I have written in a number of my articles about the challenges that U.S expats face when it comes to investing or just opening up a brokerage account. In this article I will write about some of the financial ‘hacks’ U.S expats can potentially do in the U.S and as an expat to make full use of your financial situation.
If you haven’t read some of the challenges that you face when you are investing as U.S expat living abroad then please see my blog below:
Look at Rolling over your 401K and using net unrealised appreciation
The tax on 401K and IRAs when abroad?
If you live overseas, the U.S. still imposes taxes on the retirement accounts, the taxes are the same as if you were in the states. Both 401k and IRA accounts are tax-deferred, thus meaning you will pay taxes on the withdrawals that are taxed on income.
Although Roth IRAs are paid with after-tax dollars, if you have had the account for 5 years you can withdraw tax-free even if you are living abroad.
In regards to the early withdrawals, they are still the same as in the U.S., if you make withdrawals before 59.5, on 401k and IRA and penalities will occur regardless of where you are living.
The penalities are one of two options the IRS withhold income taxes on an early 401k withdrawal. This is based on your income tax level.
Second, you might be penalized 10% on the account. These are subject to exceptions, such as hardship and medical difficulties. This is dependent on your situation and if deemed feasible.
Regular IRA and 401k withdrawals for expats
When you have reached 59.5 years old you can take withdrawals with no penalties. These however are still taxed as income when you are living abroad. The taxes are treated as unearned income thus not able to claim as Foreign Earned Income Exclusion (FEIE).
To see how it is impacted by the country where you are living look at the DTA (Double Taxation Agreement) with the country where you are presently residing. This could lower or even fully eliminate foreign taxes on an expat IRA or 401K withdrawal.
Transferring a 401k to IRA can be a smart option depending on your situation, it can give you more flexibility over investments, tax, and beneficiary options. I have done a number of separate blogs on this option that you can find below:
Another option to roll over into IRA account is net unrealised appreciation. If you are over 59.5 and have a company stock plan in your 401K looking at moving this into a standard brokerage account. As this has the ability to use the cost basis of the original amount invested.
An example of this:
You get your company stock some years ago at $100,000 it is presently worth $1 million you then roll this over to a normal brokerage.
Using a 1099 form, you can then add $100 000 to your taxable income that year and pay the taxes owed at that time. It will be at your marginal tax rate.
If your federal marginal tax rate is 37% then it is a $37 000 tax bill for that year. The $400 000 appreciated stock value will be taxed when you sell the stock.
Only at the capital gains rate depending on your income. It is important to mention that there is no capital gain tax if you are in the 10% or 12% tax bracket.
Another important option is that this when out of your 401k is not subject to RMD.
And going on to our next point that is stepped-up basis for inheritance as this is a very useful tool in IHT planning.
If you inherit money do it on a stepped-up basis
If we take the above example over getting stock at $100,000 and then growing to $1 Million. If you decided to leave this as it was when you died without passing it on the stepped-up basis it would be on the $100,000 not the $1 million. So, anyone looking to pass on the wealth outside of their gift allowance may be in better shape to hold on to it if it has significant gains.
Use your tax losses
You can use up to $3000 of your losses.
It gets somewhat more complicated as you have to figure out your long and short-term gains (short is anything sold less than a year and long is anything sold after a year).
However, once these have been aligned you can deduct $3000 of your tax losses and even roll so over to the next year.
An example would be:
Jon has $5,000 in short-term gains and $15,000 in long-term gains. He has $3,000 in short-term losses and $30,000 in long-term losses. If he wishes to use his losses to offset his gains, he must first align the short-term gains and the short-term losses. He can use his $3,000 short-term loss to offset his $5,000 short-term gain. He can also use his $30,000 long-term loss to offset all of his $15,000 gains. He now has $15,000 in long-term losses remaining. He may use $2,000 of this to offset his remaining $2,000 gain. He then can use an additional $3,000 to deduct from his taxable income. He now has $10,000 of remaining long-term losses that he can carry over to the following year or beyond.
Look at annuities in your 401k
As I have just told a client who has a long-term outlook but looking to have their 401k as part of the stable part of their overall portfolio and to have a look at annuities within their 401k. Many of the fixed-rate annuities not only offer a set rate of return (all be it pretty low) and have for example equity participation. This is where you have the option of getting 80% of the index up to a set amount for example 10%. Yes, this does limit growth, but you get protection on the downside.
