I’m 52 and want to retire in Costa Rica — but will it mess with my Social Security or complicate taxes? What do consider before retiring abroad

Furthermore, a survey by Western & Southern Financial Group suggests one in three Americans are considering joining them. (2)

One of the main reasons is cost, as many countries offer a lower cost of living than the U.S. When you’re relying on Social Security as a main source of income, it’s important to do what you can to reduce your expenses.

Take Neil, for example. Neil, who is 52, is considering retirement in Costa Rica, a location that offers amazing scenery as well as a cheaper lifestyle. According to the real estate company Coldwell Banker, housing expenses in Costa Rica are about 63% lower than in the U.S., while groceries are about 36% cheaper. Health care and public transportation costs are typically cheaper there as well. (3)

Yet despite these financial advantages, Neil is worried about taxes and Social Security while living abroad. Here’s what he needs to know about retirement benefits for Americans living in a different country.

He may be required to come back to the U.S.

While Americans are permitted to live abroad and collect Social Security benefits, there are a few restrictions that apply to certain countries. In fact, the SSA has an online tool that Neil can use to determine if the country he’s considering moving to is on the U.S. government’s blacklist.

Additionally, Neil may be able to get his Social Security benefits deposited electronically into a foreign bank account, depending on where he settles. Once he starts collecting Social Security abroad, he'll have to fill out a questionnaire every one to two years to see if he's still eligible for benefits. However, he doesn't necessarily have to return to the U.S. (4)

But if Neil was a non-citizen who’s entitled to Social Security benefits, he may have to return to the U.S. for a full month every six months to continue being eligible. That might not be a problem if he lives in a country that’s close to the U.S., such as Costa Rica.

However, if Neil were to retire to Europe or Asia, it could end up becoming too expensive and time-consuming for him to return to the U.S. that often. (5)

He still has to pay U.S. taxes

If Neil is indeed a U.S. citizen, he's required to file a federal income tax return every year, even if he's not living in America. (6)

This means Neil’s Social Security benefits will be taxable if he retires abroad, regardless of his income level.

Neil should also know that if he decides to retire in Costa Rica and work part-time, he’ll be subject to income taxes in Costa Rica. However, Costa Rica will not tax him on IRA or 401(k) withdrawals, as he’s only subject to taxes on income earned in Costa Rica. (6)

And since he’s required to file a U.S. tax return, Neil will have to pay taxes on IRA or 401(k) distributions — just as he would if he were living in the U.S. — unless he has a Roth IRA. He may also owe U.S. taxes on other investment accounts that he may have.

Neil should know what he’s getting into

Although retiring in a foreign country can be rewarding and less expensive compared to the U.S., there are some pitfalls that Neil should be aware of.