Retirement Planning for Locally Employed Accompanying Spouses

Working alongside locals to immerse in the culture of your newly adopted country is an exciting and attractive prospect, but it’s also the more difficult to achieve option for trailing spouses. We are often constrained by the duration of our spouse’s assignment and the type of visa that we are assigned. Therefore I really want to congratulate you if you are one of those who have successfully taken up this challenge!

(If you are still looking and evaluating your options, you may be interested in this article: 5 Things to Think about Before Accepting a Job Offer Overseas.)

However, being employed overseas makes your retirement planning slightly more complicated. Your retirement savings are subject to the local tax laws and regulations, and can be difficult to keep track of once you move back to the U.S. Therefore I recommend maintaining contact with a local tax professional that can help you understand the issues surrounding retirement savings in that country.

In addition, here are a few things to consider regarding retirement savings from overseas employment:

#1: You may have to contribute without ever getting it back

Certain retirement savings, such as social security income at retirement, come in the form of taxes. Just as people on work visas in the US need to pay payroll tax but relinquish their share of social security payments, you might be subject to similar treatment in another country. Although this might be out of your control, you should explore further if you may be exempt from such tax, either due to your visa status or some type of tax treaty between your host country and the US.

In addition, you forego the opportunity to contribute to the US social security system when you work for foreign employers overseas. If you plan to work overseas for a long period of time but retire in the US, this may result in a lack of enough credits to qualify you for full social security payment when you retire. And if your spouse’s career brings you to multiple countries for relatively short amount of time, you may not eligible for public pensions in any of the countries. Take a look at this page to find out if you can contribute to the US system for the sake of continuity while working overseas.

#2: Your foreign pension or employer contribution may be immediately taxable

In the U.S., contributions from your employer to “qualified plans”, such as company pensions and 401 (k) plans, enjoy tax-deferred treatment until distribution. It means that you do not have to count the contribution as taxable income, even though it’s already deposited in your account. You simply pay taxes when you start taking the money out for retirement, most likely after you turn 59 and a half.

Since foreign pension plans are not considered qualified plans by the IRS, any compensation you receive from your employment is currently taxable, even though you may not be able to access it until retirement. To make matters worse, you may be taxed again by the foreign government, either when you receive contributions to, or payments from, these foreign plans.

There are exceptions, though. Certain countries have tax treaties with the US that give foreign pension plans favorable treatment. Therefore it is beneficial to work with a local tax professional familiar with bilateral agreements between the US and your host country. Even if you cannot avoid taxation, you are able to utilize Foreign Tax Credit to offset some of the tax liability in the US. Moreover, getting retirement contributions and being taxed for them is better than not getting retirement contributions at all, don’t you think?

#3: You can still save in the US

You can still save in your Traditional or Roth IRA in the US, as long as you are reporting taxable compensation on your federal tax return. (Your total foreign compensation, including retirement contributions mentioned in #2, could still be under the limit of claiming Foreign Earned Income Exclusion. In this case, you do not have to pay US taxes now, but you also cannot save in tax advantaged retirement accounts.)

Without transferring your savings in the foreign country back to the US, you can simply appropriate your current savings in taxable accounts into the tax advantaged accounts. For example, you may have an emergency fund in US dollars sitting in a checking account in the US. After you have accumulated enough emergency funds in the local currency, which may be more useful depending on your living arrangement, you can consider funding your IRA accounts with your US checking account balance. Or, if your spouse is paid in US dollars, you can spend local currency from your pay check and save in the US accounts, which might save you the hassle of #4.

#4: You may have to report your foreign accounts

Unfortunately, in an effort to fight criminal activities involving offshore accounts, the Treasury Department now requires any US person who has a financial interest in, or signature authority over, a foreign financial account exceeding certain thresholds to report the account yearly online. It is separate from reporting your income and filing taxes, and does not increase your tax liability. You are required to report if the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year; however, certain accounts are exempt from the reporting requirement. Take a look here if you think you may need to report.

While many living the globally mobile lifestyle understand the need to consult with tax professionals regarding these issues, most fail to recognize another important aspect of determining savings and investments in other countries. That is, they may be saving and investing in other currencies or foreign assets.

With your local employment, you may be forced or allowed to save in a retirement account that invests in local mutual funds, shares or bonds. On the one hand, it is an interesting prospect because you have access to investment opportunities that your peers in the U.S. do not, or find too costly to consider. On the other hand, you might find it scary because you have little knowledge or experience in the overseas market. Whatever the case, the most important thing is that you know what you’re investing in and what kind of risk you’re taking to earn the return worth your investment.

