Managing Your Investments While Living Abroad: A Guide for US Expats 

Managing Your Investments While Living Abroad: A Guide for US Expats 
Updated on April 24, 2024

A significant number of Americans are living abroad. The Association of Americans Resident Overseas (AARO) estimates that over 5.4 million US citizens reside in foreign countries.  

Given the growing figure of Americans embracing expatriate life, understanding the potential challenges of living abroad is crucial. One of these is navigating a new financial, tax, and legal system.  

You must pay careful attention to managing your finances and investments overseas.  

Professional advice is imperative to ensure legal compliance and tax efficiency. This article explores various considerations for staying on top of your investments while living abroad.  

Before delving into that, let’s discuss the investment issues commonly encountered by US expats.  

Understanding the Common Investment Issues US Expats Face 

Americans residing overseas often encounter challenges with their financial investments. They happen primarily because of the complex interplay of multi-jurisdiction tax and regulatory frameworks. 

Understanding these issues can empower you to make informed investment decisions, optimize your portfolios, and minimize costly mistakes. Some of these include, but are not limited to, currency fluctuations and brokerage account restrictions. 

Currency Fluctuations 

Fluctuations in currencies can significantly affect the returns generated from foreign investments. Suppose the domestic currency rises in value. Foreign investments yield lower returns when converted to the local currency.  

Conversely, the domestic currency returns of foreign investments will increase if the home country’s currency is declining. Everything gets more intricate if you have assets in one place, work and reside elsewhere, and store funds or pension products in a different location.  

Brokerage Account Restrictions 

Brokerage account restrictions are another challenge that US expats face when investing overseas. No US law requires freezing or closing American expat brokerage accounts when living abroad. The internal policies of the financial institution determine the decision to do so. 

However, many US-based brokers find closing or freezing an account easier than complying with the new international regulations. This situation can be frustrating for American expat investors who need a reliable platform to grow and safeguard their wealth.  

International account restrictions differ between brokerage firms and are enforced in different ways. Some expats can’t access their accounts from a foreign IP address. Hence, it’s crucial to check the financial institution’s policy before opening any self-directed brokerage account. Many online expat-friendly brokers have managed to continue working with US expats.  

Considerations When Managing Investments as a US Expat 

You must always base your decisions on risk tolerance and investment objectives when investing. While that’s imperative, managing your investments as a US expat involves numerous considerations. Take note of the following factors to remain in control of your investments overseas:  

Investment Diversification 

Avoiding overreliance on any single asset class is an excellent strategy for minimizing the adverse effects of market fluctuations. Since US expats routinely change occupations and countries of residence, creating a well-balanced investment portfolio is essential.  

With investment diversification, you can reduce your investment risks and tap into diverse growth opportunities while exposed to different jurisdictions and currencies. However, it’s worth noting that certain investments can prompt additional US taxes or reporting requirements.  

For instance, investing in non-US registered mutual funds or other pooled foreign investments can be a costly mistake for American expat taxpayers. The Internal Revenue Service (IRS) classifies foreign mutual funds as passive foreign investment companies (PFICs).  

Under Section 1297 of the IRS Code, a PFIC is a non-US company with over 75 percent of its income from passive sources. These can include bonds, stocks, or passive real estate investments. Moreover, they hold more than 50 percent of their assets in these passive investments.  

Section 1298 of the Code requires you to report every PFIC you hold shares in on Form 8621. It’s a complicated form that may take over 40 hours to complete. Failure to comply with this requirement may result in significant penalties.  

Fortunately, you can avoid that complication and invest tax efficiently by diversifying with only US-registered investments like mutual funds or exchange-traded funds (ETFs). ETFs can be a great option for expat investors as they don’t face the same compliance restrictions as mutual funds.  

Likewise, working with an expat-friendly US brokerage company is advisable for American expats to save and accumulate wealth without PFIC issues.  

Currency Management 

Currency exposure is a significant concern for US expats living abroad, especially those whose salaries and other income sources are in different currencies.  

As investors, your primary goal is to maximize investment returns while mitigating unnecessary risk. Unfortunately, fluctuations between the currency denomination of your investments and the currency you use for paying expenses can diminish good investment results. 

Suppose you’re transferring funds from the US to buy property abroad. Even a minor fluctuation in exchange rates can greatly impact the cost of your transaction. Remember, risks are much higher if you transfer more money and hold larger investments in different currencies.  

Several strategies can minimize currency risk and the chance of a negative impact on your investments. Attention to macroeconomic factors that indicate a potential change in exchange rates must be at the top of the list.  

Another strategy you can employ is currency matching. Essentially, it involves aligning the currency of your assets with your liabilities. If you anticipate living and incurring expenses in a particular currency, consider investing in assets denominated in that currency.  

However, you must also analyze currency exposure associated with each investment you plan to use to finance an activity. An investment adviser can help calculate your actual exposure. It’s crucial, primarily if your portfolio encompasses ETFs, mutual funds, or multinational company shares.  

Importance of Financial Consultation for US Expats  

Each country has a distinct financial system you must consider. Besides tax regulations and investment opportunities, you must also think about living costs, exchange rates, current conversions, and insurance policies.  

Navigating such a complex undertaking demands more than a thorough understanding of the laws of each jurisdiction. You must also consider their interaction with one another.  

For this reason, seeking financial consultation for your investment abroad is more critical than ever. It’s essential to note that not all financial advisors will be suitable. Several advisors may only specialize in one jurisdiction and potentially miss complexities in the other.  

Hence, consulting a financial advisor with expertise in US and international markets and working with expats is crucial for long-term economic success while living abroad.  

Who doesn’t love a tax break? Use our handy calculator to learn what you can save using the FEIE.

Use our simple excel calculator to get an estimate of how the foreign earned income exclusion will save you money. It will make your day!

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