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O&G Research and Thinkpieces

11 Investment Mistakes To Avoid Abroad.

8/10/2018

 
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1. Doing Nothing
Keeping your hard earned money in cash (such as a checking account) will make it much harder for your to properly prepare for retirement.  In fact, most checking accounts lose money, when taking inflation into account.  Investing efficiently and compliantly while abroad can be a daunting task, but with a little research, quality financial advisers can be found.

2. Buying Foreign Mutual Funds
In the view of the IRS, a foreign mutual fund is considered a Passive Foreign Investment Company (PFIC) and is a tax nightmare for U.S. tax filers. If you are investing through a non-U.S. financial institution, you need to understand that PFICs are subject to special, highly punitive tax treatment by the U.S. tax code. 

3. Misunderstanding the Underlying Currency Exposures of Your Portfolio
Expat investors often mistake the currency in which their brokerage firm reports the value of their investment with the fundamental currency denomination of those same investments.  What matters is the currency denomination of the underlying investments, not the “reference currency” of the brokerage statement.

4. Over-investing in Your Current Country of Residence
It can be particularly easy to become intoxicated with “change” or “progress” when you are presently profiting from it and have the “edge” of living and breathing in the local market. Take profits in the local market along the way and re-deploy them into other (i.e., stable, boring) markets just in case your assertive long-term thesis turns out to be too bullish!

5.  Failure to Properly Report Foreign Financial Assets on U.S. Tax Returns
Virtually all foreign financial assets that are not being held in a domestic (U.S.) financial institution are subject to numerous reporting requirements. These reporting requirements include, but are not limited to, timely filing of a FinCEN Report 114 (FBAR), IRS Form 8938 (Statement of Specified Foreign Financial Assets), and IRS Form 8621(Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund). Cost of compliance with these regulations often make so otherwise attractive investments inefficient, if not out right unsuitable, for a U.S. investor.

6. Failing to Properly Report for U.S. Tax Purposes as a Foreign Business Entity 
Americans with ownership stakes in foreign entities have complex IRS reporting requirements. Failure to properly report ownership interests in Controlled Foreign Corporations (CFCs), Foreign Partnerships, and Foreign Trusts can lead to substantial IRS penalties.

7.  Paying High Fees for a Non-U.S. Investment
At the retail (individual or family) level, there is virtually no investment available anywhere in the world that cannot be purchased cheaper through a U.S. discount brokerage firm. ​

8. Buy Non-U.S. Tax Compliant Insurance
Any non-U.S. registered insurance products that hold cash value almost never qualify under U.S. tax rules as “insurance.”  Hence, they do not benefit from any of the tax advantages that can sometimes make insurance a good long-term investment.  Without this protection, your “insurance” policy is nothing more than a foreign investment account in the eyes of the IRS. Such investments and their tax reporting requirements are toxic for U.S. taxpayers.


9.  Contributing to an Unqualified Foreign Pension Plan
Foreign pension plans generally have beneficial tax treatment under local country of residence law and employers often make valuable pension contributions. However, most foreign pension plans are not qualified under double taxation treaties and participation in a non-qualified foreign pension plan can have negative tax consequences.

10. Relying on Your Legacy U.S. Estate Plan
When you relocate to a new country, make sure to consult with an estate planning expert that understands U.S. estate planning, estate planning in your jurisdiction of residence, and the potential interaction of tax treaties and foreign tax credits on the distribution of your wealth.

​11. Misunderstanding U.S. Retirement Account Contribution Rules with Foreign-Earned Incomes
Don’t assume you can no longer contribute to U.S. retirement accounts such as IRAs, Roth IRAs, or 401ks, or make the mistake of continuing to contribute without understanding the special rules that affects you. Make a full analysis of the local tax implications of a contribution to avoid being double taxed on the income contributed.

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  • About Us
  • Our Services
    • Investment Management >
      • Retirement Planning
      • Executive Compensation Management
      • Education Planning
      • Trust & Estate Planning
    • U.S. Tax Services
    • American Expat Services
  • CLIENT PORTALS
    • SCHWAB LOGIN
    • INTERACTIVE BROKERS LOGIN
  • Contact Us
  • Community
    • Volunteer & Non Profit
    • The Value Investor's Library