Tom Zachystal is president of International Asset Management providing financial planning and investment advice for Americans living abroad.
Many Americans abroad wonder whether they should invest in the U.S. or abroad. The answer depends on various factors, including financial regulations in the foreign country where you’re living, your short- and long-term plans, currency rates and fluctuations that can affect the value of your income and assets if you’re living in a different country to your investments, and the interplay between U.S. and foreign tax systems. In short, establishing and growing an investment portfolio as an expat comes with multiple, additional layers of complexity.
Despite these complexities, with the right strategies, Americans living abroad can still effectively save and invest for the future in a way that helps them meet their goals.
US Tax Implications Of Investing Abroad
Investing outside the U.S. often triggers Foreign Account Tax Compliance Act (FATCA) reporting. FATCA requires that expats report their non-U.S. financial accounts and investments if the combined total value exceeds specific thresholds. Additionally, investing in non-U.S. exchange-traded funds (ETFs), private pension plans, mutual funds or other pooled investments may lead to Passive Foreign Investment Company (PFIC) taxation, which can trigger U.S. taxes and complex reporting requirements.
To manage the complexities of PFIC reporting, U.S. expats should focus on investing in U.S.-domiciled ETFs, or individual stocks and bonds. Working with an experienced international wealth manager can help avoid an unnecessary reporting burden and ensure compliance.
Maintaining A US Brokerage Account
Many U.S. expats face difficulties keeping their U.S. brokerage accounts after moving abroad. Financial institutions often impose residency requirements due to regulatory concerns, which can lead to accounts being frozen or closed for clients no longer residing in the U.S.
Expats can, however, work with specialized brokerage firms experienced in working with international Americans. These firms understand the complexities of cross-border regulations and offer U.S.-based investment solutions for expats. In some cases, working through an advisory firm is necessary, as they can facilitate account management and ensure compliance with both U.S. and local financial regulations.
Restrictions Under MiFID II Rules For Americans In The EU
If you live in the European Union, the Markets in Financial Instruments Directive (MiFID II) restricts the sale of U.S.-domiciled investment funds to EU residents. This poses a significant challenge for U.S. expats living in Europe, as many U.S. funds are not compliant with EU disclosure rules. Consequently, expats in the EU may have limited access to popular U.S.-based mutual funds or ETFs.
To mitigate these restrictions, U.S. expats may consider investing in European-domiciled alternatives that meet both U.S. and EU regulations. Some expats work with financial advisors who pick individual stocks rather than funds or help them access U.S. funds via specialized platforms that comply with MiFID II.
Retirement Planning Challenges
For U.S. expats, participating in foreign pension schemes can present significant challenges. Many expats are required to join a local pension plan through their employer, but the tax benefits of these foreign pensions may not be recognized in the U.S. Even if the foreign pension is considered “qualified” under local rules, the IRS may view it as non-qualified under U.S. rules, meaning contributions cannot be deducted from U.S. taxable income and distributions are taxable, too. Similarly, U.S. pension plans, such as 401(k)s and IRAs, may not be recognized abroad.
Some U.S. tax treaties mutually recognize the benefits of retirement plans, but for expats in other countries, these issues can lead to substantial tax exposure. It is also important to take into account any tax treaty benefits to which you may be entitled.
Currency Risk
As an expat, it’s important to understand how exchange rate movements between the currency of your investments and the currency of your expenses can impact your returns. If you are accumulating assets in one currency but expect to use them for significant events such as purchasing property or funding education in another currency, currency risk can affect your overall returns. Furthermore, if you are transferring money internationally before investing it, you will experience a loss due to fees on the exchange transaction. The same is true when drawing if you wish to spend in a different currency to the investment.
To help balance out the effects of currency fluctuations, consider diversifying your investments across different asset classes denominated in different currencies. This approach ensures that your portfolio is less reliant on a single currency and better able to withstand currency volatility.
Understand Your Future Financial Goals
When deciding where to invest as a U.S. expat, it’s essential to start by thinking about your long-term financial goals. Do you plan to return to the U.S. for retirement or are you looking to establish a more permanent life abroad? If you’re planning to return to the U.S., keeping your portfolio focused on U.S. markets may be beneficial for maintaining alignment with U.S. tax regulations and retirement structures. On the other hand, if you intend to stay abroad, diversifying your investments into local markets could provide valuable exposure to the economy and currency of your host country.
Advantages Of Investing In The US
• Strong and stable currency and markets: The U.S. dollar and financial markets are globally recognized for their resilience and liquidity, making U.S.-based investments a solid choice for stability.
• Good growth prospects: U.S. markets have a history of consistent growth over the long term, driven by innovation and economic leadership.
Advantages Of Investing Abroad
• Currency and transaction efficiency: If you’re earning abroad, investing locally can help you avoid losses due to currency exchange fees and fluctuations.
• Alignment with current earnings: Keeping your investments in the same currency as your income can reduce financial inefficiencies and simplify management.
Balancing these factors is the key to ensuring that your investments support both your present and future financial goals.
Cross-border investing presents challenges, but you don’t have to navigate them alone. A proactive approach is key, and working with financial advisors who specialize in expat investing can help you stay ahead of regulations and tax implications and optimize your investment strategy.
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