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Alexandra Sabalier
February 03, 2023
4 min

How Are Retirement Plans Taxed in Puerto Rico?

One of the finest places for Americans to retire is the Caribbean island of Puerto Rico. This is in part because it is a territory of the US, which offers several special benefits for US citizens who find it challenging to relocate to another nation because of the US citizenship tax system.

One of the few countries in the world that taxes its residents on all of their income, no matter where they reside, is the United States. Because the United States has one of the most extensive tax systems in the world and a government that can successfully enforce that system anywhere in the world, Americans are in a particularly bad situation. In practice, Americans can relocate to a country with no taxes yet still be required to pay the entire amount due. Many people find the American tax laws to be a strangling tether. It should come as no surprise that a record number of Americans are frequently searching for cutting-edge legal techniques that enable them to evade paying US taxes.

Because Puerto Rico provides a distinct edge for fellow US citizens, now is the time when Puerto Rico may provide a lot of options. In addition to Puerto Rico's apparent appeal as a stunning tropical island, potential retirees should take into account the various financial advantages and tax advantages the island offers.

Because Puerto Rico is the only tax haven that is really a part of the US territory and has kept enough autonomy over the years to implement some favorable tax and business legislation, it has gained popularity as a new tax haven destination for Americans. Act 20 (Export Services Act) and Act 22 are the two primary tax laws that make Puerto Rico desirable as a tax shelter (Individual Investors Act).

As a result, a lot of Americans, particularly seniors, are moving to the island to retire and profit from its cheap taxes and welcoming business climate, in addition to its excellent lifestyle advantages.

What Advantages Do Retirees Have in Puerto Rico?

If you're a US citizen, there are several reasons to think seriously about retiring to Puerto Rico.

  • U.S. Territories
  • Culture
  • Climate
  • Taxes
  • Currency
  • Geographical Convenience
  • Housing
  • Healthcare

Puerto Rico provides distinctive tax benefits to residents of other countries as well as the United States. In fact, Puerto Rico, the only tax haven that is formally on US land, has gained popularity as a new tax haven destination for Americans. Act 20 (Export Services Act) and Act 22 are the two main pieces of tax law that make Puerto Rico desirable as a tax shelter (Individual Investors Act).

Income derived in Puerto Rico is exempt from extra US federal tax since Puerto Rico is legally a part of the US. This fact, along with their favorable tax policies and regulations, results in significant tax savings for many.

Act 22 is particularly alluring to potential retirees. Residents of Puerto Rico who meet the requirements are excluded from paying any taxes on dividends, capital gains, or interest under this law. You must genuinely live in Puerto Rico and stay there for more than 183 days a year to be eligible for these exemptions.

Act 20 allows for a corporation tax rate of merely 3% or less for people and/or companies who export services from the Island. It is important to create a legal corporate company in order to be eligible because the corporate entity can only have one employee, who may be the business owner.

In Puerto Rico, how are Tax-Deferred Retirement Accounts taxed?

Withdrawals from IRAs, 401(k)s, and other tax-deferred retirement funds in the US are not recognized under Puerto Rico Act 22. Thus, moving to the island won't reduce the distribution tax. The same applies to Social Security benefits and other pension payments.

While it is separate from the US IRA system, Puerto Rico has its own IRA system that offers both standard and Roth plans.

  • Puerto Rican employees cannot make IRA contributions in the United States, and vice versa.
  • A payout from a US Roth IRA for a Puerto Rican resident would be subject to Puerto Rican taxes. Unless the US Roth IRA liquidates and the funds are transferred to a Roth IRA in Puerto Rico (subject to contribution limits that are similar to the US). The inverse is also accurate.
  • A distribution from a US traditional IRA to a Puerto Rico resident would be taxed by both the US and Puerto Rican governments unless the IRA is liquidated and the proceeds are used to contribute (up to the contribution limits) to a Puerto Rican traditional IRA. In that case, the distribution would only be taxed by the Puerto Rican government. Again, the other way around is also true. Again, the inverse scenario is true as well.
  • Due to the possibility of receiving the credit from one government for taxes paid to the other, double taxation is avoided for taxable distributions, and you essentially only pay the larger rate.

For the purposes of figuring out where pension income is sourced, there are two components: contributions to the pension plan and the earnings gained from investing those contributions.

  • The contribution part comes from the place where the services that earned the pension were done.
  • The part that comes from investment earnings is based on where the pension Trust is.
  • People in the U.S. think that their social security benefits come from the U.S.

Example: A U.S. citizen worked in Puerto Rico for a U.S. business. Puerto Rico served as the location for all services. As they reached retirement age, taxpayers continued to live in Puerto Rico and started receiving a pension from their employer's U.S. pension trust. Distributions from the U.S. pension trust must be split between (1) contributions, which are seen as income from Puerto Rico, and (2) investment profits, which are regarded as income from the United States.

I'm Here to Help You:

With your relocation and retirement tax saving planning, the strategies are not one size fits all, on the very contrary, each case varies greatly, and specific personal, employment, and financial circumstances must be taken into consideration before implementing the strategies that will produce the results sought, especially if the strategy includes relocation to a new jurisdiction such as Puerto Rico or offshore. To get a specific strategy that will work for you and to guide you through your options, make sure to schedule a consultation at the most convenient day and time for you to meet.

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