Tom Zachystal is president of International Asset Management providing financial planning and investment advice for Americans living abroad.
There’s always increased interest in moving abroad in election years, and 2024 is no different. Arguably there’s never been a better time to make the move in fact, with over 40 regions now offering digital nomad visas.
Relocating abroad can be an exciting prospect, but as an American living overseas, you will encounter some new financial challenges. Seeking specialist advice, staying informed and being proactive about your finances is essential if you want to avoid pitfalls, minimize reporting, and keep your income and investments optimized. In this article, we’ll explore four financial challenges you should be aware of to ensure your move and adventure overseas go as smoothly as possible from a financial perspective.
1. Your US brokerage accounts may be restricted.
Many U.S. brokerage and investment firms either restrict or even freeze or close accounts for Americans living abroad to avoid an increased compliance burden. This is primarily because complying with U.S. know your client and anti-money laundering legislation is hard for U.S. financial firms with non-U.S. resident clients.
As a result, many brokerage firms find that the regulatory burden outweighs the benefits of maintaining expat accounts, leading them to close these accounts or significantly limit services. They may force you to sell your investments or transfer them to a different firm. Some expats manage this by working with international investment firms specializing in cross-border clients. Giving a U.S. financial firm a U.S. address where you don’t reside can also lead to issues, as it would violate the firm’s terms and conditions. The best course of action is to have a conversation with your U.S. brokerage firm before you move to find out their policies for nonresident clients and then explore your options.
2. You’ll be subject to both US and local taxes.
Living abroad does not exempt you from U.S. taxes, which is a reality that surprises many Americans. As a U.S. citizen, you’re required to file U.S. tax returns annually to report your worldwide income, regardless of where you live. Even though claiming the Foreign Earned Income Exclusion and Foreign Tax Credit can help mitigate double taxation, expats may still owe U.S. taxes on certain types of income. This can include capital gains, rental income and dividends, depending on the details of the U.S. tax treaty with the country where you are moving to.
In addition to U.S. taxes, you’ll also need to deal with the tax system of your new country of residence. Many countries impose local taxes on income, capital gains, and sometimes wealth and inheritance taxes. Managing compliance with both systems can be tricky. Working with cross-border tax advisors can help minimize your tax liabilities, ensure you are utilizing all available credits and provisions, and maintain compliance with both tax regimes.
3. There are investment limitations.
Once you’re living abroad, investing can become a conundrum as many expats find themselves caught between two sets of regulations. For expats moving to Europe, the EU’s MiFID II (Markets in Financial Instruments Directive) rules restrict EU residents from investing in most non-EU financial products, including U.S. mutual funds, ETFs and other familiar investment products, leaving you to invest in EU-domiciled funds, which can come with different fees and tax implications.
At the same time, U.S. expats face challenges investing abroad due to the IRS’s treatment of foreign investments. If you invest in foreign mutual funds or ETFs (or some foreign pension plans), the IRS classifies them as PFICs (Passive Foreign Investment Companies), which are subject to a highly punitive tax regime and complex reporting requirements. You’ll also have to report your non-U.S. financial accounts and assets to Uncle Sam every year by filing FBAR and FATCA forms. As a U.S. citizen abroad, therefore, you may find yourself caught between two conflicting regulatory environments. There are still investment options and opportunities for Americans living abroad, and some specialist expat investment firms provide, for example, all stock portfolios that are optimized for expats in different countries and regions.
4. Your US retirement plan tax benefits may be limited.
If you’ve spent years contributing to U.S. retirement plans like IRAs or 401(k)s, it’s important to know whether the country in which you are a tax resident recognizes the tax-deferred status of U.S. pension plans and the tax-free treatment of any retirement plan funds that were contributed after-tax. This can be a major issue for expats, as withdrawing money from your U.S. retirement accounts while living abroad may result in double taxation.
Certain countries such as Canada, the United Kingdom and France have tax treaties with the U.S. that provide favorable treatment for U.S. retirement accounts, allowing for tax-deferred status under certain conditions. Many developed countries have tax treaties with the USA, but even where tax treaties cover retirement plans, they may only offer partial relief and the rules can be complex to navigate. Another consideration is that currency fluctuations as well as international transfer fees can impact the value of your contributions and distributions if you’re contributing or drawing in a different currency from that in which your funds are invested.
Final thoughts
Moving abroad during an election year presents a unique opportunity for change, but it also brings new financial complexities that need careful attention, and it’s essential to stay proactive and seek advice to ensure a financial future as you start your new international life. Consulting professionals specializing in expat financial planning is a smart way to make a seamless transition, helping you avoid costly mistakes and unexpected issues no matter what the election outcome.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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