Expat Investing: Seven Tips from Expert Financial Advisors
Moving abroad means new complexities for personal investments, and it is important for those planning an international move to recognize that “staying the course” with existing investments is not always a wise (or even viable) choice.
As I outline in this Insight, there are practical solutions to many of the challenges that come with managing investments as an expat. Proactive planning and preparation are the best ways to set the stage for a successful transition to life abroad.
Interested in a comprehensive look at planning for your international move? We explore taxes, immigration, currency, exchange, banking, and more in our expat financial planning guide.
Tip One: Evaluate Retirement Plan Contributions
Typically, U.S. citizens or green card holders living abroad can keep their existing U.S. retirement plan(s). In some countries, additional contributions are also allowed while living outside the United States.
However, your move abroad may affect the optimal level of retirement contributions, and this transition is the right time to reevaluate what level of savings will be best to minimize tax and foreign exchange costs.
Tip Two: Clarify International Services with U.S. Brokerage Firms
Regulatory issues lead many U.S. brokerage firms to restrict the level of services available to non-residents. Some brokerages may even require assets to be transferred to an internationally focused institution.
Whenever possible, clarify these details well in advance of your move. Giving yourself time to identify the right mix of international brokerage services is the best way to plan for continued convenient access to your assets while abroad.
Staying invested in U.S. markets while living abroad can help avoid complex issues like Passive Foreign Investment Company (PFIC) rules, which apply to non-U.S. mutual funds or other passive investment vehicles. Designed to prevent tax deferral on passive income, these regulations impose high tax rates (up to 60%-70%) on investment income and capital gains, and avoiding PFICs is the best course for most investors.
Research shows that United States mutual funds offer some of the lowest fees in the world, and U.S. investment vehicles are likely to remain one the most cost-effective long-term investments for many expats.
Tip Three: Give Yourself Time to Find an International Brokerage
In many countries, finding international brokerage services available to U.S. citizens may prove more challenging than anticipated. U.S. law creates an additional layer of complexity for compliance and reporting, and many foreign institutions simply turn away U.S. investors.
Foreign financial institutions are required to report U.S. taxpayer account information to the Internal Revenue Service (IRS). Be prepared for extensive paperwork and documentation requirements as you establish accounts.
Tip Four: Understand Investment Regulations in Your New Country of Residence
Every country has its own laws and regulations regarding investing and security ownership. In some cases, you will be required to sell U.S. securities. In others, your U.S. securities will be subject to new restrictions. Working with those with expertise in planning issues for your destination country is the best way to anticipate potential issues.
Tip Five: Understand U.S. Tax Compliance Requirements
Even if assets are held outside the U.S., they may still need to be reported. U.S. persons must file a Report of Foreign Bank and Financial Accounts (FBAR) with the Treasury Department if their foreign accounts collectively exceed $10,000 at any time during the year.
Additionally, under the Foreign Account Tax Compliance Act (FATCA), financial assets held at non-U.S. institutions must be reported on U.S. tax returns if they exceed $50,000. For U.S. taxpayers residing abroad, this threshold is $300,000. Penalties for non-compliance can be severe.
Tip Six: Understand and Plan for “Liability Matching”
Funds and income streams used to pay for expenses while living abroad must be available not only on time but in the right currency. “Liability matching” refers to an investment strategy for aligning these details.
As a foundational best practice, account for expenses like home mortgage payments, a monthly cost of living, and an emergency fund, and plan for the requisite currency to be transferred in time. However, the best course of action may depend on your personal financial plans.
For expats who plan to draw on savings from dollar-denominated U.S. accounts to fund their living expenses abroad, a longer-term liability matching strategy is particularly important. An investment such as government bonds in the relevant local currency may provide a sound option for earning interest while maintaining relatively liquid holdings for emergency expenses. Those earning an income abroad will likely need comparatively small cash holdings in the currency of their new country of residence.
Tip Seven: Rebalancing Risk to Reflect Your New Residence
Moving abroad may affect your overall exposure to risk, and shifts in investment strategy may be prudent for maintaining a well-balanced portfolio. For example:
- Many U.S. investors maintain international investments due to their valuable geographic and sectoral diversification. When moving abroad, exposure to these risk factors may shift, and your mix of international investments should be reevaluated accordingly.
- Earnings and asset holdings in your new country may also introduce currency risk (exposure to potentially volatile swings in value due to foreign exchange rate shifts) that calls for a specific investment mitigation strategy.
- Real estate holdings may result in a large portion of your savings being held in your new country of residence’s currency and drive benefits to employ a currency hedging strategy.
For both liability matching and general risk management, your future plans are another important factor to consider. For example, a household planning to retire in their new home may wish to transfer a large portion of their investment holdings into their new currency to align assets and expenses. By contrast, expats who plan on returning to the United States in the future will likely benefit from limiting excessive exposure to the local currency while living abroad.
Learn More About Best Practices for Expat Investing
The complexities outlined above illustrate why a move abroad is a unique financial planning challenge. For many individuals and families, expat financial planning concerns are largely unfamiliar, and it may be hard to know where to begin.
For this reason, expert advice can prove invaluable when developing your plans for moving abroad – not only for investments, but immigration, medical care, routine banking, and many other areas. For a deeper look at all of these issues, our Expat Financial Planning Guide is a great place to start.
Or, if you have specific questions about the right approach to your upcoming move abroad, we invite you to reach out to our team. Our Advisors are here to help.