You have bonus, this is held within a certain time frame so for example 10% bonus at 1% a year if held for 10 years. This can make sense if for example you are younger and would get a penalty for taking it out prior to 59.5.
Tax-deferred growth options
IRA
In regards to IRA rules when living abroad it seems to hit complications and little is known about the subject. So, I will aim to go over the basics of IRA rules when living abroad.
Can I still keep my IRA when abroad?
Yes, you can have a Roth and IRA account when you live abroad. The restrictions come when you are looking to make contributions. So, if you have an IRA before you move, you can keep it. However, topping it up might be difficult depending on the conditions of the specific provider but many do require a U.S address.
A traditional IRA – Is stated as tax-deductible depending on certain factors including if you have a 401k or other pension income. You can fund an IRA with only taxable income.
Roth IRA – Is not tax-deductible and to contribute you must meet income requirements, as of 2021, you need to be earning under $140,000 for single filers and $208,000 and under for married couples. You have limits as to what you can contribute, they are $6000 for those under 50s and $7000 for over 50 on the highest contribution limit depending on income. But, Roth IRAs are tax-free on qualified distribution.
IRA contribution rules for overseas Americans
IRA distribution limits are still the same for expats as if they were in the U.S. but, contribution to an IRA is dependent on foreign earned income exclusion or foreign housing exclusion.
In order to contribute to a Roth IRA when living abroad, you need to have leftover deductions and exclusions. If you exclude all your FEIE you are not eligible to contribute to an IRA. Although, if you only exclude part of your income you may still be eligible to contribute to an IRA.
For example, if Mr Smith living in the U.K earns $100,000 and uses all FEIE to exclude U.S taxes he is not eligible to contribute. But, if he uses tax credit instead of FEIE it would be classed as excluded income on U.S tax filling and would be able to contribute to an IRA.
But, if you earn over the $107,600 income he would not be able to contribute due to earning limits.
Roth IRAs vs Traditional IRAs for U.S. citizens living abroad
IRAs get tax deductions directly correlated to the amount you contribute and are tax-deferred until withdrawals are made.
The differences are:
IRA is tax-deferred and a Roth IRA is tax-free.
Roth contribution withdrawals from income can be done at any time while IRA has penalties before 59.5 years old.
No RMDs with Roth IRAs
| ingle Filers (MAGI) | Married Filing Jointly (MAGI) | Married Filing Separately (MAGI) | Maximum Contribution for individuals under age 50 | Maximum Contribution for individuals age 50 and older |
| under $125,000 | under $198,000 | $0 | $6,000 | $7,000 |
| $126,500 | $199,000 | $1,000 | $5,400 | $6,300 |
| $128,000 | $200,000 | $2,000 | $4,800 | $5,600 |
| $129,500 | $201,000 | $3,000 | $4,200 | $4,900 |
| $131,000 | $202,000 | $4,000 | $3,600 | $4,200 |
| $132,500 | $203,000 | $5,000 | $3,000 | $3,500 |
| $134,000 | $204,000 | $6,000 | $2,400 | $2,800 |
| $135,500 | $205,000 | $7,000 | $1,800 | $2,100 |
| $137,000 | $206,000 | $8,000 | $1,200 | $1,400 |
| $138,500 | $207,000 | $9,000 | $600 | $700 |
| $140,000 & over | $208,000 & over | $10,000 & over | $0 | $0 |
How to start an IRA while living abroad
If you are living abroad and looking to contribute to an IRA I would look to see if you can get one in the U.S as an overseas one can trigger PFICs if it isn’t structureed correctly. So, make sure if you are looking to open one overseas that it is structured accordingly.
PFICS comes with a high tax. If you are unsure about PFICs, please read this blog: PFICs.
Can I move my IRA overseas?
This can be done by rolling it into a country-specific pension scheme such as U.K SIPPs, or Aus Super, if it is not possible, in many cases, look for specific rules in your country of residence.
Finally, when you do have the option rolling over into domestic plans and/or opening up a new IRA and withdrawing funds in the new account.
Offshore pension accounts
The UAP group have an offshore pension option that might be useful here is a write-up on the option and how it works.
What is the UAP group?
The UAP group identifies as
“It was identified that there was a gap within the market for a modern dynamic trust and pension company utilising the most current applications, and so The UAP Group of companies was created to develop a suite of products that would meet the needs of people of any nationality wherever they reside.”
Source UAP Group
What is offered to U.S expats?
This is defined under Guernsey as a defined “Define contribution retirement benefit plan” that is approved by the Guernsey Income Tax authority.
