info@abacus-wealth.com
Why U.S. Expats Should Maintain U.S. Investment Accounts
Author: Joel Baretto, CFP®
February 15, 2024
As a U.S. citizen residing abroad, your financial situation involves distinctive complexities and hurdles. Among these challenges is the decision of where to hold your investment accounts as an expatriate. While it might appear convenient to invest solely with financial institutions in your current country of residence, there are compelling reasons why maintaining accounts with U.S. financial institutions is advantageous for U.S. expats living abroad.
1. To simplify and optimize your annual tax filing process
An essential rationale for American expats to maintain investment accounts with U.S. financial institutions is to ensure adherence to U.S. tax laws. As a U.S. citizen, you are obligated to file an annual U.S. tax return, irrespective of your current residency and employment location. This mandates the reporting of all earnings, including investment income such as dividends, interest, and capital gains.
By holding accounts with U.S. investment institutions, you can streamline the tax reporting process, making it more efficient and less burdensome. This approach helps to uphold compliance with U.S. tax reporting regulations, ensuring that you fulfill your obligations and responsibilities as a U.S. taxpayer while living abroad.
2. To avoid PFIC (Passive Foreign Investment Company) issues
As a U.S. expatriate residing overseas, it is crucial to exercise caution regarding your investment choices. One of the most prevalent and consequential mistakes made by Americans living abroad involves the acquisition of foreign mutual funds, ETFs, insurance products, and other investments that may fall under the classification of passive foreign investment companies (PFICs), thereby subjecting such investments to punitive taxes, penalties, and interest by the United States. Furthermore, each PFIC necessitates annual reporting on the U.S. Tax Form 8621, entailing intricate accounting processes and considerable time investment.
To circumvent inadvertently investing in a PFIC, a prudent approach is to maintain U.S. based investment accounts. Numerous compliant, U.S.-domiciled investment funds are readily available through U.S. brokerages, while the same cannot be said for foreign brokerages. By continuing to utilize U.S. investment accounts, you can ensure adherence to regulatory requirements while pursuing investments as an expat living abroad.
3. Convenience
Surprisingly, maintaining your expat investment accounts in the United States while residing overseas can prove to be more convenient than opening new accounts in your country of residence. The process of navigating local regulations and requirements to open an account abroad can be both time-consuming and intricate, particularly if you are not fluent in the local language.
Most U.S. financial institutions offer online banking and investment facilities, enabling effortless management of accounts, fund transfers, and bill payments from anywhere across the globe. Moreover, U.S. brokerage firms typically provide assistance in handling a wide array of currencies, facilitating efficient cash management.
An additional advantage lies in the fact that if you ever decide to repatriate, you can bypass the hassle of transferring your accounts back to the United States. By keeping your investment accounts in the U.S., you can maintain a seamless financial transition in the event of returning home.
4. Lower fees
By maintaining your investments in U.S. accounts, you are likely to benefit from considerably fewer investment and account-related fees. The United States’ financial market boasts the most extensive and liquid selection of investment products worldwide, offering efficiencies that are not commonly found in other markets.
Notably, investment expenses such as brokerage fees, trade commissions, and advisory fees are generally substantially lower in the United States compared to other regions. Moreover, there are no U.S. laws prohibiting the transfer of funds or foreign-earned income from other countries, allowing you to continue investing any surplus cash in your U.S. investment account.
Nevertheless, it is essential to exercise caution and ensure that you contribute to the appropriate types of accounts that align with your specific financial requirements and objectives. By doing so, you can optimize the benefits and opportunities available through your U.S. investment accounts while effectively managing your investment portfolio.
5. FDIC and SIPC Coverage
The United States provides financial protections that are not universally available across the globe, rendering them highly valuable for safeguarding your assets, especially in light of recent bank closures.
One such protection is the Federal Deposit Insurance Corporation (FDIC) insurance, which typically offers coverage for deposits up to $250,000 per depositor, per insured bank. This coverage ensures that in the event of a bank failure, your deposited funds are protected up to the specified limit, instilling peace of mind regarding the safety of your assets.
Additionally, the Securities Investor Protection Corporation (SIPC) is another vital safeguard for investors. It generally provides protection for up to $500,000 of an individual’s brokerage account assets. This protection serves as a critical buffer against potential brokerage firm insolvency or misappropriation of assets, offering reassurance to investors about the security of their investments.
6. Having access to American advisory firms
One significant advantage of maintaining U.S. investment accounts while residing abroad is the opportunity to retain the services of a U.S.-based advisory firm. The process of managing multi-jurisdictional tax intricacies, investment constraints, and ever-changing regulatory obligations can be challenging for expatriates. Foreign-based advisors often lack the requisite expertise and familiarity to provide guidance in these areas, particularly concerning the intricate U.S. tax system.
Conversely, U.S. advisors who have not previously dealt with cross-border investors may lack experience in navigating diverse international complexities and tax treaties. To address this, it is crucial to identify a qualified cross-border financial advisor who possesses the necessary know-how in assisting Americans living overseas. Such advisors can offer valuable insights to help expatriates make prudent, cost-effective, and tax-compliant decisions pertaining to their income, retirement plan, investments, tax savings strategies, estate planning, and other financial matters.
7. Access to U.S. markets
There are 60 stock market exchanges in the world. The two largest markets by capitalization are the NYSE (New York Stock Exchange) and NASDAQ (National Association of Securities Dealers Automated Quotations), which are both U.S. based. According to Statista, in 2023, stock markets in the United States accounted for nearly 60 percent of world stocks.
As Americans, we have access to some of the most efficient and sophisticated markets in the world. This provides us with greater flexibility and control for a lower cost.
Essential reminder:
A considerable number of U.S. banks and brokerage firms have ceased direct engagement with individuals who are not U.S. residents, primarily because of apprehensions surrounding the complexities of adhering to FATCA (Foreign Account Tax Compliance Act) and foreign countries’ tax regulations. As a result of these concerns, numerous custodians have taken measures to either close the U.S. brokerage accounts held by American expatriates or limit the scope of services offered to individuals residing outside the United States.
Fortunately, despite the aforementioned challenges, a handful of U.S. wealth managers are willing to collaborate with U.S. expats. Although some of these financial advisors may not directly facilitate the opening of individual accounts for U.S. expats living abroad, they are open to working in conjunction with advisory firms to establish accounts on behalf of their clients.
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.