(this article originally appeared on adamfayed.com. If you have any questions or want to invest as an American overseas, please contact me — firstname.lastname@example.org)
Updated January 11, 2019 — this article is true at the time of writing and I will continuously update the information when changes are made.
Why is investing for US expats becoming more difficult?
There was a time when investing for US expats wasn’t much different than for any other nationality.
Most would decide to invest in tax-efficient offshore investments, designed for expats, and heap the tax rewards of such investments.
Times have changed though. Since the Foreign Account Tax Compliance Act (FATCA) was approved in 2010, and enacted in 2013, investing for American expats has become more difficult.
This article will explain FATCA, options for American expats and answer some frequently asked questions (FAQs).
What is FATCA?
The FATCA law requires all non-US financial institutions, to search their databases for US clients, and to self-report. This includes insurance companies, if there is a savings and investment element to the policy.
FATCA imposes a 30% withholding tax on any financial institution, that doesn’t reveal the identities of US account holders, within a specific period of time.
The costs of complying with FATCA are estimated to be about $200M for each foreign instituton.
The cost of the regulation means that many non-US financial institutions no longer accept Americans as clients, including insurance companies, if those insurance companies offer insurance with a saving and investing component.
In addition to that, many US individuals have had their American brokerage accounts closed, since they moved overseas.
For American expats, therefore, investment options have become more limited. Countless Americans living overseas, who aren’t lucky enough to have an HR department help them with the tax implications of investing overseas, end up confused by the paperwork and other requirements that go along with investing.
FATCA affects US connected persons and not just Americans.
Who are US connected persons?
The following people are considered US connected persons:
- Green Card holders
- Other visa holders living in the US. Although this can get complicated. H1B visa holders, for example, are only sometimes considered US connected persons.
- US taxpayers
- You were born outside the US but have one US parent
- You were born in the US, even if you left as a child
Also note the passport you have is irrelevant, if you were born in America.
Who does this affect?
This affects Americans living and working overseas, in any country, and US-specified persons. The majority of American expats live in Mexico, Canada, New Zealand, The UK, Germany, Sweden, Australia, UAE, Singapore, Israel, Costa Rica, France, Brazil, Colombia, Philippines, Mainland China, India, Hong Kong, Japan and South Korea.
There are, of course, American expats all around the world, including numerous places in Central and South America.
American Expat Investment Options — what are the realistic choices?
US expats have many options, including;
1. Putting the money in your partner’s name — although it may not be the most sophisticated option, having the money in your spouse’s name (assuming they are non-Americans) is one simple option to overcome FATCA. This comes with various risks, of course, if you break up. This is especially risky in countries without a developed legal system, if divorce ensues.
2. Another option is to continue contributing to your existing accounts in America, assuming they are open to American expats, which often isn’t the case. This does come with risks though, such as currency exchange fluctuations, and various banking fees.
This also isn’t an option for Americans who have lived overseas for 25–30 years, who no longer have US bank and brokerage accounts in many cases. Another risk is that your US brokerage will eventually follow in the footsteps of many others, and close your account.
3. Tax-compliant investment services overseas. There are a limited number of platforms that can accept American expats overseas, which are FATCA-compliant, which I, and some other firms, can utilize.
The benefits of this approach are the capital gains tax are slim (0%-20% depending on many short and long-term factors), whereas non-compliant US investments can be taxed up to 37%. This approach also makes tax filing and compliance as easy and as convenient as possible.
4. Giving up your American Green Card or Citizenship. This might seem like a big step, but more and more are doing it, with over 5,000 yearly cases reported, including Facebook founder Eduardo Saverin.
FATCA and double taxation on higher incomes have contributed to this situation. However, there is an exit tax for giving up your Green Card. Whether you pay the taxes depends on your immigration status and financial assets.
As a generalization, if you have lived lawfully in the US as a permanent resident, regardless of whether on a green card or as a US citizen, for eight out of the fifteen years ending with the expatriation year, could mean that you are subject to exit taxes.
If your income is above $160,000 per year, and/or your net wealth is above $2M, you are also more likely to be charged an exit-tax. If you don’t meet these two criteria, and you have correctly filed for the last 5 years, then you are less likely to be hit by the exit tax.
If you haven’t filed out your tax forms correctly, the penalties can be severe. For instance, the penalty for not having filed the FBAR (Report of Foreign Bank and Financial Accounts) or the form 8938 (the statement of Specified Foreign Financial Assets) can be up to $10,000 per-form per year.
In such situations, a taxpayer should consider entering into an IRS tax amnesty program to clean up the past and minimise penalties.
