to max out her Roth IRA contributions for the year.

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An International (Offshore) Pension Plan

International pension plans (IPP) are usually offered by global corporate employers and considered foreign trusts by the U.S. As a result, they are accompanied by more Internal Revenue Service (IRS) reporting requirements than other types of trusts, says David T. Yu, president of DTY Wealth Planning Solutions in Fort Lauderdale, Fla.

"Individuals can set up their own offshore pension plans, but all proceeds contributed to the plan must be reported to the IRS," Yu says.

These international pension plans will be governed by the entity of the individual's host country. They are often multi-currency programs, making them ideal for individuals moving from one country to another, Yu says.

Diversify to Mitigate Currency Fluctuations

Because it is tough to predict what currency value will be when it's time to dip into retirement funds, it may be wise to diversify. "It's essential to stay in touch with the markets to ensure you know the value of the currency that you are holding," says Nawaz Ali, U.K. market analyst for Western Union Business Solutions.

Yu recommends purchasing real estate, but he reminds American expats that they must report their properties' increase in value and any profits made to the IRS, as tax reporting is a requirement of U.S. citizenship.

If a retirement plan is flexible, it may be smart to include both stocks and bonds in several countries and currencies, says Douglas Goldstein, CFP, president of Profile Investment Services, a financial planning and investment firm in Jerusalem and Miami, and author of The Expatriate's Guide to Handling Money and Taxes.

Whether investing in stocks and bonds or other types of assets, using a trusted online foreign exchange provider may help individuals reduce the cost of saving for retirement plans from overseas. Signing up for email market-rate alerts makes it easier for individuals to take advantage of their preferred exchange rates by notifying them when desirable rates are available. 

Live Cross Rates

USD 69.3440 1.3139 0.7857 53.2670 1.0000 0.8780
CAD 52.7470 1.0000 0.5978 40.5230 0.7604 0.6680
AUD 50.4280 0.9555 0.5715 38.7410 0.7268 0.6386
EUR 78.9250 1.4956 0.8945 60.6340 1.1377 1.0000
GBP 88.1960 1.6713 1.0000 67.7560 1.2713 1.1169

Example: 1USD = xx INR

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