Money Rehab with Nicole Lapin - “If I’m an American living abroad, can I invest?”

Episode Date: November 18, 2021

It’s almost winter and you know what that means: it’s time to daydream about picking up and moving to some beachy country where it’s sunny 24/7. What you’re probably not daydreaming about are the financial implications of moving abroad. Today, Nicole covers these implications with David Kuenzi, Director of International Wealth Management at Thun Financial.  You can read more about Thun Financial here: https://thunfinancial.com/

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Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. Today's episode was inspired by a question from Griffin, a money rehabber living abroad.

This is the question she sent. Hi, Nicole. My husband and I are American citizens who live out of the country, and we're looking for investment options to save for the future. We're both in our 30s, we don't yet have any children, and we have our debt and emergency fund under control. While I was researching our options, however, I've run into the issue of having to prove residency in the U.S. for things like opening a brokerage account. Despite earning a foreign income, we do our U.S. taxes each year, and we both have American bank accounts that we use pretty often. Can we put our money that we earned in another country into an

American retirement fund? Are we even able to index fund and chill? Or are we just SOL? Thanks for your help. These are such good questions, and the answers get into very sticky territory very quickly. Griffin, you've stumbled into a really complicated part of U.S. tax and investing law. