Investing and Financial Planning Considerations for U.S. Expats in New Zealand
New Zealand has become a popular destination for American expats. While there may be dozens of reasons to move to the “land of the long white cloud,” as with any big move, make sure you’re prepared for the financial challenges. Especially as a U.S. expat moving to New Zealand, you’ll want to consider these important investing and financial planning implications before making the leap.
New Zealand Transitional Residency Period
New immigrants and even returning Kiwis can take advantage of New Zealand’s transitional residency period, which generally kicks in after you’ve lived in New Zealand for 183 days and can last for as long as four years.
During this transitional period, the New Zealand tax authority, known as the Inland Revenue Department (IRD), will not tax you on income generated outside the country’s borders. This period provides a prime window to establish an appropriate investing and financial planning strategy.
Most overseas income is exempt, with the exception of foreign-sourced employment and service-related income. For example, wages of digital nomads working for a U.S. company would still be taxed by the IRD. This is because their income is in fact generated in New Zealand.
Maximize Transitional Residency Benefits
After the transitional residency period is over, certain U.S. financial accounts are subject to New Zealand’s foreign investment fund (FIF) income taxes. Most U.S. investment accounts are considered FIFs. Consequently, most U.S. expats are affected by the FIF income tax, an imputed tax the IRD imposes, regardless of whether capital gains are realized or income is paid.
Because the IRS does not have an equivalent to the FIF income tax, you would not receive foreign tax credits (FTC) in the U.S. for any such payments, increasing the risk of double taxation on the income.
However, with proper planning you can limit the impact of the FIF income tax after your transitional residency period ends. For instance, if you were to purchase real estate in New Zealand, you could withdraw funds to do so from your various accounts with an eye toward minimizing future tax bills in the U.S. and New Zealand.
Notably, the IRD does not recognize the tax-free status of Roth IRAs and may tax them as FIFs.
FIF Income Tax Rules
There is currently a $50,000 threshold, so if your foreign offshore accounts are valued at less than $50,000, there is no FIF income tax assessed. U.S. pre-tax retirement accounts, such as traditional IRAs and 401ks, are also not subject to the FIF regime.
Investing in New Zealand as an U.S. Expat
American citizens and permanent residents are uniquely subject to citizenship-based taxation. In other words, no matter where you live, you’ll be required to file taxes on an annual basis and stay compliant with U.S. tax regulations.
As such, U.S. expats should avoid pooled investments registered outside the U.S., because these are considered passive foreign investment companies (PFICs), which are punitively taxed.
New Zealand investment firms are not only less equipped to handle the general complexities that arise from citizenship-based taxation in the U.S. but they’re also more likely to only offer local New Zealand funds that will likely fail the PFIC test.
Many New Zealand accounts are also not covered by tax treaty provisions, leaving tax interpretations in a murky gray area. Regardless, one of the biggest favors you can do for yourself is to work with an expat U.S. tax preparer familiar with the FIF tax regime.
New Zealand’s Retirement Savings Plan
No article on investing as an American in New Zealand would be complete without briefly discussing the popular KiwiSaver retirement scheme. We’re big fans of the KiwiSaver … for Kiwis. Unfortunately, no matter what you may have read, the KiwiSaver is not covered by the U.S.-New Zealand Income Tax Treaty.
The IRS views the vast majority of KiwiSavers as foreign grantor trusts, requiring you to report the account each year (and with the underlying assets in the KiwiSaver being considered PFICs).
Social Security Programs in the Two Countries
U.S. citizens receive U.S. Social Security benefits in countries all around the world, including New Zealand. Because there isn’t currently a totalization agreement (treaties that cover social security benefits earned and received) between the U.S. and New Zealand, non-U.S. citizen spouses resident in New Zealand may not always qualify for spousal or survivor benefits.
New Zealand has its own social security program, known as the New Zealand Superannuation or NZ Super, which is a rather egalitarian old-age pension available to those age 65 and older who reside in New Zealand and meet certain requirements.
Don’t celebrate just yet though — if you receive U.S. Social Security benefits, New Zealand will reduce the amount of your NZ Super on a dollar-for-dollar basis all the way down to $0. Given the relative size of payments from the two programs, many U.S. Social Security recipients receive no benefit from their NZ Super.
Estate and Succession Tax
Many U.S. expats confront high estate or succession taxes when moving overseas. This issue alone deters many from moving abroad, given the large estate tax exemption in the U.S. (currently $12.92 million per person). New Zealand, however, does not impose estate or gift taxes, having abolished them in 2011.
That said, you should still use trusts and other U.S. estate planning tools with caution, as they may delay the transfer of assets to beneficiaries or trigger FIF income taxes while the grantor is still alive.
Furthermore, because there’s no estate tax treaty between the U.S. and New Zealand, careful thought must be put into estate planning in situations in which a U.S. citizen is married to a non-resident alien or the final beneficiaries are non-resident aliens of the U.S.
Having two wills — one in the U.S. for U.S. assets and one in their local country for local assets — remains the most common practice for our expat clients, but New Zealand is a jurisdiction in which having one will covering your worldwide estate may be a viable option.
Whether you’re an American living in New Zealand or planning to make New Zealand your next destination, make sure you’re financially prepared. Request a meeting with a wealth manager from Creative Planning International to discuss your situation as an American expat in New Zealand and get the comprehensive wealth management solution that’s right for you.