The Pillars of Financial Planning: A Deep Dive into Cross-Border Nuance

Moving to Italy as a U.S. retiree means Italy gets a say in your worldwide income. Yes, that includes your U.S. retirement accounts!

How Italy Taxes Your U.S. Retirement Income

• Traditional IRAs & 401(k)s: Think of distributions from these like regular income in Italy. They'll be taxed at Italy's progressive rates, which can climb pretty high. Good news: the U.S.-Italy tax treaty helps prevent double taxation, but you'll still need to report and pay Italian taxes.

  
  

• The Roth IRA Trap: This is where many Americans stumble! While your Roth withdrawals are tax-free in the U.S., Italy might not see it that way. Don't assume. In some cases, Italy may not recognize the Roth structure, which can result in taxation of withdrawals despite U.S. contributions being after-tax. Some taxpayers explore options such as Roth conversions or withdrawals before residency, but the right approach depends on individual circumstances.

  
  

• U.S. Social Security: Yep, Italy considers these taxable too. But here's a silver lining: the U.S. and Italy have a "Totalization Agreement" to prevent dual Social Security taxation and help you qualify for benefits if you've worked in both countries. Just be aware of the "Windfall Elimination Provision" (WEP) – it can reduce your U.S. Social Security if you also get an Italian pension. Oh, and Medicare benefits? They're not covered by this agreement.

A Sweet Deal for Retirees? Italy actually has a fantastic tax incentive for new retirees! If you move to a town with less than 20,000 residents in certain southern regions, you could enjoy a flat 7% tax on all foreign-sourced income (including pensions, Social Security, and IRAs) for up to 10 years. Just make sure you haven't been an Italian tax resident for the past five years.

Investing & Wealth Management: Avoid the PFIC Pitfall!

Investing as a U.S. citizen in Italy requires a strategy. The U.S. has rules to prevent tax deferral on offshore investments, and the big one to watch out for is the Passive Foreign Investment Company (PFIC) rule.

• The PFIC Problem: Here’s the shocker: that popular Italian mutual fund or ETF you're eyeing? It's highly likely to be classified as a PFIC by the U.S. That means complex (and costly!) IRS Form 8621 filings every year, and potentially punitive tax rules. The IRS doesn't mess around with unfiled 8621s, so penalties can linger for years. Our advice?

  Some U.S. investors choose U.S.-domiciled funds or individual stocks to reduce PFIC-related filings, but the best approach depends on individual circumstances. Richard Taylor at Plan First Wealth sat down with our Brian Dunhill to talk about everything PFICs. This episode This episode takes a deep dive into PFIC rules and what they mean for U.S. expats.

• Reporting, Reporting, Reporting! Living abroad means more paperwork.

  
  

  • FBAR (FinCEN Form 114): If your combined foreign financial accounts (bank, investment, pension) exceed $10,000 at any point, you'll need to file this.

  • FATCA: Foreign banks report your account info directly to the IRS. No hiding!

  • Form 8938: You might also need to file this if your foreign assets hit certain thresholds (e.g., $200,000 for single filers).

    
    

• Italian Wealth Taxes: Italy adds its own taxes on foreign-held assets:

  
  

  • IVAFE: A 0.2% wealth tax on financial assets held outside Italy.

  • IVIE: A 0.76% wealth tax on foreign real estate.

    
    

Why Careful Planning Makes All the Difference

As you can see, planning your move to Italy involves more than just picking out your perfect villa. It requires careful financial strategy to avoid costly surprises. This is a general overview, and your specific situation will have its own nuances. That's where a financial advisor specializing in Americans abroad comes in handy. A financial advisor experienced with Americans abroad can help you navigate these rules.

Keep Reading: Taxes, Homes, and Financial Planning

Careful planning is what allows your Italian dream to last. If you’re still early in the journey, The Financial Pivot is a great place to start — covering residency rules, tax basics, and the psychology of money. If homeownership is part of your plan, Buying Your Dream Home in Italy — From “Maybe” to “Mine!” walks through the legal steps, costs, and ongoing obligations that come with owning property abroad.

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