When Americans move abroad and become expats, as they settle in and network locally, they often become aware of new investment opportunities.
Whether you should take the plunge and start investing outside the US depends on various factors though – your status as a US citizen and the associated tax implications, how long you plan to stay abroad, where you expect to retire, which currencies your expenses are in, and how much complexity you’re willing to manage.
To help make the decision easier, in this article, we’ll lay out some clear principles that apply to most American expats when evaluating opportunities to invest overseas.
Why most expats should keep their core investments in the US
For most Americans living abroad, keeping the core of their investment portfolios in the US remains the most practical and tax-efficient approach.
The reason for this is compliance. The US tax system follows US citizens worldwide, so wherever you invest, you still have to file a tax return and report your assets to the IRS. US-domiciled investments such as stocks, ETFs, and mutual funds are good options, as you receive 1099 forms at tax time, and gains and dividends are taxed in familiar ways, so keeping reporting straightforward. You can still diversify globally via funds that own foreign stocks, without complicating your US tax reporting.
The IRS almost always classifies foreign mutual funds and ETFs as Passive Foreign Investment Companies (PFICs). PFIC treatment requires annual mark-to-market reporting on Form 8621, potentially punitive tax rates on gains, and high compliance costs. This is surprising to many US expats, who may find that local banks or financial advisors recommend what the IRS considers PFICs without understanding the complications for US citizens.
Keeping the majority of your investments US-domiciled keeps compliance simpler and broadens your investment options, giving you meaningful exposure to international and emerging markets without the compliance complications that come with holding foreign funds directly.
Note though that most US brokerage firms won’t work with non-residents, so you should ensure you are dealing with an expat-friendly brokerage firm before you move abroad.
When global investing makes sense
That said, keeping everything in US dollars isn’t always the right answer, especially for expats building a long-term life abroad rather than treating their time overseas as temporary.
The most common factor that leads expats to invest abroad is currency. If your day-to-day expenses are in Euros, pounds, or another local currency, a portfolio held entirely in US dollars exposes you to currency conversion fees and exchange-rate risk that can compound over time. For example, when the dollar weakens, it can erode the purchasing power of a dollar-denominated portfolio, even if your underlying investments perform well.
Holding a portion of your portfolio in assets denominated in your local currency or in ETFs that provide exposure to your economies where they live and spend can make sense for expats in this situation.
Your financial goals matter too: if you’re planning to purchase a property in your country of residence abroad in the next few years, keeping funds in local-currency savings or conservative local investments reduces currency risk in an already significant financial decision.
Or, if you’re planning to retire permanently in Europe, a long-term strategy that builds a base of Euro-denominated assets can serve you better than one that assumes you’ll convert everything back to dollars later.
Many expats dream about buying property abroad, and it can be a good way to diversify your portfolio, especially if you can live in it and also hopefully watch it increase in value.
Investments to avoid
If you do decide to invest outside the US, the most important thing to understand is what not to invest in.
Most investment products offered by local banks, financial advisors, and investment platforms outside the US, such as mutual funds, unit trusts, and locally domiciled ETFs, as already mentioned, are treated as PFICs for US tax purposes. This includes EU-listed ETFs that track the same indices as their US counterparts. The fund’s domicile, not its underlying holdings, are what matters to the IRS. The complexity and cost of staying compliant with PFIC rules typically make these investments a poor choice for US expats.
The takeaway is to be cautious about investment recommendations from advisors who don’t specialize in working with Americans. A well-meaning local advisor may recommend products that are perfectly appropriate for their local clients but that can create real problems for US expats.
Temporarily vs. permanently abroad
Perhaps the most useful framework for this decision is the distinction between living abroad temporarily and making a permanent move.
If your time abroad is likely to be temporary, it normally makes sense to keep your investments predominantly in the US. Your financial life remains dollar-denominated long-term, and your retirement goals are US-based, so adding complexity to your portfolio for a finite period abroad is typically sub-optimal.
If you’re making a permanent or indefinite move on the other hand, currency alignment matters more, and it becomes important to think about your portfolio in terms of where you’ll spend your money in retirement.
Estate planning also intersects with investment strategy, and assets held across multiple countries create multi-jurisdictional considerations that require careful coordination and often the creation of a matching will in each country where you have assets.
Getting the balance right
For most expats, a core of US-domiciled investments, held through an expat-friendly brokerage, provides a clean and compliant foundation. On top of that, currency exposure and your long-term goals should help inform your strategy to create a portfolio that aligns with the life you’re building abroad.
The key is to work with a cross-border financial advisor who understands both the US and your host country’s financial environments. A cross-border investment specialist can help you build a holistic strategy that works on both sides of the equation without creating compliance issues or unnecessary tax exposure.
If you have any questions about financial planning as an American living abroad, get in touch.
This article is for informational purposes only; it is not intended to offer advice or guidance on legal, tax, or investment matters. Such advice can be given only with full understanding of a person’s specific situation.
