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):
- 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.
- Social Security is taxed in the US only.Technically this is from the Social Security Totalization Agreement.
Now, 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 by the US-France tax treaty, we would be taxed in France exactly as though we were physically present in the US, with one notable exception. Since we’ll be creating a Roth ladder and living off our taxable accounts for the first five years, we’ll pay French capital gains taxes on distributions from the taxable accounts. Thereafter, however, our entire income will be 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 Only Pay a Bit)
Imagine the following scenario: A married US-citizen couple with FIRE savings of $1 Million decides to retire in France. Their investments consist of 75% in a 401(k) (or IRA), and 25% 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 $250,000 in taxable accounts, a generous 50% is derived from gains.
Let’s briefly discuss French capital gains taxation, which will be a factor as our couple fills the Roth pipeline. In France, regardless of how long you have owned a security, gains are subject to an income tax of 12.8%, and social charges of 17.2%, for a total tax of 30%.
To fund their first five years of early retirement, our couple likely would have paid no federal capital gains had they remained in the US. In France, they would pay $6,000 in tax (($40,000 * .5) * .3), leaving $34,000 to spend annually during those early years.
Simultaneously, our couple will roll any 401(k) plans into a Traditional IRA upon retirement, and then annually convert $40,000 to Roth. This is where the magic happens: The Roth conversion is a distribution from a US pension plan per the tax treaty, and taxes are thus owed only to the US. The resulting Roth contribution can be withdrawn after five years with no tax in either country. After the $25,100 standard deduction for married filing jointly in 2021, our couple will owe the US $1,490 in tax on the conversion (we’re assuming they break their residency in their home state and owe no state taxes).
After five years, once the Roth pipeline is full, the couple will owe no further taxes to France. All of their income would be taxed in the US only. When they reach age 59.5, the 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 their net lifetime difference in taxation between retiring in France versus the US is just $22,550! To make up this gap, the couple could simply save the difference before pulling the plug, or live on a little less for the first few years of retirement.
There’s one more semi-obvious move that could eliminate the tax difference entirely: Spend the first five years of early retirement in the US. Once your Roth pipeline is primed, move to France and you’ll never owe them a centime.
Retire Early in France, Illustrated
See below for a table showing the taxes paid from year to year. Remember that the Roth rollovers from years 1-5 are withdrawn in years 6-10, meaning you paid the income taxes for year six in year one, year seven in year two, and so on.
|Year(s)||Withdrawals (Taxable)||Tax (France)||Roth Rollover||Tax (US)||After-tax Budget|
|1-5||$40,000 ($20K Gains)||$6,000||$40,000||$1,490||$34,000|
More Than Money
We’ve established that under the right conditions, the tax hit to retire early in France in minimal (or even nonexistent). 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!