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Forbes
29-07-2025
- Business
- Forbes
Why Americans Abroad Should Watch Out For Foreign Mutual Funds And ETFs
Tom Zachystal is president of International Asset Management providing financial planning and investment advice for Americans living abroad. Instead of paying capital gains rates when you sell, as a PFIC owner, you pay the highest marginal income tax rate, plus interest charges on annual gains. In many cases, the tax owed can exceed the actual profit. Holding a PFIC for five years, for example, and then selling for a modest gain can trigger a large tax bill with compounded interest. These aren't theoretical penalties; they are real PFIC penalties that can apply years after the investment. Furthermore, there may be penalties for not having reported them. The PFIC Reporting Burden You'll need to file Form 8621 for each PFIC you own annually, even if the investment generated no income. It's one of the toughest IRS forms to complete, and errors can disqualify you from making tax-saving elections. Essentially, if you skip filing, you default straight into punitive PFIC tax treatment. There is one exception: If your total PFIC holdings are $25,000 or less ($50,000 for those filing jointly) on the last day of the tax year and you received no distributions, you can skip Form 8621. However, foreign bank account (FBAR) and personal FATCA reporting of offshore foreign assets may still apply. The simple advice if you discover you have a PFIC is to seek advice from a U.S. expat tax specialist as soon as possible. What Are Other Ways To Invest As An Overseas American? The simplest way to avoid PFIC problems is to avoid investing in overseas registered pooled investments and funds in the first place. You have several other choices as an American living abroad if you're looking for international exposure or diversification: If you have earned income and meet eligibility requirements, contributing to a traditional or Roth IRA remains one of the most tax-efficient options for U.S. expats saving for retirement. These accounts are not subject to PFIC rules and allow access to a wide range of U.S.-domiciled investment products with favorable tax treatment. If you earn in U.S. dollars, you'll also save on currency conversion costs compared to investing abroad. By investing in U.S.-based mutual funds or ETFs that invest internationally, you can gain international exposure and diversification benefits while remaining within the U.S. regulatory framework. There are a couple of caveats though: First, if you live in the EU, EU rules may prevent you from investing in U.S. funds; second, most U.S. brokerage firms won't work with non-U.S. residents. If you definitely want to invest abroad, buying foreign equities or bonds directly, rather than overseas mutual funds, can help sidestep PFIC rules. This path requires more active management and an understanding of foreign markets, as well as a relationship with a brokerage firm that will allow trading on non-U.S. exchanges. Real estate can be a tax-efficient and inflation-resistant asset class. U.S.-based property offers familiarity and potential tax advantages for American citizens, while overseas real estate may provide lifestyle and cost-of-living benefits, along with local rental income. Regardless of your preferences, as an overseas American, you should ensure any investments you make are in the context of your overall financial plan and align with your long-term goals. Engaging an advisor familiar with working with expats can help you avoid making costly mistakes related to PFICs, among many other issues. The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation. Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms. Do I qualify?
Forbes
30-04-2025
- Business
- Forbes
Diversification Strategies For American Expat Investors
Tom Zachystal is president of International Asset Management providing financial planning and investment advice for Americans living abroad. Making the right investments is the key to building long-term wealth. American expat investors, however, face added complexities of global investment opportunities, being subject to both local and U.S. tax laws and regulations, and international currency fluctuations that can affect relative asset values or mean losses when transferring between countries. Given these challenges, deciding where to allocate funds can be overwhelming for overseas-based American investors. While many investors may be aware that diversification is a smart way to manage investment risk and build wealth long term, in this article, I'll discuss strategies Americans living abroad might consider when seeking to diversify their portfolios. Diversification in investing refers to reducing the risk of losses by holding different asset classes such as stocks, bonds and real estate, or holding assets in different countries or regions. A well-balanced portfolio helps protect against downturns in any one sector or country. Expat investors can still invest in the U.S., but also often discover local investment opportunities abroad. They then have to weigh whether it makes more sense for them to invest locally or to invest in global shares or funds in the U.S. This may depend on where their funds are located, and where they plan to be living when they will sell or draw on the investments, to minimize losses from transferring funds between currencies. There are other rules that may be limiting, such as EU rules that may prevent residents in the EU from buying most U.S. ETFs and mutual funds. Nonetheless, the principle stands that investors should seek to diversify across different regions, countries and asset classes. Expats often face the challenge of fluctuating exchange rates. To manage this, you might consider diversifying your holdings across multiple currencies. While stable currencies such as the U.S. dollar, euro and British pound offer security, emerging market currencies can bring higher returns but can come with risks such as inflation and devaluation. Focus on stability by investing in assets that align with your financial goals and future plans. Foreign currency accounts and globally diversified ETFs can also help hedge against currency risk, keeping your investments balanced and diversified. As an American expat, you're subject to U.S. taxes no matter where you live, so your investments must consider both U.S. tax rules as well as your host country's laws. Investing in foreign mutual funds may trigger IRS Passive Foreign Investment Company (PFIC) rules, resulting in higher taxes and complex reporting. To avoid this, you can stick to U.S.-based ETFs or buy individual stocks. Tax treaties can help, too, in some cases offering preferential treatment for U.S. retirement accounts such as IRAs and 401(k)s and reducing foreign withholding taxes on dividends. Consult with both a financial advisor and tax professional with experience working with expats in your host country to optimize your taxes and investment returns. Real estate offers many expats a tangible, diversified investment with the potential for steady income and a hedge against inflation. If you plan to stay in your host country long-term, then investing in local property can potentially be a smart move. However, local property laws, taxes and financing can be complex, so seek advice. For a more passive approach, you can consider real estate investment trusts (REITs). These allow you to invest in global real estate without the burden of property management. Before committing, make sure to research the local market conditions and understand the tax implications, making sure to consider any local property, capital gains and wealth taxes. Diversification isn't just about the assets you own; it's also about where you hold them. As an expat, you can still hold U.S.-based brokerage and retirement accounts. However, many U.S. brokerage firms won't deal with non-U.S. residents, so you may need to change your broker when you move abroad or risk your account being restricted or closed. Having local retirement and investment accounts can avoid currency exchange costs and can provide local tax benefits. Combining both can be a useful way to diversify and maximize local and U.S. tax perks. Market shifts can cause a portfolio's asset allocation to drift over time. If one sector, such as international equities, outperforms, it could, over time, make up a larger portion of your overall investment portfolio, increasing exposure to a single asset class or region. Rebalancing is key to keeping your investments on track with your long-term financial objectives. A good rule of thumb is to review your portfolio annually. Regular adjustments help keep your portfolio aligned with your risk tolerance and goals. As an expat, you have both increased global opportunities, but also new challenges as an investor. By spreading investments across regions, currencies and asset classes, you can manage risk while capitalizing on growth opportunities both in the U.S. and overseas. The key to success is staying proactive and regularly reviewing and adjusting your portfolio, as needed. It's also important to work with a financial advisor who specializes in cross-border investing and will help you align your investments with your financial goals. With the right strategies, you'll position yourself for long-term success, no matter where in the world you live. The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
