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4 Investment Management Tips for U.S. Expats
August 30, 2022
U.S. expats are all too aware of how difficult it can be to navigate the administrative hurdles posed by the Foreign Account Tax Compliance Act (FATCA), Passive Foreign Investment Company (PFIC) rules and other regulations when opening and managing investment accounts while living abroad. After overcoming the challenge of creating an account, U.S. expats are then faced with the tedious process of navigating the intricate interplay between U.S. and foreign country residence tax rules.
Due to these complexities, some U.S. expats have opted not to invest at all because these obstacles are so daunting. But disregarding the intricacies of investing may prevent one from reaching their financial objectives and optimizing their savings, when the truth of the matter is that U.S. citizens may still plan, save, and invest wisely and efficiently to meet their financial objectives. Here are four essential pointers for overcoming the difficulties of U.S. expat investment.
1. Setup a brokerage account with a U.S. custodian
Finding a U.S. custodian that will allow U.S expats to open a brokerage account will be the first task. It is exceedingly difficult for U.S. related persons to establish non-U.S. investment accounts due to FATCA legislation which are also subject to additional U.S. reporting obligations.
Placing one’s assets in a U.S. based account has numerous benefits. The U.S. financial markets, which offer a broad variety of investment products, are the biggest and most liquid in the entire globe. You can avoid additional reporting hassles and the inherent error of engaging in a Passive Foreign Investment Company (PFIC), that can result in punitive taxes, penalties, and interest (up to 60 percent -70 percent tax rates on investment income), by making investments in the U.S. markets as opposed to foreign markets. U.S. expat investors should refrain from buying non-U.S. mutual funds, ETFs and other investments that may qualify as a PFIC.
But for many U.S. expats, opening a U.S. investment account is frequently their first obstacle. Due to worries about adhering to the regulations of the other country, several U.S. financial institutions and brokerage firms have stopped approving accounts set up with a foreign address. These worries have led numerous custodians to cancel American expats’ U.S. brokerage accounts and/or limit the services offered to non-U.S. residents.
Thankfully, a small number of American brokers still deal with Americans who reside abroad. While some will not set up an account directly for a client, others will collaborate with an advisory firm.
2. Optimize income and transfer taxes
Understanding the tax laws of two different countries presents the biggest obstacle for American investors who reside abroad. The management of your U.S. expat investments will require careful consideration of a wide range of complex considerations, several of which include:
- Contrasting accounting regimes
- Contrasting filing regulations and accounting periods
- Contrasting currencies
- Dynamically changing regulations regarding immigration status, residency duration, etc.
- Intricate laws governing transfer taxes on gifts, bequests, and estates
- Investments with varying tax and investment outcomes
It’s vital to work with tax and financial experts that understand how U.S. rules coincide with the regulations of your resident nation as well as how to optimize those overlaps to decrease your tax burden and transfer fees.
3. Learn about the treaties that are present between the U.S. and your nation of residence regarding Social Security, estate planning, and income taxes
Utilizing any existing tax treaties between the United States and your country of residency is essential to managing your U.S. expat investments efficiently and avoiding or minimizing double taxation. After you have created your U.S. investment accounts, spend some time learning about ways to minimize or even do away with your withholdings and tax obligations.
4. Employ a competent group of cross-border financial advisors
Localized wealth and tax consultants from countries including the United States frequently lack the expertise and knowledge required to understand the intricacies of cross-border tax and wealth management. Because they are focused on their local clients, foreign and local U.S. consultants who have never dealt with foreign investors are unlikely to be familiar with dealing with cross-border investment accounts and tax treaties.
Therefore, it is critical to assemble a group of knowledgeable advisors who are aware of the issues that are specific to the situation of an American expat. The following professionals ought to be on your team:
- A cross-border fiduciary financial planner – You should seek the assistance of a fee-based Registered Investment Advisor (RIA) who specializes in cross-border financial planning issues in retirement planning, estate planning, investment, and tax saving strategies. Fee-based advisors are usually paid based on your Assets Under Management (AUM). They do not get paid transaction fees, sales, or referral commissions. This means that their interests are aligned with yours as they grow alongside you.
As fiduciaries, RIAs are required by law to always act in their clients’ best interest above all circumstances. On the other hand, commissioned brokers are not bound by a fiduciary duty to their clients and are free to charge commissions according to the products they sell.
- A competent cross-border tax accountant/attorney – Working with someone who is familiar with maneuvering the tax treaties between the U.S. and your home country is crucial. Since tax laws are constantly evolving, your accountant should be able to show that they have a thorough awareness of the most relevant rules to assist you in avoiding crucial mistakes.
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.
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