American expats: investing overseas

Life isn’t always easy for American expats living overseas, who want to invest in pensions and investments.  Many Americans cannot open up accounts with foreign institutions, and indeed institutions back home.  Indeed, since 2006 Americans living overseas can’t open up accounts with Vanguard and many other funds.

The following list isn’t completely extensive, but before investing, American citizens overseas should consider the following:

1. Taxes.   Capital gains tax in the US is low, at 15%, and taxes are paid on a deferred basis, meaning that the tax is only incurred when you sell the investment.  For non-US registered investments the same tax benefits often don’t exist.   The US tax authorities, the IRS, categorise many foreign-registered funds as Passive Foreign Investment Companies, which means the capital gains tax can be four or even five times the aforementioned 15%.  If you don’t properly report these gains, moreover, the IRS can prosecute Americans under FACTA laws under tax-evasion, even if that wasn’t the intention of the investor.

2.  Reporting gains.  US taxes are complicated.  Often there are different kinds of gains including segregated vs qualified dividends and taxable and non-taxable income.  This makes any firm that can give their clients a comprehensive banking activity report in the proper IRS format invaluable.

3.  Compliance and regulation.  The rule of law is important in the investing world.  Some developed countries with a long history in finance, such as Switzerland, the UK and Hong Kong have compliance which is on a par with the US.  Most places in the world, however, do not.

If your funds are being managed from a regulated domain, that will give you a lot of protections. In the US, it also has to be remembered that FDIC deposit insurance covers Americans for accounts worth up to $250,000, so even if fraud is committed, there is a fallback.  Such options do not always exist overseas.

4.  Fees and liquidity.  Unlike the first few points, this is something which applies to all investors.  Liquid investments are usually much better, and fees paid need to be reasonable.

Adam Fayed

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