UPDATE: In light of some additional learning, this post has been updated since it was first written. In short, the tax benefits of being a US citizen living off investment income in France are even better than originally described, and can result in a tax bill of 0 in France, even when deriving gains from taxable accounts.
We recently declared ourselves financially independent, which is definitely a weird and uncertain feeling. We’ll likely wait a couple more years to retire early, add to our FIREhouse (ha!) savings, and augment our early retirement travel budget a bit. Even though RE is a still a little ways out, we’ve been considering where “home” will be when the time comes. We always felt that we couldn’t retire early in France… until recently.
We absolutely adore living here in the EU, and we decided last year to make it permanent (Surprise #1! At least, if you don’t follow me on Twitter…). The European branch of my family lives in France, so we had been looking for ways to be within a reasonable travel distance from them. We had been considering low capital gains tax, high cost-of-living destinations like Belgium and Switzerland. Things began to gradually change over the past year. After a lifetime of believing that EU citizenship by descent was out of my reach, I learned that legally, I was born a French citizen. That means that our daughter also inherited my citizenship, making our life here a boatload easier (Surprise #2! At least, if you don’t read r/ExpatFIRE on Reddit…)
More recently, I had an “ah hah!” moment when I read the US-France tax treaty, which moved France to the top of our list for reasons both personal and financial. France may not be the absolute cheapest tax jurisdiction for us, but a careful reading of the tax treaty shifts it from “too expensive” into “absolutely attainable” territory.
Stepping back for a second, 75% of our investments are in 401(k)s and IRAs, and about 25% are in taxable brokerage accounts. We’ll be doing a very FIRE-standard Roth ladder, living off our taxable investments for the first five years. The key takeaway from the US-France tax treaty is the treatment of US retirement- and pension-type accounts (for US persons), as well as the treatment of taxable accounts:
- Tax-free withdrawals from Roth IRAs are recognized as tax-free (one of few countries that does this)
- IRAs, 401(k)s, 403(b)s, and similar accounts are taxed in the US only.
- Dividends, capital gains from sale of shares, royalties, and a variety of other income types benefit from a 100% tax credit for the tax that would otherwise be owed to France– even if those assets were held in a taxable account.
- Social Security is taxed in the US only.Technically this is from the Social Security Totalization Agreement.
Bearing in mind that withdrawals from IRAs and 401(k)s are taxed in the US as income, they aren’t earned income, which means they can’t be excluded from taxation under the Foreign Earned Income Exclusion. Boo. However, due to the favorable treatment of retirement accounts, capital gains, dividends, and other US-sourced income by the US-France tax treaty, we would be taxed in France exactly as though we were physically present in the US. That is to say, a person deriving all their income from US retirement accounts, or from capital gains or dividends from taxable US-based accounts, can be entirely exempt from taxation in France! Let’s do a quick case study.
An important note: while retirement plan distributions are only taxed in the US, they do get reported as income in France and may shift you into a higher tax bracket. If you ever earn any normal income that is sourced and taxed in France, it may be taxed at a higher rate as a result.
How to Retire in France (And Pay No Tax Whatsoever)
Imagine the following scenario: A married US-citizen couple with FIRE savings of $1 Million decides to retire in France. Their investments consist of 50% in a 401(k) (or IRA), and 50% in taxable accounts. They intend to withdraw 4% a year. Like us, they’ll be using a Roth ladder and living off the taxable accounts for the first five years. Of the $500,000 in taxable accounts, 50% is derived from gains.
For US citizens residing in France, holding shares in US-based accounts, the US-France Tax Treaty provides for a 100% tax credit on French taxes (Page 41, paragraphs 1 and 2 of the US-France Tax Treaty Explanation provided by the IRS), even if those shares are held in a taxable account. That means that you can owe no tax to France, even when selling shares from a taxable account. This is a huge, huge benefit.
There is one caveat to keep track of here: If you are completely professionally inactive (you have no French earned income), and you do not hold a S-1 or S-1 equivalent pension (you probably don’t), then you will be subject to a 6.5% CSM (Cotisation Subsidaire Maladie), essentially a service charge for access to the public healthcare system, on the sale of shares or dividends from taxable accounts. However, each individual also has a 20,568€ exemption. So as long as your taxable account gains don’t go over that amount (or double that amount for a couple) per year, your cost remains zero.
To fund their first five years of early retirement, our couple sells $40,000 worth of stock from their brokerage account each year ($20,000 of gains taxed at the long term capital gains rate). Simultaneously, the couple will roll any 401(k) plans into a Traditional IRA upon retirement, and then annually convert $25,900 to Roth. Therefore, for each of the first five years, we’re looking at $20,000 in LTCG, and $25,900 taxed as income.
This is where the magic happens. Consider the following:
- The long term capital gains tax owed to the US on the $40,000 total/$20,000 in gains from the sale in the taxable account is $0.
- The $25,900 from the Roth conversion, taxed as income, fits within the 2022 standard deduction for a married couple filing jointly (of $25,900). The couple will owe nothing on the conversion to the US.
- The Roth conversion is a distribution from a US pension plan, and per the tax treaty, taxes are “owed” only to the US. The resulting Roth contribution can be withdrawn after five years with no tax in either country.
- The sale of shares from from the brokerage account receives a 100% capital gains tax credit in France. No tax is owed on this sale to France.
- The couple’s $20,000 in capital gains from the taxable account are well under the 41,136€ exemption they have as a couple. No CSM is due.
- Five years down the road, the couple reduces the annual sale from their taxable account to $14,100 and begins to use the Roth conversion funds to make up the difference.
End result? 0% effective tax rate worldwide. Our couple could more than double their sales from taxable accounts before being hit by the CSM charge.
The example is slightly simplified as couple’s withdrawal rate, US standard deduction, and the CSM exemption will increase over time, and their conversions and spending should adjust appropriately.
When they reach age 59.5, the couple’s Roth gains will be tax free in both the US and France. When they reach Social Security age, Social Security income will only taxable in the US. This means it’s possible to retire in France with a lifetime net tax difference of $0, and potentially a global tax burden of $0.
More Than Money
We’ve established that under relatively common conditions, the tax hit to retire early in France is zero for US citizens. It’s not the aim of this blog to talk people into retirement abroad. Rather, if you are reading this post, you likely already have your own reasons for considering such a move. Still, if you had dismissed France as either too expensive or too high-tax, here are some of the concrete, non-cultural advantages you might reconsider, knowing that you may not pay much more than retiring in the US:
- Long term stay visas are available for people of independent means. The Visiteur residence permit, despite its name, is a renewable visa and pathway to citizenship.
- After five years of legal residence (and filing taxes every year), you can become a French– and EU– citizen without forfeiting your existing citizenship.
- Your children can be naturalized between age 16 and 18 if they have lived in France for at least five years. If not, they can remain residents of France past 18 and apply as adults.
- France has the world’s best healthcare system, overall.
- French residents have access to low or no cost university education domestically, and EU citizens have the same rights everywhere in the EU.
- OK, I said non-cultural, but… Baguettes, museums, paté, the Mediterranean, 11 border countries, cheap air travel to countless destinations… This list could go on forever!
… And Who Knows Where Else?
Every tax treaty and every investor are different. If your retirement savings are largely in taxable accounts, perhaps it wouldn’t be quite as easy to retire early in France. Still, for a great many Americans seeking the become financially independent and retire early in France, the dream might not be so far-fetched after all.
What do you think? Given the extremely favorable tax treatment of retirement accounts in France, could you see yourself retiring there? Do you know of other countries with similar tax arrangements with the US? Let me know in the comments below!