Below are a few things to think about regarding your retirement savings in foreign accounts.

#1: You may be exposed to currency risk

Even if you are simply putting cash in a foreign savings account, you are in effect investing in the local currency if you intend to eventually leave the country and exchange the currency back into U.S. dollars. Most of us, if we never left the U.S., would not even think about engaging in investing in foreign currencies, so it is important that you are aware of the currency risk you are exposed to.

Being exposed to currency risk is not all bad. After all, risk could bring return, which means you have the potential to make (or lose) money based on the relative valuation between the U.S. dollar and your local currency. I personally have experienced earning income in foreign currency both in times when the U.S. dollar is strong and when it is weak. Most of the time exchange rates fluctuate. There is not much you can do so I would not stress over it.

One theoretical way to mitigate currency risk is by transferring your savings in foreign currency into a U.S. dollar account in regular intervals, so over a long period of time you average out the fluctuation in exchange rates. However, this may not be as beneficial as you think since foreign transfers between bank accounts usually come with hefty transaction fees. Just remember if you want to transfer local savings back into a U.S. account, do so when local currency is strong and the U.S. dollar is weak.

Another way to approach currency risk is to consider your retirement income needs as a liability to be funded with your retirement assets. Where you plan to retire is also part of the equation. If you plan to retire in France, then having all your retirement assets in U.S. dollars may not be the best idea either.

#2: Your investment may be concentrated in one country

Just as some 401(k) plans in the U.S. may only offer U.S. based mutual funds that invest in U.S. stocks or bonds, it could be the same with your foreign retirement account. It is also more likely that a foreign country’s public pension system is invested in its own domestic bonds. Moreover, you may be required to contribute to the retirement account by law. Therefore, you need to be aware what percentage of your retirement savings is invested in a specific economy versus the entire world.

You may be thinking, “But I also only invest in the U.S. stocks or bonds when I live in the U.S.!” This is what we call “Home Country Bias.” The reason that investing in the U.S. alone is not as bad is because the U.S. is still the world’s largest economy and has an open stock and bond market. Investing in the U.S. economy alone allows you to tap into at least 20% of the world’s GDP. In addition, many U.S. corporations have revenue from or investment in foreign countries, which further enables you to diversify investments in the global markets. Let’s say if you live in New Zealand and can only invest in the New Zealand market, you would concentrate your investment in only 0.2% of the world’s GDP. Working overseas really help us avoid Home Country Bias when investing, but you need to make sure you don’t end up with a “Host Country Bias”.

#3: You should look at the risk of your retirement portfolio as a whole

As mentioned earlier, you may be required to contribute to a retirement account in another country without the choice of what you invest in. But that doesn’t mean you have no control over your overall retirement portfolio. Since you may still be able to direct investments in the U.S. or elsewhere, you can balance your overall portfolio so it is diversified across asset classes and globally. Of course, that requires you to first find out what your retirement accounts or plans are investing in.

For example, if you work in Europe and contribute to a pension that invests in the local economy, you may want to revisit your IRA and old 401(k) portfolio to decrease the weight of investments in those accounts in European markets.

The same principal of diversifying your risks applies to your employment situation. As trailing spouses, our income stream may not be as stable, which means we are taking more risks with our income. To counter the risk of income volatility, you may want to have an investment portfolio for retirement that is less risky and provides steady growth. On the other hand, the reason that we became a trailing spouse may be that our spouse has a very stable career, with low risk of income volatility. In this case, as a couple you may be more willing and able to take on higher risk with your retirement portfolio for higher growth potential.

#4: You may have higher cost of investing overseas

If you are not required to contribute to a foreign retirement plan, and the plan does not come with benefits such as tax breaks and free employer contribution, is it still a good idea to contribute to the plan?

One thing to consider is that investment cost, including brokerage and fund management fees, are higher in foreign markets. The U.S. is the world leader in low-cost investing, with fund companies offering low expense ratio and sometimes with no transaction fees. You may not be able to enjoy such advantages in an overseas account, and should definitely understand the cost structure of investing before proceeding.

Another area of cost comes from taking the money with you when you depart the country, or managing it from overseas as a non-resident foreign account owner. You should consider the restrictions and cost for these scenarios before you make any non-mandatory investment.


Hui-ChenHui-chin Chen is a financial planner and co-owner of Pavlov Financial Planning. For the last ten years she has worked in the US, India, Taiwan, Mexico, and now in New Zealand, both independently and as a “trailing spouse.” She shares personal finance knowledge and financial planning topics for globally mobile professionals on her blog: Money Matter for Globetrotters, and welcomes any feedback or comments at

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