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Thun Financial Advisors Research 2017 Ø
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Top Ten (Twelve) Investment
Mistakes Made By Americans
Abroad
Editor’s Note:
We realize that our “top ten” mistakes lists twelve mistakes. At
the risk of excluding a mistake of which readers should be
aware, we’re leaving twelve top-ten worthy mistakes to avoid.
1) Buying foreign mutual funds. Foreign mutual funds may seem at-
tractive to an American living abroad. However, in the view of the IRS, a
foreign mutual fund is considered a Passive Foreign Investment Compa-
ny (PFIC) and is a tax nightmare for U.S. tax filers. If you are a U.S. citizen
or a U.S. permanent resident who has been living and working outside
the U.S. and investing your savings through a non-U.S. financial institu-
tion, you need to understand PFICs quickly. PFICs are subject to special,
highly punitive tax treatment by the U.S. tax code. Not only will the tax
rate applied to these investments be much higher than the tax rate ap-
plied to a similar or identical U.S. registered investments, but the cost of
required accounting/record-keeping for reporting PFIC investments on
IRS Form 8621 can easily run into the thousands of dollars per invest-
ment each year.
2) Doing Nothing. Many American expats find themselves so over-
whelmed by the complex rules and many horror stories they have heard
about investing while living abroad that they are cowered into taking no
Thun Financial Advisors Research ©| 2017 2
action at all. However, remaining in cash will not
provide for a comfortable retirement for yourself
or a college education for your kids. Investing effi-
ciently and compliantly while living abroad can be
daunting, but it does not have to be overwhelming.
A little research can go a long way. Qualified advi-
sors can be found. Do not give up. This is too im-
portant.
3) Not understanding the underlying currency
exposures of their portfolio. Expat investors of-
ten mistake the currency in which their brokerage
firm reports the value of their investment with the
fundamental currency denomination of those
same investments. For example, many foreign
public companies list their shares in both their
home country and in New York. The New York
listed shares will trade in dollars, but that does not
make them fundamentally U.S. dollar investments.
The U.S. listed shares will simply track the perfor-
mance of the shares on their primary exchange.
Similarly, the performance of a U.S. listed mutual
fund that invests in foreign currency bonds will be
determined by the fate of those underlying curren-
cies. It is irrelevant that the fund trades in New
York in dollars. The corollary is that truly multi-
currency investment portfolios can be constructed
through a U.S. brokerage firm that lists all invest-
ment values in dollars. What matters is the curren-
cy denomination of the underlying investments,
not the “reference currency” of the brokerage
statement.
4) Overinvest in your country of current resi-
dence. Fortunes have been made in all corners of
the Earth, and rapid growth and opportunities
may seem limitless one day … and disappear the
next. It can be particularly easy to become intoxi-
cated with “change” or “progress” when you are
presently profiting from it and have the “edge” of
living and breathing in the local market. The laws
of diversification are universal, and the penalties
of failing to obey those laws are equally universal.
Take profits in the local market along the way and
re-deploy them into other (i.e., stable, boring)
markets just in case your bullish long-term thesis
turns out to be … too darn bullish!
5) Failure to properly report foreign financial
assets on U.S. tax return. Following IRS report-
ing requirements is an important concern for
Americans living and investing abroad. Virtually
all foreign financial assets that are not being held
in a domestic (U.S.) financial institution are subject
to numerous reporting requirements. These re-
porting requirements include, but are not limited
to, timely filling 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 In-
vestment Company or Qualified Electing Fund).
Cost of compliance with these regulations often
makes otherwise attractive investments ineffi-
cient, if not outright unsuitable, for a U.S. investor.
In light of FATCA, risk of non-compliance should
only further steer any and all U.S. investors to-
wards keeping their financial assets in a domestic
institution, where none of these requirements ap-
ply.
6) Fail to properly report for U.S. tax purposes
a foreign business entity. Americans with own-
ership stakes in foreign entities have complex IRS
reporting requirements. Failure to properly report
ownership interests in Controlled Foreign Corpo-
rations (CFCs), Foreign Partnerships, and Foreign
Trusts can lead to substantial IRS penalties. For
example, failure to file Form 5471 for a CFC typi-
cally results in penalties in excess of $10,000 per
form and opens the taxpayer’s entire return to an
audit indefinitely. While in the past it has been dif-
ficult for the IRS to discover ownership infor-
mation on foreign corporations, this is currently
becoming much easier through FATCA and inter-
Thun Financial Advisors Research ©| 2017 3
governmental agreements. Enforcement for these
violations will only increase in the future. Many
American entrepreneurs starting companies
abroad unknowingly dig themselves into a deep
tax reporting and compliance hole by starting to
deal with these issues many years after launching
their businesses.