I will put a link to all the technicalities of offerings below. However, I will try and sum it up in a simple fashion.
It offers a contractual base Guernsey contract. The contract is written by Bourse pension trustees Ltd and is paid by the member and investors from instructions from the member or the member’s financial advisor.
The value is based on the value of the investments and in the drawdown of the pension at age 55 or over (this can be deferred till 75) will continue to give an income for life. The drawdown is based on GAD rates and allows a flexible drawdown with 30% PCLS at the age of 55.
Simply put its works a lot like a Roth IRA with after-tax dollars (Pounds or Euros), with different factors being the age that you can drawdown on and income levels requirement, that with Roth IRA is set at $140,000 for single filers or $208,000 for married couples, and no contributions limits ($6000 for under 50s in Roth IRA and $7000 for over 50s).
You have investment options in what you invest in and the tax is taxed on the gains on withdrawal and the structure doesn’t include PFICs.
A full link can be seen on the link below:
https://theuapgroup.com/wp-content/uploads/2021/06/UAP-US-Brochure-Final-VI.pdf
Why it might be useful to U.S expats
Simply put you don’t have many options, unlike British citizens or many other citizens living abroad. They don’t have the complication of tax filing on investments offshore and many offshore companies are open to dealing with them.
As a U.S expat, many investments are not feasible for many options as many platforms don’t want the obligation of dealing with the IRS and as a result, they don’t accept U.S expats.
The UAP contract acts in a number of ways like a pension plan that you would have back in the U.S, with an after dollars IRA or Roth IRA.
The fact that it is portable with you as an expat, easy to file your taxes without the complications of dealing with PFICs and is not taxed every year are some of the prime reasons to review it as an option.
Instead, you are taxed on the gains on withdrawal. This can make a big difference as if you wanted to go into an actively managed fund such as Blackrock an accountant filing your taxes will need to know what they sold within the tax year within the fund plus the dividends that were distributed. This can be a pain, to say the least, and can potentially cost more on accountant fees for complications.
Furthermore, if you are a U.S expat in the U.K or Europe (which are around 1-2 million according to U.S diaspora) you might want to invest in GBP or EUR and investing in an active European or U.K fund, which would not be feasible for many reasons. With UAP, you do have a wider option to invest in and potentially more investing options with only getting taxed on the gains, which for a younger investor or those with a larger investment amount can add up and allow more time to compound.
Some of the key advantages are
- IHT planning for high net worth individuals over $11.7 million
- No contribution limits
- Investment flexibility
- Simple tax reporting
- Investments grow tax-free
Who is this for and who is it not for?
As I have described earlier in the article, the key points are that it works as a pension that you can withdraw at the age of 55. This inadvertently means it is not for anyone needing or wanting liquidity in their investments prior to 55. One way I would use it is like an IRA where you contribute and can’t take it out till a set age (IRA 59.5 and UAP 55).
Other than that it can be used in a number of ways for U.S expats that are looking to set up a pension plan or those with surplus wealth that want to invest in PFICs companies and funds, with the ability to grow tax-deferred.
This is designed for U.S citizens who are offshore.
Is it safe?
In terms of the set-up, it is safe as it is set up by contractual law and this is one that is accepted in many locations as a sound frame of law.
In terms of the companies involved I will put a link below:
For me, I see the two main factors in terms of safety, the jurisdiction, and Guernsey. This is deemed appropriate here is an overview of the jurisdiction.
Guernsey is a well-regulated British Crown Dependency and remains a jurisdiction of choice for companies and individuals seeking trust, corporate and pension products and services.
Guernsey has long been considered a centre of excellence for the provision of offshore financial services. The Island is renowned for its robust yet pragmatic regulatory environment and is on the G20 ‘white list’ as having substantially implemented internationally agreed tax standards.
Guernsey is not part of the United Kingdom and has the autonomy of internal government, including taxation. The legal system is derived in part from the customary laws of Normandy but has been strongly influenced by English law. In addition, Guernsey is not part of the European Union and therefore EU directives on fiscal harmonisation, financial services and company law do not have effect in Guernsey. In this respect, Guernsey enjoys significant advantages over other jurisdictions.
All aspects of the Island’s financial services industry are carefully regulated by the Guernsey Financial Services Commission (“GFSC”). Financial services businesses such as Bourse are licensed by the GFSC according to their activities.
The other considerable factors as where and whom it is invested with this can be a range of investment options platforms and would speak to IFA about this in more detail.
