Moving abroad triggers unexpected financial challenges for Americans. One such hurdle many expats face is the potential closure of their US brokerage accounts, as most US brokers won’t work with non-US residents, while those that will accept expat clients often limit the scope of available services.
This can be a significant inconvenience, as the benefits of retaining US brokerage accounts include simpler tax filing (due to avoiding foreign account and asset reporting), lower fees, and the convenience of the same language and culture when dealing with American brokers, compared to holding foreign investments.
In this article, we outline into the reasons behind the issue along with the possible remedies.
- The global financial landscape
- Retirement plans
- The FATCA factor
- What options are available for expats who face brokerage account closure when moving abroad?
- Maintain a US correspondence address with caution
The global financial landscape
Many US brokerage firms are no longer able to retain clients that live outside the US. This may include the majority of mainstream brokers, including Fidelity, Morgan Stanley, UBS, Wells Fargo, and Merrill Lynch. This relatively recent issue is due to a global trend of governments limiting financial institutions in an attempt to prevent money laundering in an interconnected international banking system. In the US in particular, KYC (Know Your Client) and Anti-Money Laundering rules are the primary drivers of account closures for expats.
Another layer of complication for US banks is due to EU MFID rules, which prohibit EU residents from purchasing funds that don’t provide an EU-format information sheet. This includes most US investment products, and US banks wary of inadvertently violating these regulations, exposing themselves to legal issues and potential lawsuits.
Another barrier for expats from investing is because many US mutual fund providers won’t sell funds to non-US residents. This is because US fund groups can’t actively seek business for their SEC-registered funds outside the United States, so offering mutual fund shares to Americans living abroad could potentially create lawsuits.
Retirement plans
Unlike personal retirement or brokerage accounts, 401(k) retirement plans can usually be maintained when moving abroad, as long as you remain employed with your US firm. However, if your international move involves separating from your US employer, it’s often advisable to consider rolling over your 401(k) into an IRA (Individual Retirement Account).
This allows more investment options available, providing greater flexibility for portfolio diversification as well as investments in local currencies, allowing expats to align their retirement savings with their evolving plans and priorities abroad.
The FATCA factor
The Foreign Account Tax Compliance Act (FATCA) adds another layer of complexity. Enacted in 2010, FATCA empowers the US government to require foreign banks to report details of their American account holders to the IRS. While most foreign financial institutions comply with FATCA, some choose instead to avoid the reporting burden by not accepting American clients. This unintended consequence has left many US citizens living abroad struggling to access banking and financial services in the country where they live. Those that do comply with FATCA meanwhile ask their American clients to confirm their US tax filing situation.
What options are available for expats who face brokerage account closure when moving abroad?
While access to US mutual funds may be restricted for expats, exchange-traded funds (ETFs) may still be available depending on your country of residency and broker. ETFs offer comparable or better diversification to traditional mutual funds and are often more tax- and cost-efficient. EU MiFID II rules can limit access to US ETFs for expats living in Europe, but some US brokers allow distribution if managed by a US-registered investment advisor.
For non-US residents, building portfolios with individual stocks and bonds is another option, although there may be higher costs involved and asset diversification limitations.
Working with an expat specialist brokers or investment managers is a third option. These specialized professionals focus specifically on the unique financial needs of US expats, offering a global perspective. They possess a nuanced understanding of expats’ investment options and the associated tax implications. By leveraging this expertise, these professionals provide personalized, compliant solutions that align with both the financial regulations of the resident country and the US, all while striving to meet long-term financial goals.
Maintain a US correspondence address with caution
If you’re only planning on a short tern stay abroad you could also consider retaining a US correspondence address. However, this approach may have implications for state income taxes, among other liabilities, and if your bank or broker discovers that you don’t live at the address you provided, they may take action such as freezing your accounts. It’s essential to seek advice and weigh the benefits against potential drawbacks of this strategy.
Although many US brokers may be hesitant to serve clients abroad, there are still options available for US expats. The optimal choice varies based on individual circumstances, including the destination, duration of stay, and long-term objectives. Consulting with an expat specialist investment advisor is recommended, providing the right insights to navigate the array of options. With the right knowledge, you can confidently embrace the exciting opportunities of living abroad as a US expat.
If you have any questions about financial planning or investing 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.
