The excitement of embarking on an international adventure is often accompanied by an unexpected financial hurdle. A significant number of US brokerage and investment firms are reluctant to hold accounts for US expats. However, this reluctance isn’t on a whim; it stems from the intricacies of international financial and tax rules. In this article, we’ll outline the challenges faced by Americans living abroad with US investment accounts, and the available options when relocating overseas, whether for a short or extended stay.
In this article we cover:
- Challenges faced by US expats with investment accounts
- US tax reporting obligations and foreign investments
- Brokerage options for Americans moving abroad
- Should you keep your US brokerage accounts?
- 401(k) plans
- Strategies for moving abroad
- Final thoughts
Challenges faced by US expats with investment accounts
The global financial landscape comprises a diverse set of regulations that vary from country to country, and financial institutions must comply with these regulations to ensure their operations remain legal. Some of these regulations create barriers for Americans living abroad that complicate the management of their brokerage or investment accounts. In particular, the stringent US rules surrounding anti-money laundering (AML) and know your customer (KYC) measures become difficult for financial firms to comply with across international borders. It is for this reason that many US banks and brokerage firms have stopped working with clients living outside the US.
US tax reporting obligations and foreign investments
However, investing abroad has complications for expats too, as there are US reporting rules relating to foreign investments that can carry steep penalties if you ignore them. For example, you may be required to file FBAR and FATCA Form 8938 to stay compliant with US tax reporting requirements.
Moreover investing in foreign mutual funds can trigger IRS PFIC (Passive Foreign Investment Companies) reporting and a possible US tax liability. As such, if you’re considering investing abroad, always consult with an expat financial planning expert.
Brokerage options for Americans moving abroad
Amidst these challenges, expats still have options, and with good advice it’s possible to make the right investments to achieve your long term goals while remaining tax efficient across international borders.
Maintaining US brokerage accounts by using a US mailing address
If you won’t be retaining a residence in the US when you move abroad, you might consider obtaining a US mailing address, which might, for example, be a relative’s home. This approach is particularly helpful for those planning an eventual return to the US. This arrangement allows your investment accounts to remain active while you’re living abroad, providing financial continuity and stability.
Banks and brokerage firms need to know where their clients live so that they can fulfill their obligations under FATCA to report on accounts held by residents of other countries. For this reason, and to fulfill KYC rules in the country of residence, the financial institution will typically ask for your address of residence and, in some cases, may no longer want to deal with you if you are resident in a country in which they choose to not do business.
Expat specialist brokers and investment managers with tailored solutions for US expats
Alternatively, you might consider working with an expat specialist broker or investment manager. These specialized firms cater specifically to US expats, bringing a global perspective and an in-depth understanding of expats’ investment options and the tax implications that accompany them. Armed with this expertise, these brokers offer personalized, compliant solutions that are aligned with both the financial regulations of your resident country and the US while aiming to meet your long-term financial goals.
Should you keep your US brokerage accounts?
Whether moving abroad permanently or temporarily, for US expats there are significant advantages to maintaining investment accounts in the US:
- Streamline your tax filing: American citizens have to file US taxes from abroad, and maintaining their investments in the US avoids additional reporting of foreign investments and assures that the proper US tax reporting forms, such as 1099s for example, are provided.
- Convenience: Most US brokerage accounts can be managed online, and there won’t be foreign language barriers or complications relating to foreign investment rules.
- Lower Fees: US accounts generally offer lower investment-related fees compared to foreign equivalents, thanks to the vast selection of products and market efficiency.
- FDIC and SIPC Coverage: US accounts provide FDIC and SIPC insurance, offering asset protection and peace of mind. The insured limits on US accounts are significantly higher than in most other jurisdictions.
401(k) plans
Unlike brokerage or personal retirement accounts, 401(k) retirement plans can usually be maintained when you relocate abroad, although you may no longer be able to continue contributing to the plan if your international move means separating from employment under your US firm.
If you do separate from your US employer, it may be in your best interest to roll the 401k plan into an IRA account to take advantage of a greater diversity of investment options. If, for example, you’re planning to move abroad permanently and retire abroad, it may make sense to keep at least a part of your retirement savings in local currency investments – something that is typically not an option in a 401k plan.
Strategies for moving abroad
Short-Term or Part-Time Relocation abroad
- Consider retaining your US brokerage accounts. If you’re only moving abroad temporarily or for a short or fixed period of time, it may be possible to use a US mailing address to keep your account open. Otherwise you may need to move your accounts to one of the few expat-friendly brokerage firms so that you can use your local residential address.
- Seek professional tax and investment advice to ensure that you don’t fall foul of investment regulations (both US and other countries’ rules) as well as ensuring that you take advantage of any tax benefits in either country as you invest when abroad, which may be contained in an international tax treaty for example.
Embracing living abroad long-term
- Review and potentially restructure your investments. Seek advice from an expat investment specialist to see whether it’s worth reorganizing your portfolio to align with your changing situation and evolving financial goals. Things to discuss include: whether US mutual funds and ETFs will still be available to you once you move; keeping part of your investment portfolio in local currency; which brokerage firm to deal with; and the best way to transfer and convert funds between countries.
- Conduct a tax efficiency assessment. Consult an expat tax specialist too, who can help you delve into the tax implications of both your host country and the US. Depending on the tax laws, it might be advantageous to avoid certain types of investments.
Final thoughts
While most US brokers aren’t happy to work with overseas-based clients, there are still options available for expats. The best option depends on each expat’s individual situation though, such as where they’re moving to, for how long, and their future plans and long-term goals. It’s always worth consulting an expat specialist investment advisor who will be able to guide you through your options so that armed with the right knowledge, you can confidently embrace the thrilling opportunities available living abroad as a US expat.
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.