Annuities
I have written a bit about this above but these can be used as another option that allows for tax-free growth even though if they are outside of a retirement plan they are classed as none qualified.
The Annual Reset Annuity: US Expats
529 Savings Plans
529 saving plans allow investors to make contributions to education costs. These are state-specific, although expats have no specific state. You can still contribute to 529 plans as there are no state residency restrictions on 529 plans.
Although, contributions to 529 plans are not tax-deductible, and are made with after-tax dollars.
The growth is tax-free until the education cost is paid. Contributions can be made by anyone, not just a direct relative.
Tax-free distributions are used if it is used to fund “qualified” higher education expenses. These cover tuition fees and material costs such as textbooks.
One point for 529 accounts (until recently) were limited to Universities in the U.S. Now, K-12 tuition only can be covered by 529 plans. If funds are withdrawn for non-qualified expenses then will be subject to your income tax and 10% penalty.
The advantages of 529 plans are that when you contribute, they are not subject to the gift tax. Also, having the flexibility in the investment option of the plans.
Also, if the beneficiary doesn’t attend university or use the qualified distribution it can be passed on to another beneficiary.
If an individual expat is not subject to state taxes, then state tax benefits which create an incentive to use the home state plan are not relevant. Therefore using a better plan such as Ohio and Utah, is feasible for U.S expats.
Brokerage accounts that you can use as a U.S expat
One challenge that U.S expats often incur is investing when living outside the U.S. This is due to the tax filing regulations.
Traditional accounts may not be open to those who are based in the U.S. Therefore, I want to write about some of the platforms that US expats have open to you and how Investments for Expats can help.
Note, that most U.S. brokerage accounts either do not accept or freeze clients’ accounts when you move abroad. In most cases, you will need to contact the brokerage to find out what the terms and conditions are for the specific brokerage. As a side note, it is worth pointing out is by using a friend or relative’s address for your investment purposes is not simple and also fraud and have seen this method advised in social media groups. There are brokerages now that accept US expats and you can use an address that is based outside of the US.
Brokerages
I will go over three of the brokerage accounts for U.S. expats that I believe, in my opinion, are the best platforms for U.S. expats presently in the market.
These platforms allow for U.S expats to invest in most parts of the world and allow for both self-managed or advisor lead accounts. The platforms also offer low-cost ETFs for expats to invest in.
Opening a U.S. expat account can still come with limitations, as you will still have to be aware of PFICs, tax reporting and the regulatory landscape in which you are residing that may have extra hurdles.
Interactive Brokers
Interactive Brokers (IB), the brokerage is an alternative to Wall Street. This has grown over the last 20 years to be one of the leading global individual investor platforms. Individuals can trade on U.S and global exchanges on most of the worlds leading stock exchanges. With the ability to purchase individual stocks, bonds and ETFs. It also allows Foreign Exchange (FX) at a very low cost which can be very appealing for many expats who are looking to change currency.
There are still places where IB won’t work, including countries where the U.S. Treasury Department’s Office of Foreign Asset Control has upheld sanctions but IB is open for business in more countries than any other reputable brokerage firm.
Customer service has been frowned upon because it can be hard to talk to someone due to all the automated processes you need to go through and I have had clients that have complained about not being able to get to talk to an actual human in some circumstances.
From my own personal experience, it can be a hard platform to navigate and seem quite complex for the average investor. For those looking for more of a trader experience although most trades are low-cost to free, however, if you would like real-time quartations these do require a subscription.
Finally, it should also be noted that for residents of the EU, Interactive Brokers has blocked access to U.S. registered ETFs. Given the dangers of foreign-registered ETFs, discussed above, this leaves Americans in the EU with the daunting task of constructing their portfolios with individual securities (e.g., stocks and bonds) rather than getting their diversification through ETFs. For unsophisticated investors, or even sophisticated investors that don’t have the time or inclination to manage their own stock and bond portfolios, this is a major impediment that must be considered.
My thoughts are that although this might be a difficult platform to use for the beginner investor the low cost and range of stocks and funds more than make up for its downsides. This is why we at Investments for Expats are presently using this platform as an advisor-led platform.
Praemium
One platform that many might not be familiar with but is one of Australia’s largest platforms and is big in the international market is Praemium.
In 2019, launched it’s U.S expat service, however, before I go into detail about this I will look more into Praemuim.
Who is Praemuim?
