Taxes as an American abroad... (part 2)
Or accidentally starting an passive foreign investment corporation
In the US, I considered myself a relatively financially savvy person. I maxed out my 401(k) and Roth IRA, I had a brokerage account, a high yield savings account, and followed all the flow charts that Reddit has told me to. đ¤ When I moved to London, I quickly realised that my financial planning had to change a lot, and I found that it was really hard to figure out what I was supposed to do with my money?!
This process was particularly frustrating because:
The rules are somewhat byzantine and non-intuitive
Finding expert help can be really expensive, and sometimes even the âexpertsâ donât know because the rules can have nuance
You can make expensive mistakes without realising, because some of the decisions you make in the first couple years wonât have an impact until much later.
This section will be really boring and thereâs going to be a lot of acronyms, but Iâll end it with a TL;DR so you donât have to worry too much.
Disclaimer: This is not financial advice, this is a summary of things Iâve learned from multiple engagements with expensive accountants and financial planners, a lot of Googling and tax code reading, and Reddit lurking, of course.
Tax-advantaged retirement accounts
The most common tax-advantaged retirement accounts in the US are the 401(k) and the IRA (Traditional and Roth). I wonât go too far into the differences because thereâs about 500 TikTokers spewing basic financial advice at all times. When it comes to living outside the US (aka Personal Finance Level Hard), the main things to know are:
In almost all cases, when you move abroad you will not have access to an active employer-sponsored 401(k). Youâll still have 401(k) funds from previous employers that can continue to grow, but you wonât be able to make new contributions. You can still choose / change what assets youâre invested in, though. Donât lose your passwords!
Tax-advantaged retirement accounts outside of the US are treated differently by the US depending on whether the US has a Tax Treaty with that country. Remember tax treaties from Part 1? It is important to check that contributing to a pension or retirement account outside of the US wonât burn you tax-wise in the future, so check the treaty list for the rules in the country you decide to move to!
You can contribute to a self-directed Traditional and / or Roth IRA, if you have earned income in the US. That is, if you exclude all your income using the Foreign Earned Income Exclusion, which we talked about last week, you donât have any âincomeâ to contribute from. This is a key thing to check, since it could lead to penalties later. The contribution limit for 2023 is $6,500 across both plans.
Many countries outside of the US have their own tax-advantaged retirement schemes, usually called pensions, and the shape and rules of these programs will vary country by country. You should probably be contributing to these since theyâre tax-advantaged, even if youâre not sure youâre going to live in that country for the next 40 years. Keeping it high-level for now, and maybe weâll do a deep-dive on the UK soon.
Brokerage accounts
Brokerage accounts are not tax-advantaged. They are funded with post-tax money and generally just subject to regular capital gains tax as the value grows. There are a lot of things to remember here, and things can get tricky (and expensive, painful) fast.
If you have an established brokerage account in the US with one of the big firms (Vanguard, Fidelity, Charles Schwab), you should retain a US address that you can use for correspondence and proof that you still have a mailing address in the US. If you try to change your address to a non-US one, or let them know that youâve moved abroad, tbh these firms will likely block and liquidate your account. If you donât have one before you move, you should probably open one with Charles Schwabâthey are known to be more amenable to US citizens not living full-time in the US.
If youâre looking to invest in US mutual funds or ETFs, you should always keep these holdings in a US brokerage account. This is probably the piece of advice that can make your life the simplest. If you invest in an ETF (e.g. Vanguard VOO for the S&P 500) outside of the US, it will be considered a Passive Foreign Investment Company (PFIC) â the details here are too long and boring, but it essentially means you will likely pay a painful amount of taxes at some point in the future if you do this, because of punitive US tax rules on PFICs.
If youâre looking to invest in single equities or stocks, you can try to open a brokerage account in the country you moved to, but a lot of brokers outside of the US do not serve US citizens because our tax reporting is complex and annoying. Also, why would you try and pick stocks? #indexgirl
The best way to fund your brokerage is by transferring money from your new country back to America (e.g. GBP to USD conversion). It will be annoying and painful when you do this, but you will be happy in 30 years when you hopefully donât owe everyone, everywhere taxes (all at once)1.
And a UK bonus! đŹđ§ The UK doesnât like when you are invested in ETFs or mutual funds in America that are not on their long UK Reporting Funds list. If you have investment income and are a tax resident in the UK when you realise those capital gains, you could be taxed at 45% instead of 20%. Most of the main index funds are on the list, but be sure to do a cross-check before you allocate your assets.
TL;DR2
401(k) - Likely will no longer be an option, unless you have very specific employer circumstances or set up a solo 401(k) if you have self-employed streams of income in the US. However, you may have access to an employer or government-sponsored pension in the new country that you move to! Verify that you should contribute here by checking the Tax Treaty rules for that country.
Traditional or Roth IRA - Will still be an option, depending on your income level and whether youâre excluding that income via the Foreign Earned Income Exclusion tax deduction â check this one carefully with the guidelines here.
Brokerage account - A US-domiciled brokerage account should be the main place your investments go as a US citizen abroad, outside of a pension in the country you move to. It becomes very messy to be passively invested in mutual funds or ETFs outside of the US due to the PFIC rules.
High-yield savings account - Not really an investment, but depending what your USD liabilities are (e.g. do you continue to pay for ongoing expenses in USD?), it is valuable to keep a good amount of USD in a high-yield savings account.
In summary, figuring out how to build wealth as a US citizen abroad and not be taxed extortionately is tricky, but not impossible! Iâm always keen to learn from others who have navigated things differently. Would also love to hear from you at lola dot agabalogun at gmail dot com if you found this useful.
Sorry, I couldnât help myself. It deserves best picture.
TL;DR = Too long; didnât read for anyone not working in tech đ