While living as an American expat in the EU is an amazing experience, it can be challenging financially, including managing your investments. In this article, we look at some essential considerations when managing a cross-border investment portfolio for Americans residing in (and investing in) the EU.
- Diversification across borders
- Holding and buying US investments from abroad
- Tax treaties, reporting obligations, and strategic planning
- Assembling an advisory team
Diversification across borders
Many expats reconsider their investment portfolio either just before or just after they move to the EU. This may be because your US broker or investment manager won’t continue working with you when you move abroad, or because you want to understand how moving might affect your investments.
Most Americans’ portfolios are heavily weighted toward US investments, however this may not be ideal once you are living in the EU, depending on your future plans, such as when you’ll want to realize or draw on your investments and in which currency, so diversification across different geographies and currencies can be useful for expats. For instance, diversifying into European stocks and bonds can help edge against risks associated with Euro/dollar currency movements as well as aligning your investments more closely with your current or future living expenses.
However, while diversification is an important risk management strategy for all investors, caution should be exercised when investing in non-US funds, as certain types of investments can trigger complex US tax reporting, or even additional US taxes.
So while living in the EU provides new investment opportunities that can contribute to useful portfolio diversification, always seek advice from a US expat financial advisor to ensure that your investments don’t trigger unexpected tax issues and contribute to diversification within the strategic framework of your long term plans and goals.
Diversification doesn’t just involve geographical investing, but also investing in different types of assets.
Diversifying across different asset classes, such as stocks, bonds, real estate, and commodities, helps to safeguard your investment portfolio against market downturns in any single asset class. So by having a diversified mix of assets across different regions, the impact of market volatility on your overall portfolio can be reduced.
Buying and holding US investments from abroad
There are no legal restrictions on Americans living abroad investing in the US, including contributing to US retirement plans. However, many US brokers won’t work with Americans living overseas, so it may be necessary to work with an advisory firm that specializes in working with American expats. Furthermore, they will advise on minimizing currency risk, whether because you’re transferring income earned in Euros to the US to purchase a US investment or the pros and cons of investing in the US or Europe depending on your personal circumstances.
Tax reporting obligations, and strategic planning
All US citizens are taxed by the US globally, so Americans living in the EU still have to report their worldwide income on Form 1040 every year. They can claim the Foreign Tax Credit or the Foreign Earned Income Exclusion (FEIE) to prevent double taxation, as they pay local country taxes as a resident in an EU country too.
There are also additional US reporting requirements relating to foreign financial accounts and investments, such as the Foreign Bank Account Report (FBAR) and IRS Form 8938 under FATCA rules. Note that the US can check information reported as foreign investment firms and banks also report on their US account holders, and while there are no tax implication from holding foreign bank investment accounts, there are high penalties for not reporting them.
Some types of non-US funds are considered Passive Foreign Investment Companies (PFICs) by the IRS, and PFICs not only have to be reported but can lead to punitive taxation for US citizens, so it’s important to work with a qualified US expat financial advisor or wealth manager who is experienced in managing the finances of expats to avoid these types of investments and establish a balanced, cross border portfolio that effectively manages currency risks while considering global market exposures and achieving your financial goals.
Assembling an advisory team
Assembling a team of advisors with expertise in the intricacies of the US tax system, EU regulations, and international investing is the first step to ensuring that you stay compliant with both US and EU rules and minimize your overall combined tax bill. Your team should ideally consist of an expat specialist financial advisor, and tax professionals who work with expats both for your US and your host country taxes. They should all have experience navigating the complex terrain of cross-border investing, and work together in your best interests.
If you have any questions about financial planning as an American living in the EU, get in touch.
This article is for informational purposes only; it is not intended to offer advice or guidance on legal, tax, or investment matters. Such advice can be given only with full understanding of a person’s specific situation.