As alluded to in our last post about planning a family year abroad (that wound up lengthier than expected!), this post will focus solely on a number of available financial strategies to soften the blow – specific to this kind of adventure. Not all of these will be applicable to everyone and I’m sure I missed some good ones, but these are all of the tools that we utilized. I wanted to get this post out before the new year as there’s some stuff related to tax timing that some might find useful. If you’re only interested in cute kid pics from abroad, you can skip this post and we’ll get back to that in January. Happy holidays!
Investing & Financing
By this point in the planning process, you should have at least a rough budget estimate. And a plan to have enough liquid investments (i.e. cash and securities readily convertible to cash) to cover that. Any financial cushioning from other illiquid holdings should be treated just as such – a cushion. Global and personal events can drastically alter your cash needs on short notice, and it’s important to be ready for that.
Building up cash in an high-yield (and liquid) savings account is obviously the best way to go about funding a year abroad, and gradually selling investments to do so is likely to be a part of the package for most. But please, for the love of god, don’t raid an IRA for this! I’ve met more than a few people here in Bali that have done exactly that – and have thus greatly increased the long-term costs of their adventures. Beyond the early withdrawal penalties, those tax-advantaged funds cannot be re-contributed later beyond the annual limits ($6500 in 2023)- compounding the financial loss over years or decades. Using such funds prematurely should be minimal at most and only for a real emergency.
Any investments sold for travel should come from non tax-advantaged accounts – and should be those that have been recently performing well (see tax section below for elaboration). You don’t wanna be in a cash need abroad and have to sell an asset at a loss prematurely. Diversifying investments for at least a few years prior to funding a major expense like this can provide a huge leg up – in that some will likely be doing much better than others at showtime and will be ripe for the picking. Buy low / sell high – old, but still very relevant advice. I like to keep a healthy mix of stocks (defensive and non), REITs, precious metals, commodities, and crypto – as these are unlikely to all take a nosedive at the same time. More recently we took advantage of sky-high interest rates on I-bonds too, which were a great risk-free vehicle for preserving purchasing power regardless of what our other investments did. Recent global interest rate increases have put other bonds like T-Bills and CDs back into play for diversifying too.
And while I’m hesitant to recommend going into any kind of debt from taking a year off, there is an exception – 0% credit cards. Many of these offer terms of nearly 2 years of promotional rates at 0% for upwards of $20k balances. So if you can ensure you have (or will have) the cash to pay the piper when the time comes, that’s essentially an interest free loan that’ll get eaten up a little by inflation by time it’s paid off. It’s important to note that in the fine print most of these cards require the minimum payment to be made monthly to retain the 0% rate – usually 1% of the balance (which can be set on autopilot).
Downsizing
Another great source of upfront travel cash is selling your stuff. Pretty much everyone has unused assets lying around that someone would pay good money for (video game systems, camera equipment, camping gear), which comes with the added bonus of freeing up storage space. Things like rare books can fetch a premium on Amazon, and just about anything can get listed on Craigslist. I even recently sold an old collectible toy gun on ebay for almost $400 after curiously looking around online for what it even was.
Other things that can be sold for cash fall into the category of things you still use, but come with storage and/or maintenance concerns. For us, this meant bikes, kayaks, and cars. While we’ll certainly want these again upon return to normal life, they are easy to replace and selling them let us not think about what to do with them while we were away. We did decide to hang on to one car to ease our return to the USA, but that was not without costs and efforts. Cars need to be driven to stay functional (gaskets will become brittle, tires will get uneven, electronics will die)- and we are incredibly thankful that a neighbor is handling that for us. Registration, inspection, insurance – these don’t stop becoming requirements while away either.
Rental Property
If you are a homeowner, there are a whole load of other considerations to address. Renting out your home while away is kind of a no-brainer, as you have no need for it and it has the potential to generate income (as well as to appreciate and pay off your mortgage in the interim). And if you are going to a place with a much lower cost of living, a revenue stream in your home currency can go a long way. But becoming a first time landlord is not without costs and headaches either.
The most common way to ease into becoming a landlord is to do a standard one year lease- but in the context of spending 1 year abroad that means finding a tenant for the exact window you’d be gone (ignoring the time it takes to get a place marketed, cleaned up, and ready to rent). Shorter-term rental options like Airbnb are thus a better fit and the route we chose. But critical to either long or short-term rentals is having someone on the ground locally to deal with tenant and maintenance issues. Who will handle a broken pipe flooding the kitchen while you’re in the jungles of Guatemala? Again, we were incredibly fortunate to have an experienced Airbnb host as a friend who offered to manage our place for us. We give him a healthy percentage of our rental proceeds – which definitely eats into the revenue stream but allows us priceless peace of mind. There are companies like Vacasa and Evolve that do this sort of work, but we felt more comfortable with a trusted friend.
