Financial planning empowers individuals and families to save money, make informed saving and investment decisions, and achieve their financial goals. As an American living in Europe, financial planning advice is all but essential, as you navigate the impact of two tax systems and regulatory regimes in terms of compliance and investment decisions. In this article, we look at some financial planning dos and don’ts for Americans living in Europe.
Dos:
Understand local tax regulations
Gain a thorough understanding of the tax regulations in your European country of residence. Local tax laws can significantly impact your financial strategy, and, as always, knowledge is the key to optimizing your tax position. Seek advice from a local tax professional who has experience working with Americans and who will provide guidance tailored to your specific situation.
Build a rainy-day fund in local currency
Establishing a rainy-day fund in the local currency provides gives you the ability to cover unforeseen expenses without being susceptible to exchange rate fluctuations. This fund should be easily accessible and equivalent to at least three to six months of living expenses.
Explore tax treaties
Investigate tax treaties between the US and your European host country. While these treaties typically contain a savings clause that means Americans living abroad still have to file US taxes, they can alleviate taxation on certain types of income, particularly retirement income, depending on the treaty. Understand the nuances of these agreements can help you to make informed decisions about your financial affairs, such as where you save for retirement and where you register structure such as companies or trusts.
Diversify your investments
Moreso than for Americans living in the US, for expats in Europe, a diversified investment portfolio that is aligned with your financial goals and risk tolerance is essential, due to the additional factor of how currency exchange movements can affect your income and asset values on either side of the Pond. Currency as well as asset type and geographical diversification is an effective risk management strategy that should be the cornerstone of every good financial plan. Consult with an expat financial advisor to tailor your investment strategy to the unique opportunities and challenges of being an American living in European.
Consider maintaining your US retirement accounts
Your US retirement accounts offer certain tax advantages and contribute significantly to your long-term financial security, even while living abroad. There may also be financial penalties if you close them. However, if you’re planning to retire overseas, it is important to start examining a tax efficient retirement strategy in the country where you live, too.
Update estate planning documents
Check that you have up to date estate planning documents, in both the US and your country of residence in Europe, including your will and power of attorney. This will ensure that your loved ones wouldn’t be faced with an unnecessary international administrative burden if you unexpectedly passed.
Keep track of currency exchange rates
If you have assets in both the US and Europe or you need to transfer funds internationally regularly, it’s worth staying informed about currency exchange rates. Note that it rarely makes sense to transfer internationally via your bank, rather than a specialist currency broker who can offer better rates and lock in better exchange rates if you’re not in a hurry. Furthermore, some non-US investments can trigger an unexpected US tax implication.
Don’ts:
Neglect your US filing obligations
As an American living in Europe, you still have to file US taxes, as well as in your country of residence. This is because the US taxes based on citizenship rather than residence. Your US tax professional will advise you on the best strategy for you to avoid double taxation. There are also US reporting obligations relating to your non-US assets and financial accounts, including bank accounts.
Ignore social security contributions
Find out whether you should be paying social security contributions in your host country or in the US. The US has totalization agreements with several nations to prevent double taxation of income related to social security taxes. These agreements determine whether an individual is subject to US Social Security/Medicare tax or a foreign country’s social security taxes.
Delay retirement planning
When it comes to retirement planning, the earlier you start exploring opportunities for tax-efficient retirement saving, the better. As an American living in Europe, you can potentially save in both US and European retirement plans. Which you save in will depend on your circumstances, retirement plans, and the tax treaty between the US and the country where you live. Many expats choose to save in both dollars and Euros, to mitigate currency movement risk. US citizens residing abroad can save in both traditional and/or Roth IRAs, and if you already had an IRA before relocating overseas, there’s no requirement to close it or transfer your assets.
Forget about insurance
Healthcare systems vary widely in Europe, so many expats purchase international ensure health insurance coverage to be sure that they will receive fast, high quality treatment in case of emergency. Many expats also purchase life and disability insurance. Consult your financial advisor to find out your options, as well as the bet place to purchase it, either in the US or your country of residence.
Final thoughts
An expat specialist financial advisor possesses the expertise to provide you with tailored insights into your unique financial situation that can save you money and grow your wealth. From retirement planning to investment strategies, they will guide you through the complexities of managing your finances while living abroad. Periodically review your financial plan with the advisor to ensure it aligns with your evolving plans goals.
If you have any questions about financial planning as an American living in the EU, get in touch.
This article is for informational purposes only; it is not intended to offer advice or guidance on legal, tax, or investment matters. Such advice can be given only with full understanding of a person’s specific situation.