Moving to Spain? Why Your Financial Plan Should Be Written in Pencil

Americans moving to Spain often spend months researching and deliberating about their financial life changes. Ironically, few spend even a few minutes planning for the possibility that one day they'll move back.

It's easy to see why. Why imagine the journey home before you've begun your adventure abroad?

But I've had clients tell me: "We're moving to Spain permanently," and two or three years later, they're back in the United States. It's rarely because they didn't like Spain. Instead, it's because of a family or health issue — or maybe a career opportunity.

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I applaud anyone who wants to "create a financial plan." For Americans who'll spend their lives in the U.S., these plans can be carved in marble.

For those hoping to maintain a residence in Spain and one in the U.S., however, their plans should be etched in ink. For Americans who assume they'll move to Spain and never leave, they should only write them in pencil.

Counterintuitively, the more permanent the move feels, the more important it might be to keep parts of the financial plan flexible.

What do I mean by writing a financial plan in pencil?

Despite what a family might have planned, not every move to Spain ends up being a permanent one. Making irreversible financial decisions based on the assumption that they'll never leave Spain entails some risk.

Once the decision to move has been made, the temptation is to step on the gas. Financially, though, this might be exactly the time to tap the brakes. That's why I recommend resisting the urge to accelerate four important money-related decisions:

1. If circumstances allow, rent before buying

Americans often arrive in Madrid, Barcelona, Valencia, Seville, etc., fall in love with the lifestyle and think: "Why throw money away on rent? We're staying forever."

But buying property in Spain is a far cry from doing so in the U.S. First, taxes are paid upfront when purchasing a home, adding an additional 6% or more to the cost, depending on location.

Banks in Spain offer mortgages under conditions U.S. banks would consider old-fashioned: with a laser-like focus on the aspiring homebuyer's paycheck, how long they've been receiving it and how long they'll continue to receive that paycheck. Credit history and down payment amounts are much less relevant to their analysis.

The result is that Spanish banks seldom offer mortgages that extend beyond an applicant's 67^th birthday (the age of retirement, when the bank assumes they'll stop receiving a paycheck). That means a 57-year-old applying for a mortgage is unlikely to be offered a mortgage longer than 10 years.

Purchasing property also reduces mobility. After two years, an American in Spain might discover: they prefer another Spanish city, or their work or residency circumstances change, or they need/want to return to America.

Please recognize that I am not saying don't buy. I'm simply saying please don't confuse enthusiasm about your new life with certainty about that life.

2. Don't be too quick to move your entire U.S. investment portfolio

It's important to realize that geography and portfolio structure don't necessarily need to match. When it comes to tax-advantaged investments such as 529 savings plans, IRAs, 401(k)s, it's often advisable to simply leave existing accounts where they are.

It often makes sense to keep even ordinary U.S. brokerage accounts in place. One reason is a little-known IRS rule called Passive Foreign Investment Company (PFIC). Some Americans living in Spain discover PFIC rules only after they've invested in European funds. That's because funds that are perfectly normal investments for European investors can be problematic for U.S. taxpayers.

When gains are realized in an investment that's considered a PFIC, the IRS typically treats them as "excess contributions." This has two undesirable outcomes: 1) income might be taxed at the highest historical marginal rates and 2) Form 8621 needs to be filed every year. This form is highly technical and often requires specialized tax preparation with significantly increased accounting costs.

Taxation and currency considerations are additional reasons to think carefully before withdrawing from/closing existing U.S. accounts. Although a tax treaty exists which prevents double taxation on the same income by both countries, some timing differences result in taxes owed in one country but not in the other. Adverse movements in the euro/dollar exchange rate can significantly impact the results of liquidating an account to bring the money to Spain.

3. Think twice before immediately selling the U.S. home

Let's imagine a couple sells their U.S. house before moving to Spain. Two years later, their circumstances change. Now they're trying to re-enter a housing market that might have changed substantially. They might have lost a favorable mortgage rate or now be priced out of their old neighborhood. In either case, they no longer have the home that could have served as their landing place.

Keeping a house has risks and costs too: taxes, insurance, tenant issues, maintenance. The advice isn't: Never sell your American house. It's: Don't sell it simply because permanence feels certain today.

4. Don't be in a hurry to sever your U.S. financial relationships

Americans abroad sometimes discover that financial institutions impose restrictions once they have a foreign address. If they eventually return, rebuilding their U.S. financial infrastructure might be much harder than maintaining appropriate relationships in the first place. This can be true of U.S. bank accounts, credit cards and credit history.

FATCA, the U.S. Foreign Account Tax Compliance Act, is another reason to think twice before closing American accounts. FATCA is a law requiring non-U.S. banks and financial institutions to identify and report accounts held by U.S. citizens to the IRS. Its intent is to combat offshore tax evasion. Its unintended consequence: Many firms in the Spanish banking sector place restrictions on U.S. clients, and some don't accept Americans as clients at all.

The goal of tapping the brakes on such decisions isn't to "pretend you still live in America", but rather "to not voluntarily close doors that may be difficult to reopen."

Before making a major financial decision after moving abroad, I recommend asking three questions:

1. Is this decision reversible? If circumstances change in two years, can it be undone?

2. What does flexibility cost? Maybe keeping the U.S. house costs $20,000 annually. Maybe adding Spanish accounts while maintaining American ones makes recordkeeping more difficult.

3. What would losing that flexibility cost? This is a question that's often overlooked. Maintaining the house clearly costs money. But what happens if a couple sells it, returns three years later and housing prices have risen 30%?

Moving to Spain shouldn't require keeping one foot permanently planted in the United States. At some point, it might make perfect sense to sell the American house, consolidate accounts, buy a home in Spain and organize your financial life around staying there.

Until then, some financial decisions are better left in pencil.

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