Lauren Miller is a US-based business owner who writes about money management, career development, and retirement planning.
Living overseas is likely to be one of the most memorable, exciting undertakings of your life - but if you're considering investing while living as an expatriate, don't expect the experience to be quite as thrilling. In fact, the passage of the Foreign Account Tax Compliance Act (FATCA) in 2010 has made it more difficult for U.S. citizens living in foreign countries to invest at home or abroad.
Luckily, it's not impossible - you just need to educate yourself before you dive in headfirst.
1. Consider Repatriation
Think very carefully about your long-term living plans before choosing an investment strategy. If you're planning to live and work in a foreign country for a few years before returning to the United States, your investment strategy will be quite different than if you're planning to retire overseas.
The key consideration here is how to manage currency risk. Currency risk is essentially the risk of losing money in an investment due to the rate of currency exchange. The best plan of action is to invest primarily in the currency against which you eventually plan to use the funds. So if you plan to retire in Europe, invest in stocks, bonds, and mutual funds based on the Euro. If you plan to retire in the U.S., invest in stocks, bonds, and mutual funds based on the U.S. dollar.
2. Seek an Expat-Friendly Broker
One of the purposes of the 2010 Foreign Account Tax Compliance Act was for the IRS to more stringently enforce the U.S. laws regarding taxation and reporting of foreign investments. As a result, more foreign institutions are refusing to allow Americans to open overseas investment accounts, and even more concerning is that many U.S. brokerages are also unwilling to work with expats.
All is not lost though. Simply do your research and seek a U.S.-based broker who's knowledgeable about expat investments and who regularly works with Americans living overseas. Even if you're planning to retire in a different country and want to make most of your investments in a different currency, housing them with an American investment firm makes it easier to comply with confusing tax laws.
3. Research Taxes
One of the main reasons you want to continue using an American-based investment firm to make your investments boils down to tax penalties. When you house your investments overseas, FATCA requires extensive record keeping and reporting based on the Passive Foreign Investment Corporation (PFIC) rules. These rules apply to all mutual funds, hedge funds, cash management products, and foreign pension plans housed in foreign countries. Investments that fall under PFIC rules are taxed at a much higher rate - upwards of 35%. That's a much more difficult pill to swallow than the tax rate associated with long-term capital gains.
The trick here is understanding what "housed" means. You can invest in European stocks and bonds by purchasing them through a U.S. brokerage or purchasing them through a brokerage based in Europe. The investments themselves might be identical, but those housed in the U.S. through a U.S. brokerage would be subject to the lower tax rate, while those housed outside the U.S. might be subject to the higher tax rate, depending on the total sum of all your foreign investments.
4. Construct a Globally-Diversified Portfolio
Given the globalized economy, everyone should develop a globally-diversified portfolio of investments, but this is particularly true of expats. If you're not sure where you plan to eventually use your investment funds, work with a broker to develop a portfolio based on multiple currencies. This reduces overall risk when it comes time to cash in your investments.
5. Invest in Property
If you have the means and inclination, carefully consider a property investment. If you're planning to live overseas indefinitely, you can invest in foreign property without the same tax penalties associated with investing in foreign stocks. And depending on where you're living, the returns can be significant when it comes time to sell. Just be very careful about the laws and customs surrounding property purchases in foreign countries. Work closely with a reputable real estate agent - preferably an American living in the foreign country - and enlist a lawyer.
If you plan to return to the U.S. within a few years, you might also consider purchasing a U.S.-based property to rent out while you're overseas. As long as you have a reliable property manager who can handle the rental while you're gone, real estate is a great long-term investment strategy.
If you're preparing to move overseas and you already have a well-crafted portfolio of investments, don't just assume you can maintain them as-is while living as an expat. Talk to your broker to make sure the brokerage is expat-friendly and is familiar with the laws and regulations regarding Americans living overseas. The last thing you'd want is to receive a phone call or email notifying you that your account was being shut down because you failed to notify the brokerage of your new living situation.
Have you lived in a foreign country? How did you plan your investments?