7) Pay high fees for a non-U.S. investment that
could have been bought through a U.S. broker
for much less. At the retail (individual or family)
level, there is virtually no investment available an-
ywhere in the world that cannot be purchased
cheaper through a U.S. discount brokerage firm.
Investment expenses (brokerage fees, trade com-
mission, advisory fees, mutual fund fees, etc.) are
substantially lower in the United States than they
are anywhere else in the world for the same or
very similar investments. Furthermore, the range
and liquidity of investments available to retail in-
vestors through U.S. brokers is vastly greater than
it is everywhere else in the world.
8) Buy non-U.S. tax compliant insurance. Any
non-U.S. registered insurance products that hold
cash value – policies that can be redeemed for
some amount of cash immediately – 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 – primarily tax deferral. Without
this protection, your “insurance” policy is nothing
more than a foreign investment account in the
eyes of the IRS. In addition, it is probably a foreign
trust and loaded with Passive Foreign Investment
Company (PFIC) investments. Such investments
and their tax reporting requirements are absolute-
ly tax toxic for U.S. taxpayers.
9) Contribute to non-qualified foreign pension
plan. American citizens living abroad often partic-
ipate in foreign pension plans sponsored by their
employers. Foreign pension plans generally have
beneficial tax treatment under local country of res-
idence law and employers often make valuable
pension contributions. However, even in light of
all these benefits, American expats must remain
aware that not all foreign pension plans receive
favorable tax treatment under U.S. tax law. Most
foreign pension plans are not qualified under dou-
ble taxation treaties and participation in a non-
qualified foreign pension plan can have negative
tax consequences. For example, local tax benefits
may be nulled by U.S. tax treatment and double
taxation could occur in the worst case scenario. A
high risk of failing to report these assets further
adds complexity to planning a retirement with a
foreign pension. Americans living abroad should
beware of the tax treatment of both contributions
to, and distributions from, these foreign plans in
order to avoid headaches in the future.
10) Rely on your legacy U.S. estate plan. Your
U.S. estate plan may not travel well. Laws regard-
ing wills, trusts, and who can lawfully inherit your
wealth upon death may be different in your new
country of residence, and, as a result, you may find
that your legacy estate planning strategy either (1)
is no longer legal valid, or (2) even worse, triggers
taxes that render the strategy completely counter-
productive. When you relocate to a new country,
it makes sense to consult with an estate plan ex-
pert 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) Sticking with your old U.S. tax preparer
even after moving abroad. Many competent U.S.
tax preparers will mistakenly believe that they can
continue to prepare your tax returns even after
you move abroad. But beware: quite often, even a
very good domestic tax preparer may be out of
their depth when preparing expat returns. Too of-
Thun Financial Advisors Research ©| 2017 4
Thun Financial Advisors Research is the leading provider of financial planning research for cross-border and American
expatriate investors. Based in Madison, Wisconsin, David Kuenzi and Thun Financial Advisors’ Research have been featured in
the Wall Street Journal, Emerging Money, Investment News, International Advisor, Financial Planning Magazine and Wealth
Management among other publications.
“Thun Financial Advisors is a Creative Planning, LLC company. Creative Planning, LLC (“Company”) is an SEC registered investment adviser located in Overland Park, Kansas. This commentary is provided for general information purposes only and should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.”
Contact Us Thun Financial Advisors 3330 University Ave Suite 202 Madison, WI 53705 608-237-1318
Visit us on the web at
www.thunfinancial.com
ten, the tax preparer with little or no expertise in expat tax prepa-
ration will fail to do even the most basic research on special report-
ing requirements, relevant income tax treaties, the application of
foreign tax credits, etc. We’re not telling you that your existing tax
preparer is purposefully misleading you, but we are certainly sug-
gesting that finding out years from now that your tax preparer con-
fidently continued to prepare your returns without considering the
requirements of X, Y, and Z can be hazardous to your financial
health.
12) Not understanding U.S. retirement account contribution
rules when you have foreign earned income. Many Americans
who move abroad incorrectly assume they can no longer contrib-
ute to U.S. retirement accounts such as IRAs, Roth IRAs, or 401ks.
Others make the mistake of continuing to contribute without un-
derstanding the special rules that affect the eligibility of Americans
abroad to continue to contribute. Finally, those eligible, often con-
tribute without making a full analysis of the local tax implications
of a contribution and unwittingly set themselves up to be double
taxed on the income contributed because they did not fully under-
stand the complex interaction of their local tax obligations and
their U.S. tax obligations.
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