Why investing can be a headache for expats
In 2010, Congress enacted the Foreign Account Tax Compliance Act (FATCA). As the U.S. Treasury very bluntly puts it, this legislation was expressly passed to “target non-compliance by U.S. taxpayers using foreign accounts.”
As part of the new FATCA rules, foreign banks and brokers were required to begin reporting the foreign assets of their U.S. customers. This placed a tremendous burden on these financial institutions that many weren’t prepared to bear. And rather than put up with the extra requirements, many simply began closing their expat accounts.
On the flip side, many U.S. banks, brokers, and 401(k) providers will only work with customers who have U.S. addresses because they want to steer clear of foreign regulatory laws. So many Americans living abroad have found their accounts shut down by brokerages including TD Ameritrade, Vanguard and Fidelity.
In many cases, firms will freeze accounts belonging to U.S. citizens living in one country but not another. This is especially true of brokers as U.S.-domiciled mutual funds are often only open to U.S. citizens. So many expats who switch to a foreign address with their financial institutions receive an unexpected notice that they’re accounts will be shut down in 30 days.
This can present major headaches for handling your finances while living abroad. On the one hand, overseas brokers may be hesitant to work with you. And, on the other hand, your U.S. financial institution may not want to keep you as a customer after you move!
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How to keep your U.S.-based financial accounts open while working abroad
If you’re able to, opening an account with a foreign bank can add a lot of convenience to your life while you’re living overseas. However, if the combined balance of all your foreign banks accounts exceeds $10,000, you’ll be required to file the FBAR each year with FinCEN.
To avoid this, expats may want to leave the majority of their funds in U.S. accounts and keep just enough cash in their foreign accounts to cover their day-to-day expenses.
But, of course, this strategy won’t even be a possibility if you’re U.S.-based accounts are closed after you move. Here are a few steps you can take to keep them open.
1. Maintain a U.S. address (simplest option)
The easiest way to avoid running into problems with your U.S. bank or brokerage account while you’re abroad is to truly have a U.S. house or apartment. This might already be planning to do this if you’re only planning to work abroad for a short period of time.
If you’ll only be gone for a few months, for example, you probably won't want to give up your U.S. place of residence. Plus, homeowners may have the opportunity to earn a little side income by listing their home on a short-term rental site like Airbnb.
2. Look for “expat-friendly” brokers
If you won’t still have a personal U.S. address while you’re living abroad, you’ll want to seek out banks and brokers that are known for working with expats.
In addition to wide country availability, you’ll want to look for financial institutions that charge low fees for international transfers and purchases. And bonus if the institution supports multiple currencies!
3. Use the U.S. address of a family member or friend
Ok, so now we’re moving into a bit of a gray territory. Technically, brokers want the address on file with your account to truly be yours. However, many expats have claimed success with keeping their financial accounts open by simply changing their address to someone they know and trust who lives in the U.S.
After making the address switch, they simply elect to receive all of their statements electronically. This solution will probably become less viable the longer you plan to live overseas. But over shorter time frames, this is a virtually hassle-free option that might just work.
4. Pay for a virtual mailbox service
There are several companies that offer virtual mailbox services that are specifically designed for remote workers and expats. With these services, you’ll receive a real physical U.S. address (not a PO box) where your mail is delivered. From there, your mail is scanned and made accessible to you online from anywhere in the world.
Popular virtual mailbox services include US Global Mail, Earth Class Mail, Virtual Post Mail, and many more. Pricing for virtual mailbox plans will vary by company and your needs but tend to start at around $15 to $20 per month.
Can expats contribute to U.S. retirement accounts?
Whether or not you can contribute to your company’s 401(k), your IRA, or a self-employed retirement plan will depend largely on whether or not you plan to claim the Foreign Earned Income Exclusion (FEIE). Here’s why.
The IRS only allows U.S. citizens who have earned income to contribute to a tax-advantaged retirement account. But if you exclude 100% of your foreign income using FEIE, then you won’t have any income that’s eligible for 401(k) or IRA contributions.
Remember, if you’re only planning to live overseas for a few months, you won’t qualify for FEIE anyway. In this case, you may still be eligible to contribute to your company’s 401(k) or to your individual IRA account. But if you plan to live a year or longer in a foreign country, you most likely will want to claim FEIE and this will present problems for retirement account contributions
If you have a 401(k) through your employer, you’ll want to speak with an HR advisor about your overseas investing options. If your company is well-accustomed with sending employees overseas, it’s likely to have some pension suggestions. You may also want to consult with a tax professional.
Finally, if you plan to live long-term overseas, you may want to investigate your foreign pension plan options. Know that these plans could be classified as passive foreign investment companies (PFICs), which means many more reporting requirements. However, the U.S. does have tax treaties with several countries that allows their pensions to receive the same tax treatment as U.S. Qualified Plans.
Look at local investment opportunities
U.S.-based investment markets are some of the greatest in history. But if you live abroad and earn locally, consider local investment opportunities. If you live in a developed area, such as Canada or Europe, local investment markets and exchanges offer compelling investment opportunities. In some cases, you can even invest in U.S. assets through local exchanges.
For example, the New York Stock Exchange is part of a company called NYSE-Euronext. The two exchanges merged in 2007, creating the largest group of exchanges in the world. If the company is not located where you live, you may still find a local brokerage that can give you access to global markets, including U.S.-based investments.
If you live in a developing country, your local investment opportunities may be limited and very risky. In those cases, you can still invest in the United States and manage your money remotely.
Please be aware that non-U.S.-based funds can be classed as passive foreign investment companies (PFICs). These are subject to very strict and complicated tax guidelines by the IRS. We recommend that you consult a tax professional before diving in.
Stay mindful of tax implications
That brings us to taxes on investments in general.
One of the biggest things to look out for, beyond exchange rates, is taxes. Contrary to popular belief, U.S. citizens living abroad are required to file a U.S. tax return. This is true even if they don't owe taxes to the IRS. But odds are, if you have a job and get paid, you will owe something to the IRS even when living far away.
Although you still owe, there are some foreign earned income exclusion limits to avoid double taxation. You also have to report to the IRS income from foreign bank and investment accounts. This applies even to many overseas retirement savings accounts. We recommend finding a tax specialist for expats who can help you navigate the financial minefield of U.S. taxes for foreign residents.
We can’t say this enough: Whatever you do, don't ignore the tax implications. Ignoring your taxes could lead to future fines, penalties and hassles from the IRS. They don't care where you live; they just want their money.
Don't let exchange rates ruin your finances
Before you start looking into exotic foreign investments or get stuck in a U.S.-centric investment plan, start by looking at how you handle money on a daily basis. That starts with your income.
If you live abroad and get paid or receive Social Security in U.S. dollars through a U.S. bank account, you can manage your money in the U.S. easily. But if you get paid in pounds, pesos, euros or any other foreign currency, you will need to make some difficult choices.
Try to keep from converting back and forth between dollars and local currency. Exchange rates add up fast. And going from local currencies to dollars and back means you pay for foreign exchange twice.
The bottom line
Living abroad gives you lots of opportunities, including ones to ruin your finances. Don't let exchange rates, taxes or anything else get in the way of your savings, investments and retirement. Your future financial stability is too important to leave to chance or put aside for a few years while on an exotic adventure.
Wherever you are in the world, you can manage your investments and continue to grow a successful portfolio. Make it a priority so you don't regret missing out on those years of investments down the road.
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