Best Strategies for Investing as an Expat
Plus Worst Mistakes to Avoid
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.
The Short Version
- In response to the Foreign Account Tax Compliance Act (FATCA), many foreign banks and brokers began closing the accounts of their U.S. customers due to the extra requirements placed on them.
- There are ways for expats to keep their U.S.-based financial accounts open, such as maintaining a U.S. address, looking for “expat-friendly” brokers, or using the U.S. address of a family member or friend.
- Whether or not expats can contribute to U.S. retirement accounts depends largely on whether or not they plan to claim the Foreign Earned Income Exclusion (FEIE).
- Charles Schwab and Interactive Brokers are two companies that have strongly positioned themselves as expat-friendly.
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!
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.
Best Brokers for Expats
Finding a stock broker is likely to be the most difficult task for expats. Due to the complicated rules that can surround cross-border trading, many brokers simply stay away from working with customers who have foreign addresses.
However, Charles Schwab and Interactive Brokers are two companies that have strongly positioned themselves as expat-friendly. Below, we break down what each broker has to offer to U.S. citizens working abroad.
|Charles Schwab||Ease of Use|
|Interactive Brokers||Global Availability|
Charles Schwab offers a fantastic suite of services to U.S. citizens working overseas. You can open and access your account from over 30 countries. And active traders living abroad will have access to Schwab’s advanced StreetSmart Edge® trading platform, just as they would if they were U.S.-based.
In addition to its stock market tools, Schwab also offers a variety of cash management services to its customers. Most notably, you’ll receive a refund for all ATM fees that are charged by third-party ATMs whenever you use your Schwab Visa® debit card. Schwab also says that it offers competitive currency exchange rates.
With all of these banking and brokerage tools rolled into one, you could potentially rely on Schwab for all your financial needs while you’re working abroad. Wondering if Schwab is available in the country you’ll be moving to? You can find out here.
Interactive Brokers (IB)
Interactive Brokers (IB) isn’t as focused on customer support and banking services as Charles Schwab. But what it does offer is unrivaled access to international markets.
As of writing, IB serves clients in over 200 countries and territories. That means IB customers can truly invest in stocks, bonds, currencies, and more from all around the globe from just a single brokerage account.
Keep in mind, though, that IB is geared towards high frequency traders and its trade commission pricing structure can be confusing. Also, just because you can invest in foreign investments doesn’t mean you should. Foreign-registered mutual funds and ETFs, for example, are considered PFICs and are taxed according to complicated rules.
If you decide to use IB, sticking with U.S.-domiciled investments will be your safest bet. And if you really want to invest in a foreign mutual fund or ETF, you should probably talk to a tax professional to make sure that you handle everything correctly.
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.
I’ve been told similar here in Norway. That the tax treaty (or some international treaty between the US & Norway) says that since Norwegians cannot buy anything on the US stock market, Americans cannot buy on the Norwegian stock market. This doesn’t seem to limit investments in private start up companies (those not listed on the public stock market yet / pre-IPO) or in mutual funds though. This may be mute if you become a dual citizen, since then (theoretically) you may be able to be treated like a local. But this is just my personal experience here in Norway so be sure to check this with a certified advisor in Portugal. Often the US Embassy or consulate has people they recommend. Or there are a lot of local Facebook (or other social media) groups for “Americans in XXX” that could tip you on to a good financial advisor for your area. Each country has slightly different agreements, but at a guess this may be why you have been told that you can’t buy anything in Portugal.
Once again I read about Charles Schwab and their ‘excellent’ investment services for Expats. However, I have been trying for three months to contact them by their website contact form, telephone, and calling a Southern California Charles Schwab brokerage office. I have spent hours on hold with the results being disconnected. If anyone knows how to successfully contact them I would be happy to hear the secret.
There are some excellent follow-up questions to this “article” but I am not sure this is the place to get answers. It would have been nice if the writer looked for answers and produced a second article, no?
Anyway, Julia, I am not qualified to give investment advice, but I live in the EU and your idea of marrying filing separately IS a good idea according to the asset manager my husband and I have been speaking with. It helps but doesn’t solve all issues. There will still be double costs for anyone sending money to the U.S. and then using it to pay for expenses or investments in their foreign country of residence. Likewise, there will always be reporting requirements – but taxation is another thing. At the moment, my husband and I are considering having all investments in his name, in an EU-based investment firm. These might be reportable (I’d have to look into that – I don’t think so if only in his name) but they wouldn’t be taxable.
That said, we live in the country which has the highest taxes in the world the last time I checked.
Footnote, I’m not sure I’m okay with this. He doesn’t know it, but, assuming the U.S. becomes a stable place to live again, I still hope to return there. He does know that I want to live there about 6-9 months per year (note- there are legal implications one should always check regarding durations like this).