Giving up US Citizenship is a big step, with tax and personal implications, so shouldn’t be taken without huge amounts of research and professional advice sought.
In general, option 3 is the best option for most Americans living overseas.
Frequently Asked Questions
This sections will cover some FAQs.
Can a US citizen living overseas invest in Vanguard or other mutual funds?
Vanguard used to be able to accept American expats, but this is no longer the case. However, some of the US tax-compliant platforms can accept various low-cost funds, and other investment options.
Most passive funds work in a similar ways these days in any case, so many ‘Vanguard-like’ funds exist in the market.
What does a client need to do?
FATCA requires all US taxpayers with financial assets exceeding $50,000 to report these on IRS form 8938, attached to the taxpayer’s annual tax reports. Many institutions will help US expats with tax filing, or make it as easy as possible to do it themselves.
Who is considered US Status or US specified persons?
The following people are considered US specified persons;
- Green Card holders
- US birthplace
- Has US residential address
- Sending instructions to transfer funds from the US
- A power of attorney granted to a person with a US address
What about joint accounts — if one person is American and one is non-American?
In this case, FATCA still applies, unlike if you put 100% of the money in your partner’s name. It is subject to the same reporting as a US person.
What about people who took out accounts before FATCA was enacted?
Americans who took out insurance or financial accounts overseas before 2013, should still receive tax advice, as they will still need to report any financial activity.
What if my family or friends in the US sends me money?
Money sent out of the US will not trigger FACTA withholding. In comparison, money sent into the US, and income earned in a US account, may be subject to FATCA.
Could FATCA be rolled back?
There has been speculation that The Trump Administration may roll-back or repeal FATCA reporting. This is just speculation at this stage, and cannot be relied upon. Laws can always become less, or more, strict with time. A rational investor can only make decisions based on the information he or she has available to them.
Does FATCA affect health, life and other insurance products?
Many health and life insurance providers, such as AXA, also provide investment products. Many of these providers can no longer accept Americans.
Providers that only provide non-investment-linked insurance products, in comparison, can usually still accept American expatriate clients.
Are foreign mutual funds more heavily taxed?
Yes. The IRS considers foreign mutual funds as Passive Foreign Investment Companies (PFIC), and these are subject to high taxes.
Should I contribute to my employer’s scheme?
Many employers offer excellent schemes, where they contribute $1 for every $1 you contribute. However, this is only a good idea if the scheme is US tax efficient, otherwsie you will still have tax issues.
Do American expats pay taxes on income?
All Americans living overseas need to file a tax return. However, most Americans do not pay income tax in the US, unless they are earning over $101,000 per year.
How about US legacy estate planning?
Your US estate plan, including wills and trusts, may not be viewed the same way in your country of residence, as in the US. If you have these plans in place, therefore, it makes sense to contact an expert in this space.
What’s the best brokerage accounts for American expats?
There is no best option per see, just that some are tax-compliant and reasonably priced, and some aren’t. Brokerage accounts for US citizens living abroad, that are tax and price efficient, are few and far between, but exist.
Should Americans expats have a specific US financial advisor, who specializes in US non-resident matters?
This isn’t always needed, as most expat financial advisors are aware of the issues many US expats face. Financial advice for US expats is specific, however, so the financial advisor should know about the specific issues non-residents face.
What are some of the key mistakes I have seen when it comes to expat retirement planning?
An even more common mistake than making bad investments is deciding to not save and invest at all because the process seems too complicated. Most expats, and non-Americans alike don’t have access to local social security and pension programs, which means that poverty can await in retirement.
This is especially the case if expats move from country-to-country. Expats who stay in numerous European countries for 30 years plus, are often entitled to reasonable local pensions.
Over-reliance on your country of residence is another key mistake for American, and non-American expats, alike.
It can be difficult to say no to local stocks and real estate, when you regularly go to dinner parties or bars, where everybody is talking about it.
However, most emerging markets are very high-risk. I have seen many expats get caught up in the mania.
Furthermore, tax laws are always changing, so it is important to ask your accountant and investment advisor to be up-to-speed.
As a final note, it is always prudent to get independent tax advice.
Are non-US investment accounts always expensive?
Not always. Some options in the overseas market are cost-efficient and are available with low account minimums.
In the US, it is normal for financial advisors to only accept larger accounts. Many advisors have account minimus of $250,000 a year, or even higher.
In the overseas market, getting advice through an advisor, at a reasonable cost, is often more accesible.
What should I do if I want to contact you?
I have set up many tax-efficient accounts for Americans living overseas. My email is email@example.com and various other contact options, including WhatsApp and Line, are available here.
Please note, however, that I am not a tax advisor. I can just help with tax-efficient investment structures that make filing more convenient.
