Retirement income is taxed differently than earned income — and most expat tax guides are written for workers, not retirees. Here's exactly how Social Security, IRA, 401k, pension, and investment income is taxed when you retire in Mexico as an American.
The most popular tool for eliminating US taxes abroad — the Foreign Earned Income Exclusion — doesn't apply to retirement income. The FEIE only covers earned income: wages, self-employment, and freelance. Social Security, IRA distributions, 401k withdrawals, pension payments, and investment income are all excluded from FEIE eligibility. For retirees, the Foreign Tax Credit and the US-Mexico Tax Treaty are the primary tools for reducing double taxation.
The US-Mexico Tax Treaty specifies that Social Security benefits are taxable only in the US — Mexico cannot tax your US Social Security payments regardless of how long you live there. On the US side, up to 85% of your Social Security may be subject to federal income tax depending on your combined income (provisional income formula). The good news for retirees in Mexico: your overall income is often low enough that less of your Social Security becomes taxable. The guide includes the provisional income calculation for typical retiree income levels.
Traditional IRA and 401k distributions are taxed as ordinary income by the US — no special treatment for living abroad. Mexico generally taxes these distributions as foreign-source income if you are a Mexican tax resident (183+ days). The Foreign Tax Credit prevents actual double payment: Mexican taxes paid on these distributions can offset your US tax bill. Importantly, some retirees moving to Mexico convert Traditional IRA funds to Roth IRAs in the year they move — when US taxable income may be lower — to eliminate future US taxes on those funds. The guide covers the Roth conversion window strategy in detail.
Under the US-Mexico Tax Treaty, government pensions (federal, state, military) are taxable only in the country of origin — a US government pension is only taxable in the US, not Mexico. Private pensions follow different rules: they are generally taxable in Mexico if you are a Mexican tax resident. The treaty's pension provisions are underutilized by American retirees in Mexico — the guide covers every applicable article with plain-English explanations.
Dividend income, capital gains, and interest from US investments are taxed by the US at preferential rates for long-term gains and qualified dividends. Mexico also taxes these if you are a Mexican tax resident. The Foreign Tax Credit applies, but the calculation is separate from earned income credits and uses a different 'basket.' Mexican investment accounts (fondos de inversión) trigger PFIC rules and should generally be avoided by American retirees entirely. Read the PFIC guide →
Medicare does not cover healthcare outside the US. American retirees in Mexico need private health insurance or must plan for out-of-pocket care. The good news: Mexican private healthcare costs roughly 70–80% less than the US. Comprehensive private coverage for a 65-year-old retiree runs approximately $2,000–$5,000/year depending on age and coverage level. IMSS, Mexico's public healthcare system, accepts foreign residents for approximately $500/year. Many retirees maintain Medicare Part A and B while using Mexican private care for day-to-day expenses. Read the healthcare guide →
Moving to Mexico often creates a strategic window for Roth IRA conversions. If your first year in Mexico is a partial year and your income is lower than usual, converting some Traditional IRA funds to Roth at a lower marginal rate eliminates future US taxes on those funds — while Mexico's Foreign Tax Credit offset means your Mexican tax bill on the conversion may also be manageable. The guide runs the exact calculation for conversions at different income levels.
If your Mexican bank account exceeds $10,000 aggregate at any point during the year — very common for retirees keeping emergency funds locally — you must file an FBAR (FinCEN 114) annually. Penalties start at $10,000 per year per violation. This catches many retirees off guard because they assume it doesn't apply to 'just a local account.' It does. Read the FBAR guide →
Educational content only — not tax or legal advice. This guide is an orientation document. Tax law is complex and individual situations vary. Always consult a qualified US expat CPA and a licensed local attorney before making financial, visa, or property decisions. Figures are verified as of the date shown and subject to change. Full disclaimer →