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Investing and Banking for U.S. Expats
Author: Joel Baretto, CFP®
March 15, 2024
One of the initial dilemmas that American expatriates encounter regarding financial management pertains to the location where their investments should be overseen. They must deliberate whether it should be within the United States, in their current country of residence, or in an offshore jurisdiction.
Many American expats eventually opt to invest through financial institutions situated in their host country or in renowned financial hubs like London, Amsterdam, or Hong Kong, particularly when their overseas residency becomes a permanent or semi-permanent arrangement. However, upon thorough examination of all relevant considerations, it becomes evident that entrusting investments to non-U.S. financial institutions typically proves to be a costly error for Americans. Why is this the case?
1. Fees
Regardless of whether you opt for a well-established and reputable broker-dealer or consider offshore investments, you’re likely to encounter elevated fees when dealing with non-U.S. financial institutions. Fees, in a general sense, tend to be relatively high globally, but the United States consistently boasts considerably lower fee structures compared to other regions. A recent study published in The Review of Financial Studies, which assessed mutual fund fees across 18 developed European, American, and Asian markets, unequivocally demonstrated that the U.S. exhibited the most favorable fee conditions by a significant margin.
2. Investment Access and Liquidity
The U.S. financial markets offer unparalleled access and liquidity in the global investment landscape, surpassing other international markets in this regard. Virtually any investment, regardless of its nature, can be readily and cost-effectively procured through U.S. markets.
For instance, nearly every publicly traded company across the world lists its shares on U.S. exchanges in addition to their primary listings in their home countries. This dual listing practice extends to a wide array of investments, including global stocks, bonds, commodities, and exchange-traded funds (ETFs). Furthermore, the liquidity available for these investments within the U.S. market exceeds that found in other global financial centers, making it a particularly attractive destination for investors. Exploring the advantages of ETFs as a valuable investment planning tool for Americans living abroad is also worthwhile.
3. Taxes
Taxes represent another compelling rationale for American expatriates to generally steer clear of non-U.S. registered investments. Long-term investors in U.S. securities derive benefits from a favorable capital gains tax rate, typically ranging between 15% to 20%. Additionally, taxes are deferred until the point of investment disposition.
Furthermore, focusing solely on U.S.-registered investments enables expats to sidestep the potential pitfalls associated with passive foreign investment companies (PFICs). Investments categorized as PFICs are subject to a distinct and markedly punitive tax regimen. Under PFIC rules, tax rates on investment income can escalate substantially, reaching levels as high as 60% to 70%. Given these factors, it is our recommendation that U.S. expat investors refrain from holding non-U.S. mutual funds in their portfolios.
4. Reporting
The U.S. tax code is renowned for its intricacy, and this complexity is magnified for investors. In response to this, U.S. brokerage firms such as Schwab and Fidelity diligently furnish clients with comprehensive activity reports that adhere to the IRS-prescribed format. These reports meticulously segment critical categories, including dividends, qualified dividends, taxable and non-taxable interest income, as well as short- and long-term capital gains. Each of these categories demands unique and specific tax treatment. In contrast, non-U.S. institutions typically do not offer this level of detailed reporting, making it another practical reason for U.S. expatriate investors to favor U.S.-based brokerage firms.
5. Compliance
Even if your assets are situated outside the United States, it is imperative to recognize that they may still be subject to reporting requirements. According to the Report of Foreign Bank and Financial Accounts (FBAR), if the cumulative assets held by a U.S. person outside the U.S. exceed $10,000 at any point during the year, they are obliged to report these holdings to the U.S. Treasury for that particular year.
Furthermore, due to the enactment of the Foreign Account Tax Compliance Act (FATCA), financial assets surpassing $50,000 held at non-U.S. financial institutions ($200,000 for U.S. individuals not residing in the United States) necessitate inclusion on U.S. tax returns. Failing to file or misreporting can result in severe penalties. It is imperative for American investors to acquire comprehensive knowledge about FATCA, as well as to be well-informed regarding the tax and legal ramifications associated with retiring abroad, including the implications of FATCA.
6. Safety
Regulatory standards across global banking centers indeed exhibit significant variability, ranging from highly stringent in some regions to nearly absent in more exotic offshore banking jurisdictions. It’s essential to recognize that while the Federal Deposit Insurance Corporation (FDIC) provides deposit insurance and the Securities Investor Protection Corporation (SIPC) offers investment insurance for all U.S. accounts, these protections do not extend to non-U.S. accounts. Consequently, when managing financial assets in international contexts, careful consideration of the regulatory environment and associated risks is paramount.
Where Should U.S. Expats Bank
American expatriates residing abroad should consider opening local bank accounts in their country of residence. This facilitates the management of local income and living expenses in the native currency of the host country, obviating the need for frequent and costly currency conversions. It is advisable to familiarize oneself with the logistics involved in opening and maintaining bank accounts as an American expat.
Conversely, funds allocated for savings and investments are typically best placed in a U.S. account and invested through a U.S. financial institution, as previously mentioned. Nevertheless, it’s worth noting that establishing a U.S. brokerage account with a U.S. custodian can be a challenging endeavor for American expatriates residing abroad.
In recent years, many U.S. banks and brokerage firms have ceased accepting non-U.S. residents as clients, a development largely attributed to the Foreign Account Tax Compliance Act (FATCA). This has resulted in the closure of international accounts for non-U.S. residents, even by major brokerage firms and banks.
Fortunately, avenues still exist for opening a U.S. brokerage account, including working with advisory firms like Abacus Wealth International. Scheduling a consultation with a cross border wealth manager experienced in expatriate investing and financial planning requirements can be a prudent step in navigating the complexities of U.S. financial accounts while residing abroad.
Disclaimer:
- The information provided is for educational purposes only and does not constitute personal financial, tax or investment advice and should not be relied on as such. It does not take into consideration any investor’s particular investment objectives, strategies, time horizon, and tax or legal status. Abacus Wealth International (AWI) does not provide tax or legal advice. Please consult a tax or legal professional for corresponding tax and legal advice.
- All material and content have been obtained from sources believed to be reliable. AWI does not guarantee the accuracy of the information provided and shall not be held liable for decisions based on the foregoing information.
- All examples of graphs, financial products and historical returns contained in the foregoing material are for illustration and educational purposes only and shall not be deemed as financial advice or recommendation. Past performance is not indicative of any future investment returns.