Six Reasons Why American Expats Should Keep their Investments in the US
By David Kuenzi
Kuenzi shares six key reasons why Americans living abroad should keep their money at US based financial institutions.
Americans living abroad often end up moving their investment accounts to non-US financial institutions. Whether they employ a large global investment bank headquartered in Switzerland or the UK or find themselves enticed into the world of “off-shore” banking in places like Lichtenstein or Panama, they are making a mistake. The very high costs of investment services outside the US, the lack of proper tax advice, and the risks engendered in weak regulatory regimes constitute serious impediments to successful long-term wealth accumulation. Below I expand on the six most important reasons that Americans living abroad should keep their money at US based financial institutions and seek out the advice of an experienced financial advisor who understands the special circumstances of Americans living abroad.
- Fees, fees and more fees. First, consider that individual investors incur various kinds of transaction fees (commissions, management fees, and trading costs) that commonly consume more than 3% of invested assets annually. Now consider the fact that inflation adjusted long-term stock market returns average about 6.8% per annum. Do the math: many investors are losing up to 40% or more of their potential investment returns to the brokerage and mutual fund fee machine. That is why successful investing requires close attention to minimizing expenses.
Investment “expenses” are high everywhere in the world, but the fact is they are still much lower in the US compared to everywhere else. In the hyper-competitive US market, on-line trading, “discount” brokerage services, index funds and exchange traded funds have driven down costs. In Europe and Asia expenses remain high due to fractured markets, lack of investor protection rules and a general lack of competition among providers, especially in some of the smaller markets. For example, a recent survey of mutual funds fee by country found that, among 18 developed European, American and Asian markets, average US fees were 22% lower than the next least expensive market (France). Fees in Switzerland and Canada were 43% and 279% higher, respectively, than in the US. It is not uncommon for customers of international banks in Switzerland to pay as much as $500 to buy $30,000 worth of stock, while the same transaction in the US could be performed for $20 or less.
- Taxes. Americans gain no special tax advantage from having their money in non-US accounts and in some cases face punitive tax rates versus holding a similar, US registered investment. Like it or not, the US government taxes the world-wide income of Americans and US permanent residents. This applies to investment income and capital gains as well as earned income. Americans with assets over $10,000 in a non-US investment or bank accounts must report the account to the US Treasury Department by filing form TD-90. Given the fact that the IRS is dramatically stepping up its monitoring of Americans’ non-US financial transactions, the mere act of having to file the TD-90 is likely to raise the risk of an audit. Furthermore, any “pooled” investments registered outside the United States fall under the Passive Foreign Investment Company tax rules. These rules require that American investors in financial products such as non-US registered mutual funds, investment trusts and hedge funds must file form 8621. The result is that in almost all circumstances, investment income and capital gains will be taxed at the highest possible marginal rate. Furthermore, the benefits of tax-deferral until sale and the low long-term capital gains rate are largely foregone.
- Retirement accounts and planning. Even Americans who spend much of their life abroad or who intend to retire abroad need to take advantage of tax-advantaged retirement vehicles such as IRAs, 401ks and Roths. They also should be using 529 accounts as savings vehicles for their childrens’ education. Self-employed Americans with businesses abroad still need to set up Individual 401ks or SEP-IRAs. These accounts can only be opened at US financial institutions. Big international banks may be able to open the account for you through their US subsidiary, but they will charge you a very high fee to do so. Furthermore, the rules regarding contributions and withdrawals to these types of accounts are exceedingly complex. Foreign offices of even US banks are unlikely to be able to provide the proper guidance and planning advice required to properly use these important investment accounts. Improper use of the accounts can lead to very high IRS imposed penalties, interest and back taxes.
- Record-keeping. When it comes to tax time, nothing makes life easier than a properly prepared year end brokerage statement from a US brokerage firm such as Fidelity or Charles Schwab. Investment activity is categorized into the tax relevant pools (long-term capital gains, short-term capital gains, dividends, qualified dividends, taxable interest, tax-free interest etc) so that it can be reported accurately and easily by your tax preparer on the relevant IRS tax form. Try to get that from your bank in Lichtenstein or Switzerland!
- Security. The world of “off-shore” investing is littered with scams and rip-offs. But even the legitimate off-shore outfits are not covered by the FDIC and SIPC insurance and are not regulated by the SEC or the Federal Reserve. Local regulators and government guarantees may be strong in some jurisdictions (Switzerland, for example) but may be very limited in other popular off-shore banking locations. Furthermore, the guarantees and protections that do exist may not be available to foreigners.
- Getting good advice. In the long-run, successful investing requires making the right investment choices, maintaining diversification and minimizing and deferring taxes. It is virtually impossible for investment advisors who are not fully trained in the intricacies of US investment tax law, retirement planning and estate planning to adequately advise American citizens on these matters. Americans living abroad need to find qualified advisors (preferable a Certified Financial Planner®) to work with. Finding a qualified advisor while living abroad can be tough, but the modern communication revolution and the internet have made it easier than many realize. Working with an advisor back in the US is usually still the best option.
About the Author
David Kuenzi is the founder of Thun Financial Advisors. He is a Certified Financial Planner® and has previously held positions with Chase Manhattan Bank, Deutsche Bank and Bank Austria. His financial industry career included postings in New York, London and Moscow. Kuenzi grew up in Wisconsin but spent most of his professional career in New York City and in Europe, before returning to the Midwest in 2005. He received his undergraduate degree from the University of Wisconsin and completed graduate work in politics and economics at Columbia University and Harvard University before launching a career in finance.
Write a Comment about this Article
Comments about this Article
Here is the problem and my question. Even if you are a US citizen but you put a different country as your address at a US brokerage house, your assets will immediately be frozen. You cannot have a bank account in the US if you do not reside in the US. If this is incorrect, could you sight anything that would dispute it? I have not been able to find anything that clearly states the law on this. I have called Schwab and not gotten a clear answer. It sort of sounded like, "Why are you asking this?"
I am an American living in Canada, with duel US/Canada nationality. I had a brokerage account and mutual fund account with a very large US investment Co. for about 15 years. About 5 years ago I was told by the company that they could no longer keep me as a client, because I had foreign residency. I was unable to find another US Investment firm that would have me as a customer.
Have rules been changed recently?
Yes, try to find a bank or brokerage firm that will accept a client with a non-US address. From my research, there is noting in the law or US Treasury regulations that prohibit this as long as they verify the individual's identity. However, as a practical matter, all the banks and brokerage firms I've asked will not accept applications from individuals who don't have a local physical mailing address. This is a big problem for anyone wanting to retire abroad and keep their accounts in the U.S.
First Published: Jan 17, 2009