Financial Freedom

What to Do With Your Portfolio While Living Abroad

Most Americans choose to spend their lives (and retirements) right here in the United States. But there are almost 200 countries on this earth – lots of other choices. These days, there are many reasons why Americans – especially retirees – might choose to live abroad.

Some people are drawn to Latin America’s low cost of living. Others like the subsidized health and education systems offered by Western European countries. And still others leave the country for a more exotic life in East Asia or sub-Saharan Africa.

Regardless of where and why you become an expat, you should take steps to protect your American portfolio. Between tax policies, financial regulations and currency risk, it can get complicated to be a U.S. investor living overseas.

Living Abroad Doesn’t Deter the Taxman

One of the biggest headaches for American expat investors is called FATCA. The Foreign Account Tax Compliance Act was passed in 2010 to fight offshore tax sheltering. But much to the chagrin of ordinary people living abroad, it doesn’t just affect nefarious billionaires.

FATCA requires foreign banks to disclose the holdings of American investors to our financial authorities. It also raises taxes on foreign assets owned by American expats.

This creates two problems for Americans living abroad. First, they have to pay our taxes on top of the taxes from their country of residence. Some foreign tax payments can be deducted from American taxes, but not all.

Second, it forces expats to find foreign banks that comply with FATCA – and many don’t. There are heavy penalties for getting caught with undisclosed foreign assets. And that includes money in a non-FATCA-compliant account. In some cases, violators may need to pony up 40% of their portfolios. That’s just for holding it in the wrong foreign bank.

It’s important to know where your foreign bank stands with U.S. tax authorities. The only way out of FATCA requirements is renouncing your American citizenship – something no expat wants to do.

American Portfolios and Foreign Currency

We don’t all use the same kind of money. And the value of your American portfolio may differ from its value in your country of residence. Exchange rates are a big problem for investors living abroad.

For example, suppose that you live in Mexico. The dollar value of the Mexican peso has been swinging up and down with recent political events. Your portfolio is held in dollars, but you want to spend the money generated by that portfolio in pesos.

Let’s say that your portfolio gained 10% in the last year, but the peso also gained 10% against the dollar. Your return, as a person living in Mexico and spending Mexican pesos, is zero. Your 10% gains are completely canceled out by a 10% drop in the peso price of dollars.

There are two ways to protect your portfolio from currency risk. First, you can move some of your assets into your country of residence. That way, the value you see is the value you get. You can also invest in currency-hedged funds, which insulate themselves from exchange rates.

Maybe you’re considering moving abroad in search of cheaper living. Maybe you want government-provided healthcare in your golden years. Or maybe you just want the adventure and new experiences that come with the expat lifestyle. Whatever your reason, there are many benefits to living abroad. But there are also many financial risks to keep track of.

To protect your American portfolio while living abroad, you must stay ahead of tax authorities and exchange rates. If you’re interested in learning more about retiring outside the U.S., check out International Living. It has been helping its readers retire smartly overseas for more than 30 years.

*The views and opinions expressed in this article are those of the author and do not necessarily reflect the official position of Wall Street analysts.

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