The US tax code is also very generous towards landlords, and the costs involved with running and preparing a rental can be used to offset the rental proceeds. If your year away covers pretty much the specific January 1 – December 31 period, expenses in excess of revenue can even be taken as a loss against other income, but other year-long windows will only allow for deductions up to the revenue amount (with the rest getting dealt with at home sale down the road). Rental property taxation can get pretty complicated, and reaching out to a pro might not be the worst idea.
Capital Gains Tax Savings
Perhaps the most interesting tax planning strategy related to spending a year abroad relates to capital gains tax. For the uninitiated, when you sell an investment for more than you paid for it, you usually owe capital gains tax. Capital gains tax rates for investments held for more than 1 year are lower than normal tax rates, and can be 0% if one’s overall taxable income is below $44,625 in 2023 ($89,250 for married filers). So if you bought an investment for $50k (its cost basis) and it’s now worth $150k, that’s $100k of taxable profit when you sell it. In a normal income-earning year, that profit would likely get taxed at 15% or 20% if sold – but in a low income year, most of that $100k profit could qualify for the 0% rate.
This situation comes into play here since most people spending a year abroad will have much lower income to report too- allowing for an unusual tactic called “gain harvesting”. People in the tax community more commonly speak of “loss harvesting”, whereby non-performing assets are sold at a loss at year-end to offset other income. However, the IRS long ago minimized the utility of that – capping the offset at $3k and prohibiting the repurchase of those assets for 30 days. But no such rules exist for harvesting gains! The IRS is always happy to have gains reported, as that usually means Uncle Sam gets his cut. But there’s a loophole here that encourages premature gain reporting.
Using that $100k as a simple example, let’s say a married couple made $200k in wage income for 2023. Adding a $100k capital gain would mean 15% of that goes to the IRS. Now imagine that same couple quit their jobs and moved abroad for 2023. Assuming no additional income, a most of that $100k capital gain would fall below the $89,250 threshold above (which increases every year along with inflation) – qualifying for a 0% tax rate! Why is that useful? Because of the loophole, they can immediately repurchase that asset – with a new cost basis of $150k (something called “step up basis”). Fast forward a few years when the couple is earning their usual salary and assuming $50k of additional gains on that asset – that couple then sells it for $200k. They now are taxed only on the $50k gain, not the $150k gain – a savings of $15k in taxes! (*note for single filers: divide all of these numbers by two)
While the strategy applies to almost all types of investments, it is especially relevant to those who fared well in the cryptocurrency boom. A single Bitcoin purchased a year ago for under $17k and sold now for over $42k (and immediately repurchased) could allow for $25k of tax-free gains if timed right.
Online Work
While keeping one’s regular income stream going while overseas (digital nomads) can pretty much negate the need for putting much bandwidth into financing time overseas, that isn’t really feasible (or desirable) for most. For us, a primary driver for taking time off was to be 100% available for our awesome kiddo outside of his 8-3 school hours – something that was not possible in the real world. That being said, we’ve also come across small ways to pick up additional income from abroad that don’t occupy much time and further help cushion things. Almost anyone can find something online-based to make a little cash in the digital era if they want to. But, and I can stress this enough, be careful not run afoul of your visa terms and get deported! Many countries are developing “digital nomad” visas that allow folks to work exclusively online (read: no local clients), but currently most visas expressly prohibit any kind of work- Bali is notorious for fining folks working here illegally and sending them to the airport.
Final Thoughts
While these little tricks can shave 30-50% off of the financial hit from an extended time abroad, it should by no means be assumed that they’ll all work perfectly. Just turn on CNN for a few minutes and you’ll likely learn about something that could inadvertently alter your travel plans. COVID lock-downs trapped some folks in other countries MUCH longer than they’d intended (or desired) to be away. Even in a “normal” year, would you have enough of a financial cushion to pull off a wildly disruptive life change? This is also a good time to take a hard look at how a year away could impact your long-term financial goals (buying a house, kids going to college, retirement planning) and weigh the benefits vs the costs. Perhaps another year of saving is in order to make sure you don’t have to pinch pennies abroad and not make the most of your time? It’s best to be over-prepared financially than have to miss out on what you hoped to do while away.
Well I hope that at least some of you found this useful. It’s almost New Year’s Eve here in Malaysia and it’s time for us to make the most of our limited time with family, so see you in 2024! Selamat Tahun Baru!