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Top Five Investment Mistakes Made by Americans Abroad

Updated: Mar 30, 2023

Investing in a foreign country can be a dizzying experience. At first glance, it can seem like countries overseas offer plenty of new investment opportunities, some too good to be true. Oftentimes, they are too good to be true, and inexperienced investors can make decisions they’ll regret later. Here are some of the most common investment mistakes that Americans abroad make.

1. Over Investing or Not Investing at All

Sometimes, expats get overconfident and may decide to dip their investing fingers in a variety of pies. Don't overdo investments by flipping profits, or investing profits from one market in another. Take it slow, and be cautious.

On the other hand, don't fall into a horror-induced stupor. Many Americans get spooked by all of the nightmarish stories they have heard about investments abroad, and simply fail to put their money into anything at all. Take good and sound financial advice, before you invest.

Take time to speak to a financial consultant familiar with the country’s laws, as well as those of the United States. When you hire an advisor, they should be both regulated in the country you're residing in and the United States.

2. Buying Foreign Mutual Funds

Stay clear of foreign mutual funds. The Internal Revenue Service will consider your foreign mutual fund to be a Passive Foreign Investment Company, and you may find yourself sinking in paperwork when tax season comes around. Passive Foreign Investment Companies (PFICs) are subject to special treatment by the U.S. tax code, meaning they have much higher tax rates. Apart from mutual funds, non-US pensions, insurance policies, and certain hedge fund products are also considered Passive Foreign Investment Companies and may qualify for hefty taxes.

3. Pay fees for non-U.S. Investments

If you’re buying a non-U.S. investment, you might assume you have to go through a foreign broker, but often you can actually buy through a U.S. broker for much less. In fact, there are very few investments in the world that can’t be purchased through a U.S. brokerage firm, usually for a cheaper price. Why the price difference? Investment expenses like mutual fund fees, trade commission, and brokerage fees, are lower in the United States than elsewhere. Plus, the range of investments available through U.S. brokers is usually larger than in the rest of the world. So, just because you’re living abroad or investing in foreign assets, doesn’t mean you need to forego U.S. brokers.

4. Failing to Report Taxes Right

As an American investing abroad, you are now subject to a number of tax reporting requirements. The Internal Revenue Service requires Americans living abroad to file taxes. There are many reporting requirements and filing forms specifically for Americans investing or banking abroad, so do your research and make sure you’re in compliance.

5. Put Money into a Non-Qualified Foreign Pension Plan

Oftentimes, Americans living abroad participate in pension plans sponsored by foreign employers. At first, this seems to make sense, as it’s what you would do at home, and these pension plans usually have beneficial tax treatment locally. But it’s important to look at not only local benefits but how these plans are treated under U.S. tax law. Most of them are not qualified and can actually have negative tax consequences, like double taxation. If you’re planning to retire on these assets, you need to be aware of your obligations to report these assets, as well as the tax treatment of your contributions. If your pension plan is not qualified in the U.S., you probably want to consider other options.

Investing abroad can be lucrative and exciting, provided you are cautious, sensible, and willing to understand local culture, laws, and idiosyncrasies before you expect returns.

We would be glad to help you with your queries regarding investing as a US Expat and help you plan your finances accordingly.

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