Does Mexico Tax Retirement Income?

Understanding tax exposure is key to having a plan for a successful retirement in Mexico–ensuring you can relocate with confidence that your pension income and savings will comfortably cover the lower living costs.

In general, if you have a pension product within the US and receive that income in Mexico, you won’t be subject to any additional taxation. Although the IRS will typically tax pension earnings, the Mexican tax office doesn’t apply any further levies.

Of course, it’s well worth speaking with a tax adviser if you have any concerns and to ensure compliance with US law if you are obligated to file annual tax returns or make other declarations.

Tax Implications of Retiring to Mexico

Mexico is a fantastic place for retirees from the US and Canada looking for towns and cities with beautiful beaches and a thriving expat community. The weather, food, lifestyle, affordable real estate market, and relaxed pace of life are hugely appealing.

Many expat retirees find that their pension income and savings stretch considerably further, allowing them to make the most of their golden years with sufficient earnings to explore, socialize, travel, or soak up the ambiance and the warm sunshine. However, we’d also suggest you review your income, savings, and budgets to ensure you don’t run into any pitfalls, make informed decisions about where to live, whether to purchase a property, and account for your ongoing tax liabilities.

Paying Tax on Pension Income 

As indicated, US citizens remain subject to taxes in their home country and will usually need to report their income and file tax returns like any other retiree. If your income originates in the US, you won’t usually be exposed to further taxation. That might change if you have a retirement account or pension product based in Mexico, usually an AFORE account or an Administradores de Fondos para el Retiro.

In these scenarios, you may be able to claim favorable tax treatment in the US but should consult your tax adviser to clarify your position and how to declare your income both in the US and Mexico. The tax system is similar for Canadian citizens. However, you might find that payments from the Canada Pension Plan (CPP) and other schemes have a deduction called the non-resident tax; this is normally around 25%.

Tax Residency as an Expat Retiree in Mexico

One of the complexities around tax for expats is that a lot may depend on the type of visa you apply for and whether you are considered a Mexican tax resident. Retirement visas specifically aimed at those relocating to Mexico who do not intend to work or run a business often provide flat taxation rates. However, you’ll likely be treated as a tax resident if you officially move your permanent residence to Mexico.

Most of the time, a non-resident or a retirement visa holder isn’t subject to federal taxes in Mexico if their income arises in their country of origin and is already taxed at source. This might change if you are categorized as a tax resident, which means you’ll be treated as any other citizen for tax purposes.

Canada and Mexico hold a Tax Convention, which defines how your income is taxed if you become a resident in one country or the other. This means you’ll normally pay a 15% withholding tax as a Mexican tax resident on pension income from defined benefit, Canada Pension Plan (CPP), or Old Age Security (OAS) schemes.

It’s also essential to account for any separate revenue sources, such as a rental property, because you’ll typically be subject to local tax rates on your worldwide income as a Mexican tax resident.