So one should also consider, if going the route of all funds being in one party’s name: what are the potential costs/risks that are personal to the American. Where I live, assets like this are community property so in theory, I’m not at a high personal risk if the money we will be investing resides in liquid assets in the EU. Still, I’m not comofrtable with that. . . .
And so it goes . . . .
My wife is a US-citizen, I am German, together we live in Germany.
I understand that investing in ETFs through a European broker is tax-toxic for her as ETFs are deemed passive investments in regard to US expats.
What about individual stocks in a European broking account? That would be seen as an active investment, wouldn’t it?
She would have to declare her profits and that’s it, right?
Also, did I understand correctly that investing in international ETFs usiing Interactive Brokers would be ok with the IRS?
I am wondering – would “married filing separately” help in your case if the european investments are under your name and she just has the US based ones?
I live in Portugal and earn 100% of my income here in euros. I had one expat specific financial planner tell me that it was illegal for me as an American citizen to invest in overseas markets and even illegal for me to have full-term life insurance based in a country other than the US. I have been looking for places to verify this information but can’t find it anywhere. Above in this article, it appears that I can do that. So my question is exactly that…can I invest here in Portugal as an American? (BTW – I have absolutely no US income whatsoever.)
I’ve been told similar here in Norway. That the tax treaty (or some international treaty between the US & Norway) says that since Norwegians cannot buy anything on the US stock market, Americans cannot buy on the Norwegian stock market. This doesn’t seem to limit investments in private start up companies (those not listed on the public stock market yet / pre-IPO) or in mutual funds though. This may be mute though if you become a dual citizen, since then (theoretically) you may be able to be treated like a local. But this is just my personal experience here in Norway so be sure to check this with a certified advisor in Portugal. Often the US Embassy or consulate has people they recommend. Or there are a lot of local Facebook (or other social media) groups for “Americans in XXX” that could tip you on to a good financial advisor for your area. Each country has slightly different agreements, but at a guess this may be why you have been told that you can’t buy anything in Portugal.
Would be great to take a deeper dive on this topic. How can US persons invest at all when living overseas permanently?
Many people convert to USD (ideally at good exchange rates) and send money to the US to invest there. Downside is, if you’re planning to permanently live overseas, that means 2x currency exchange rates (to send funds and then for disbursements), as well as the risk of double-taxation by the foreign country of residence.
Others recommend a QEF election for selected PFICs that qualify – seems to have some potential, but still potentially quite complicated from a US tax reporting perspective. Typically this also requires a managed fund, often with very high minimal investments. General guidance for any local funds without QEF election is do-not-touch: despite the tempting high returns, the tax typically dramatically exceeds any gains. Even investing in US assets via local exchanges can sometimes be classified as a PFIC.
All in all, most options for financial guidance and management seem to only be available for those ready to invest a half million plus. Self-managed trading is an option, but hard to know where to start. Would appreciate Investor Junkie diving into this topic further from an expat lens.
I started with The Bogelhead’s Guide to Investing and that’s gotten me pretty far in the last four years since I inherited several hundred thousand dollars.
I find Schwab is better overseas. 1. They do not have a min trading amount, which interactive does 2. I can buy Private Equity through Schwab, where interactive is solely looking for trading volume. 3. I can buy interval Funds through Schwab as well. Interactive doesn’t even know they exist, yet. 4. No annual fee, unless you hire an Register Investment Advisor, Broker, or some Schwab program.
Interactive does a great job of setting up accounts. You just need a higher dollar amount to avoid their monthly account fee or you need to trade a lot, which has shown to be an unsuccessful strategy for most people.
So is that to say that with this Schwab account you can trade in US stocks, ETFs, etc. while living in ie: Chile or Panama?
I live overseas and use Schwab, they are great for Expats. Their High Yield Investor Checking has some of the lowest international fees of any bank out there.
Now Schwab will not accept a US expat application if they do not have a US address! I tried and got rejected. It is illegal to use a US P.O. box or other family’s residence. I am trying to transfer my UBS account out of the US since I am breaking the law and risk having my account seized but I am having extreme difficulties finding a brokerage that allows me to open an account. I live in Portugal and have a Portuguese family. I do not qualify as having a residency in the US since I sold my house in California a few years ago and do not spend enough time in the US to qualify as a resident. I am at my wits end!
Peter, I am running into the same issue, only difference is that I live in Poland, not Portugal. Have you had any luck finding a US entity that would allow you to open an account?
Same situation here in Ecuador where I live. I am in the process of trying to open an account with Zacks Trading which is in Chicago, however customer service is problematic with delays and non-answers. The possibility still remains…. My research has narrowed the search(for possible options, although perhaps not preferred) to Interactive(fees!), Schwab(apparently not), and Zacks.
Have you tried Charles Schwab international?