Keys to Keeping Investments in the US While Living Abroad
Increasingly, US citizens of all ages are moving abroad – to study, to work, to volunteer, to retire and get more from their pensions or to just experience a completely different life than what they’ve had in the U.S.
Estimates suggest that:
- Roughly 3 million Americans move abroad each year,
- There are approximately 6.3 million Americans working or living abroad,
- 5% of America’s 25 to 34 year olds are contemplating a move abroad, from less than 1% two years ago, and,
- 40% of Americans between the ages of 18 and 24 are considering going abroad
While the US economy is relatively mature and in a bit of an economic funk, foreign economies in places like Hong Kong, China, India, southeast Asia, the middle-east (Abu Dhabi, Qatar, Saudi Arabia) and parts of Africa are experiencing significant growth and are eager for American talent.
Much of this foreign growth is being driven by American firms – Starbucks, Wal-Mart, Pizza Hut, McDonalds, Procter & Gamble, Nike, GE and so on – that are moving their staff into new markets.
In addition, more tangible issues such as the lack of health insurance in the US (fully 40 million Americans do not have health insurance), prohibitively high healthcare costs in the US and the significantly lower cost of living abroad (in places like Mexico, central and south America, Australia, New Zealand, Canada, and countries in Europe, Asia and Africa) – have prompted many Americans to live, work or simply retire outside the US.
Some countries, such as the United Arab Emirates, are attractive because they give Americans the option of paying no local taxes on their incomes. And the US dollar’s recent surge has made things abroad much cheaper – hotels, rent, food, travel, healthcare, etc.
Moreover, conveniences like the Internet, Skype for free calling and social platforms like Facebook have made it easier to move abroad while still staying actively engaged with friends, family and colleagues in America.
Americans who move abroad also find that investing abroad as a US citizen is not necessarily the easiest in certain countries for a host of reasons – local laws that prohibit foreigners from investing, archaic investing standards, lack of access to financial or investment information, lack of transparency in international financial reporting, different accounting policies that make investing more difficult, higher fees and commissions, complicated rules on investment tax filings, etc.
Therefore, many Americans prefer to invest their money through US brokerages, something that the Internet has made significantly easier.
So here are a few pointers on how best you can continue to invest in the US while living abroad:
1. Before you leave the US, open an investment account because US brokerages require proof of a US address, otherwise you cannot open an account. Pick a good online broker that gives you free, real-time access to stock quotes, investment screening tools, equity research reports, and low commissions, all on an easy to use platform. A simple Internet search with keywords such as “best online broker 2012” should lead you to sites such as Kiplinger or SmartMoney that can help you pick a good broker based on your trading level of expertise, trading frequency, use of options, etc.
2. Open as many investment accounts as you want, based on your needs. You could do a simple investment account, an IRA or a ROTH IRA based on your income levels, a 401-K, a SEP and so on. The good news is that there is no restriction or limitation on the number or type of accounts you can have while living abroad.
3. Go paperless. Once you have an account, opt for the electronic statements option. This way, paper statements do not get delivered to your US address but come straight to you via email and are available online for you to download and print. So, wherever you are, you have seamless access to your statements every month and at year end when it’s time to file your taxes. Moreover, by going paperless, you’re actually reducing your broker’s printing, processing and mailing expenses, so many brokers actually give you a financial incentive, such as a certain number of free trades, to go paperless. You have everything to gain on this one.
4. Once you’re abroad and have an online US brokerage account, doing research, trading and keeping up with your investments is as easy as it was in the US. You typically see the same computer screens that you have viewed in the US and are eligible for the same level of reporting and SIPC protection. The only adjustment you have to make is getting used to a different time zone.
5. You can invest, seamlessly and legally, in exactly everything you could in the US – stocks, options, debt funds, mutual funds, ETFs, commodities, currencies, etc. Your being abroad in no way limits what you can do with the money you hold in your US brokerage account. You can also continue to make investments in other assets and investment vehicles such as property, private equity funds, hedge funds and so on, provided you meet their investment eligibility criteria.
6. Always file your taxes on time, including your capital gains and losses from US investment accounts. Even though you live abroad and pay foreign taxes, you’re still fully liable for all US taxes. Believe it or not, the US is the only western nation that taxes its citizens even when they already pay foreign taxes.
7. Often, you may be enticed by better interest rates on fixed deposits or savings accounts abroad. If you can, by all means, take advantage of these options but do know that you are still liable to pay US taxes on these foreign investments through non-US accounts. Unfortunately though, the US government almost always penalizes Americans for investments abroad. For example, while you’d pay a lower long-term capital gains (for assets held more than a year) tax rate on US accounts, similar long-term capital gains on non-US investments abroad are taxed as ordinary income or higher depending on your tax bracket. What’s more, capital loss carry forward rules do not apply to foreign investments – so while you can offset your gains with past losses in the US, you do not have this option on investments made abroad.
8. All your assets abroad need to be reported. Say you have a few checking and savings accounts, an insurance product and some property abroad, US tax authorities require you to file a Report of Foreign Bank and Financial Accounts or FBAR. If you don’t file an FBAR, you can be fined $10,000 per bank account per year, retroactively for the past six years. So even if you have, say, just $1,000 in an account, your penalty could add up to $60,000 or more – draconian, to say the least, and perhaps a tad unfair, but there’s little you can do… so please make sure you conceal nothing right off the bat.
9. Taxes can become very convoluted if you move abroad. Our international tax code is quite a jungle and even many so-called international tax experts or even folks from the IRS aren’t quite sure how certain rules must be interpreted and applied because interpretations vary by country and are sometimes tied to mutual tax treaties. So make sure you report everything or be prepared to pay high penalties if you are found out. That said, your foreign income (not your investments) is not subject to taxes up to a limit under the Foreign Earned Income Exclusion (FEIE) and you may be eligible for a Housing Exclusion and credit for foreign taxes paid.
10. Beware of currency risks. If you live abroad and depend on your US investment income to sustain yourself, then the amount you get in local currency would depend on its exchange rate to the US dollar, which can be very volatile with swings of 20% or more within short spans of time. So make sure you move your dollars gradually as you need them. It’s hard to time or predict relative currency movements so you’re probably best off just converting your dollars as you need them. Generally speaking, this is also safer because scam-artists often prey on wealthy Americans and target their homes for robberies, so the less you have in local currency the better.
Todd Johnson helps other investors understand that investing in stocks and other assets that are subject to wide price swings can actually enhance their returns when the right investment strategy is applied. He reads company 10k and 10q statements so you don’t have to. He compiles and analyzes the market research that isn’t always at your fingertips, and he doesn’t make any investment recommendation to which he hasn’t already committed his own funds – as the purest form of accountability.
Readers may know Todd from the Seeking Alpha website where he is a popular contributing writer. Todd also has a weekly newsletter in which members will receive weekly updates on an unhedged stock portfolio where he sorts stock recommendations by timeliness and safety. The focus is to buy stocks with both price appreciation and dividend growth potential. Members will also receive weekly updates on a hedged portfolio for investors who want to clearly limit losses. Hedges, including options and inverse funds, are used to reduce risk exposure. The portfolio’s returns are reviewed weekly by a CPA. For more info on the newsletter, please go to: http://www.dividendlab.com/salesletter/