In its own words, taken from the Praemium website:
“Praemium Limited was established in Australia in 2001 as a non-custodial reporting and aministration provider and has since grown to be an award-winning provider of investment platforms, portfolio administration, investment management and CRM solutions with offices in Australia, UK, Jersey, Armenia, UAE, Hong Kong and China. The value of investments managed or administered by Praemium is now in excess of AUD$100 billion for almost 1000 financial services organisations.
Praemium’s clients include some of the world’s largest financial service providers, including Citigroup, Asgard and BlackRock.
Praemium launched its platform services into the UK market in 2008 and the international market in 2012, where it is now one of the fastest-growing discretionary platforms available.”
The company has offices in Australia, the UK, Jersey, Dubai, Armenia, Shenzhen and Hong Kong.
Praemium launched its services into the UK market in 2008, where it is now one of the fastest-growing discretionary platforms available.
In the UK, the Praemium group is regulated by the Financial Conduct Authority.
Personally, after having a play around with the portal, it is fairly easy and from a client’s perspective to use, it is easy to navigate and see your investments.
In terms of funds, it doesn’t have a full fund range but it is large enough to see the majority of investors through. You have a range of major currency options and have to keep 1% in the cash management account.
It works with wealth crafts that use the Oxford Risk to help model portfolios for advisors and investors, this can be a useful tool to help automate the risk profiles.
As well as this you have (Capital Gains Tax) CGT calculators, bulk rebalancing and portfolio analytics.
If you have transferred or looking to transfer your pension you have trust options as well as those looking for IHT planning have the ability to wrap into a trust.
See the figure below for the portal specifics
The cost of Praemim is where it can be competitive. As seen below the breakpoints are from 0.35% to 0.25% depending on your amount.
PFICs Tax
Funds are U.S based so not subject to the PFICs taxation for U.S expats.
The U.S part of the platform is more expensive than the international platform starting at 0.35% and going down to 0.25% and with not many options in the market, this can be a feasible option.
With this, you also have a tax filing service for 195 GBP and here is some information about the platform from its flyers, please see below.
My Thoughts & Opinions
I have been a big fan of the platform and its international branches and I have ranked it as one of my top 3 platforms for international investors in 2022. Although the U.S platform is more expensive, it is still reasonable and I do see prices coming down as the U.S platform becomes more popular.
For U.S expats who have limited options to invest this is a more than welcome platform to help US expats. The fact that it combines the tax reporting service could be a huge bonus to US expats.
If you are a U.S expat that is looking for a platform and advisor we are happy to review your situation and see if we can help in any way.
Please email info@investmentsforexpats.com
Charles Schwab
Charles Schwab which was one of the first platforms to go online has two forms, the advisory service and retail clients (DIY). It is a platform for IFAs through the Schwab Alliance platform.
In terms of funds, Schwab offers a wide range of ETFs. The benefit that would personally put Schwab over IB is the ease of use. It is more user-friendly although not always cutting edge in terms of technology, however, it does get the job done.
Schwab is one of the few brokerage accounts that have a specific platform dedicated to U.S expats. As other platforms have closed doors to the expats that no longer reside in the U.S. Schwab has opened up it’s doors to help solve an issue.
However, even Schwab’s international ambitions have their limits. Schwab may or may not provide the ideal solution for the international customer depending on individual circumstances regarding the customer’s residence and/or whether the customer works with an advisor (institutional client vs. retail client). If you want to see whether you live in a permitted country, Schwab provides a convenient link to try to open an international account.
From there, you can simply go to the drop-down menu of countries on the page and select your residence country to determine whether you can complete an application or whether Schwab is unavailable for residents in your country at this time.
For clients living in the EU and working with U.S. independent advisors on the institutional platform, Schwab offers a key advantage: access to U.S.-registered ETFs.
Unfortunately, retail Schwab customers with EU addresses will be blocked from purchasing U.S.-registered ETFs.
Accordingly, just as with IB, retail customers in the Eurozone are considerably hampered by the EU rules that foreclose access to simplified diversification offered by ETFs (and mutual funds).
Summary
At Investments for Expats we are helping U.S expats invest in platforms that help US expats invest in the market to suit their needs. Please feel free to get in touch if you need any help and aim to guide you over the complexity of U.S expat investing.
Please be aware that any kind of investing involves risk and you can get back less than what you invested. Your capital is at risk and nothing is guaranteed. Before investing, please make sure that you understand the product you are investing in and the reasons why it has been suggested to you.
If you are a US expat looking to invest and want to know the options available to you, please email me at info@investmentsforexpats.com
