Who of us hasn’t dreamed of moving abroad at some point? For some, the lure of exotic beaches or cosmopolitan cities has proved too great, and we’ve found ourselves living abroad as a U.S. expat.
Moving away from the United States can be an amazing experience. It may lead to a lower cost of living, new career opportunities and the chance to immerse yourself in a new culture. For retirees, it’s a decision that’s growing in popularity.
But when you move abroad, you also run into a new host of challenges, including how to manage your investments. Read on to learn about the best ways for U.S. expats to invest while living abroad.
FATCA and Brokerage Accounts
“Easy peasy,” you say. “All I have to do is maintain my current brokerage account. After all, everything’s online now, right?”
Well… unfortunately, it’s not so easy peasy.
Back in 2010, something known as FATCA became law. “FATCA” stands for “Foreign Account Tax Compliance Act,” and it lengthened the reach of the IRS when it comes to U.S. expats and their money.
FATCA made it difficult for American citizens to hold money in foreign accounts. And, as an unfortunate side effect, it also made many U.S.-based brokerage firms leery of dealing with American expats.
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.
Other firms are restricting the choices that expat Americans have. Many have placed a ban on foreign residents purchasing U.S. mutual funds,” for example.
Brokerage Accounts for U.S. Expats
U.S. expats report that Interactive Brokers is currently the friendliest brokerage for their needs. The largest U.S. electronic broker, Interactive Brokers offers expats access to stocks, options, futures, forex, bonds and ETFs with the IB Universal Account. The brokerage also supports funding and trading assets in multiple currencies.
With its introduction of the Schwab One International account, Charles Schwab has also become more welcoming to U.S. expats. You can trade U.S. dollar-denominated stocks, options, bonds and ETFs, as well as offshore mutual funds, with this account.
- Minimum Investment: $1,000
- Stock Trades: $4.95/trade
- Options Trades: $4.95/trade
Of course, if you still maintain a U.S. address and banking accounts, there’s no reason why you should be barred from being a U.S. brokerage client. So the many expats who still spend time back in the U.S. should have no problems.
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.
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.