Moving abroad is a thrilling and life-changing experience. It presents opportunities for adventure, career advancement, and the chance to immerse yourself in a different culture. However, alongside the upsides, there are particular financial challenges for Americans living abroad. One such challenge is how to invest while residing overseas. In this article, we explore some of the principal considerations for US expat investors.
Understand US reporting rules and how they affect investments
As an American expat in a foreign country, you’re subject to both the tax and reporting rules in that country as well as US ones.
In terms of US reporting, there are 4 main areas US expat investors should be aware of:
Reporting income from your investments on your US tax return
As an American citizen, you’re required to report your worldwide income on Form 1040 each year, wherever in the world you happen to be residing unless your income is lower than the standard deduction amount. This includes any income you receive from investments, whether your investments are in the US or abroad, and whether it is received in US dollars or a foreign currency. If it’s received in a foreign currency, you have to convert it into dollars when you report it.
FBAR filing
Americans living abroad have to report any foreign financial accounts that they have if the total value of their foreign account balances exceeds $10,000 at any time during a year. There’s no tax payable based on (foreign bank and investment) account balances, however penalties for not filing an FBAR (Foreign Bank Account Report) (officially called FinCEN 114) form are steep and Uncle Sam is receiving the same information directly from foreign banks.
FATCA reporting
Americans with offshore financial assets may also need to file IRS Form 8938 depending on the amount and nature of the assets.
PFICs
Expats who invest in foreign mutual fund type investments, which the IRS calls PFICs, have an additional reporting requirement to file IRS Form 8621, and may have to pay tax relating to them. As such, always seek advice before investing in non-US funds.
Interests in trusts of corporations registered in a foreign country may also have to be reported to the IRS.
Minimize your tax bill
There are several ways in which you can minimize your US tax bill. As an expat, you’re eligible to claim US tax credits to offset foreign taxes that you’ve paid. There may also be provisions in an international tax treaty that benefit you, depending on your circumstances, for example relating to the taxation of corporate, dividend, or retirement income.
Lastly, the US may have signed a Totalization Agreement with your country of residence that could help you avoid double social security taxation or help you combine US and foreign contributions when you retire.
As an expat investor, understanding ways that you can minimize your tax bill may influence which investments you choose to make.
Manage currency risk
As a US expat investor, if you receive income or hold investments in a different currency than that where you live, fluctuations in exchange rates can affect the value of your income, investments, and expenses, potentially impacting your purchasing power and financial goals.
To manage exchange rate risk, consider the following strategies:
Monitor exchange rates:
Regularly monitor exchange rates to assess the potential impact on your financial situation and make informed decisions accordingly.
Diversify your currency exposure:
Holding investments in the same currency in which you are spending will mitigate the risk that your spending power will decrease as a result of adverse currency fluctuations. However, the US Dollar tends to strengthen during times when there are negative shocks to investment markets, like during the 2008 financial crisis for example. So holding some of your portfolio in US Dollar investments may offset negative market movements once your investments are re-computed into local currency.
Currency hedging:
Currency hedging often involves either waiting for a currency to reach a certain value before exchanging, or agreeing to buy or sell currency at current exchange rate but on a fixed date in the future regardless of fluctuations.
Considerations for remittances:
If you regularly transfer funds between your host country and the US, explore options for cost-effective remittance services with competitive exchange rates. Compare fees, exchange rates, and transfer speeds to find the most suitable solution for your needs. Bank-to-bank transfers usually give poor exchange rates; currency transfer services generally give a better rate and also some brokerage firms give quite good exchange rates and allow the wiring of funds in multiple currencies.
Retirement contributions
As an expat, where you invest for your retirement will depend on several factors, such as where you plan to retire and the relative tax benefits of different savings and investment accounts in both the US and abroad.
As a US expat, you may be able to continue contributing to your US retirement accounts, such as Individual Retirement Accounts (IRAs) or 401(k)s while living and working abroad.
As long as you have earned income from the US, you can contribute to a traditional or Roth IRA. However, it’s important to be aware of the annual contribution limits and any eligibility requirements based on your income and filing status, similarly to Americans in the US.
If you have a 401(k) from a previous employer, you generally have the option to leave the funds in the account or roll them over into an IRA. Consult with a financial advisor to determine the best course of action based on your specific circumstances.
Note that unless specifically covered in a tax treaty, most countries don’t recognize the tax benefits of these US retirement plans, and similarly the US often doesn’t recognize the tax benefits of foreign plans. If there is a tax treaty between your country of residence and the USA then it will contain a section on pension plans and outline the types of accounts that are considered to be pension plans and therefore receive special treatment under the treaty.
Where to invest
Similarly to retirement planning, whether you invest in the US or abroad, or both, will depend on your personal circumstances and plans.
Even if you intend to live permanently outside the USA, if you are a US citizen it likely makes sense to keep your investments in a US brokerage account since you will receive the necessary forms for US tax filings that way and will avoid PFIC issues. The US is also a very competitive financial marketplace and therefore investment costs tend to be lower than in many other parts of the world. Finally, US accounts offer substantially higher insurance limits, to protect against default of the financial institution holding the account, than in most other countries.
That said, investing locally can provide advantages, such as exposure to the local economy’s growth potential and diversification of your investment portfolio.
Working with a financial advisor who specializes in international investments will provide valuable insights and guidance in identifying the right investment opportunities for you while ensuring compliance with local laws and regulations.
Seeking advice
Investing as a US expat can be complex. Your investment plan should always be tailored based on your goals, your risk tolerance, your personal circumstances, and the country where you’re living. Working with an investment professional who specializes in expat investing and who is familiar with cross-border financial circumstances will allow you to realize your goals while minimizing your exposure to the intrinsic challenges presented by living abroad.
By staying informed, seeking professional advice, and being proactive, you can effectively navigate the challenges of investing as a US expat while making the most of the adventure of living abroad.
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.