What are your account minimums?
$50,000 as of May 2019. I started with $30,000, but have gradually been pushing up my minimums.
What documents are needed to open up an expat investment account?
Typically proof of identity (passport or ID card), and address dated in the last 3 months (utility bill or bank statement), plus an online or paper application form.
I have seen applications approved in hours, and some take months. A week is normal.
What are the minimum contribution periods overseas?
Just like back home, that depends on the product provider. In general, lump sum accounts are quite liquid, if you need themoney.
However, with market-investments, it is always best to be long-term. Time in the market reduces risks of losses dramatically.
Can you invest in US Markets like the S&P500 from outside the US?
Absolutely. You can invest in the US Markets, without the money being held in the US.
What average returns could I expect?
Just like back home, nobody can predict what will happen to markets short-term. I have seen clients and associates make 30% 1 year, and 0% the next year.
In general, however, the long-term market average return is 8%-10% per year. That average merely gets distorted by the good, and bad times.
1985–1999 and 2009–2017, for example, regularly gave 15%+ yearly returns, whereas the US markets produced 0% from 2000–2009.
Is now the right time to be in the markets?
The academic evidence shows there is no “right time” to get in the markets — it is best for investors to buy and hold and have a diversified portfolio.
Market timing is pretty much impossible. There are too many unknown unknowns and known unknowns to know when to get in, and out, of markets.
That isn’t to mention that market timing isn’t very cost-efficient, due to the taxes and trading costs.
As most investors should want to invest in a diversified portfolio, moreover, this will insulate you from some of the market falls.
In 2008–2009, as an example, government bonds increased when stock markets fell.
This allowed investors to rebalance their portfolios. It took barely 3 years for stock markets to regain their value.
Are political issues like Brexit and the Hong Kong protests likely to affect markets?
Stock Market have gone up, and down, during various periods of geopolitical calm and risks.
Markets rose in December during the government shutdown, and have also risen during some previous geopolitical crisis, such as North Korea, China and the Cuban Missile Crisis.
They have also panicked, however, such as in the days following the 9/11 attacks in 9/11.
So nobody knows for sure, but Hong Kong and even the UK, are relatively small parts of the global economy.
What we do know, is “market timing” just doesn’t work. Buying and holding, through thick and thin, makes sense.
What about the 2020 election?
One point I could have made in the last section is Trump’s election victory in 2016.
Few people, both his supporters and opponents, expected markets to increase by 20% in his first year in office.
That is neither due to Trump, or because of Trump. Markets tend to rise, long-term, under most presidents, but can do so at random times.
The point is, most people overestimate the affects politics can have on the market long-term.
As Vanguard’s founder Jack Bogle said, “short-term the market is dominated by speculators speculating about what other speculators are speculating about”.
Long-term, markets are driven by business earnings and innovation.
What are some trends for expats to consider?
For expats of all nationalities, not just Americans, the days of the “career expat” are largely over.
There was a time when expats would settle in 1–2 cities, such as Hong Kong, Singapore, Dubai or Qatar, and not move for long periods of time. This has changed.
With the exception of expats setting up their own businesses for 20–30 years, most are moving from country to country every few years rather than staying in the same place.
This means that it is important to have financial solutions that are transportable and online, so you don’t need to experience many hassles when you move locations.
It is so much easier to just change your address and card online, with a few clicks of the button.
So it is important expats don’t place too much important on local solutions — such as local banks in the country you are residing in.
By definition, this means needing to change every time you move, as opposed to seeking an online solution.
Have you got any case studies involving US expats?
I have been living overseas 8 years myself, and I am often approached by US expats living overseas.
Usually they are looking for tax efficient investment structures, and are worried about recent US tax changes.
One of my US clients, called Tom, living in Germany, spoke about his experience in this audio.
About about taxes on the local side?
Of course, this article doesn’t have enough space, to speak about 200 countries in the world!
In general, however, most countries do not make it difficult for expats to invest in a tax efficient manner.
It also needs to be remembered, that the main taxes are capital gains. By definition, this happens at the end of the investment.
Therefore, it is tax-efficient, to buy and hold an investment, as opposed to buying, selling and buying again.
It also has to be remembered, that these rules can always change. Right now there are various proposed rule changes in the European Union, and beyond.
However, the rational investor can only make a decision based on the information that is available to him or her at the time of making the decision.
It is easy to get into analysis paralysis and never make a decision, and thereby leaving your money in the bank, earning below inflation.
Before FATCA, many Americans bought offshore pension products. Some people were happy, but many complained about bad returns and high fees eating into their investments.
For Americans with existing insurance-investment schemes overseas, the article below may be useful: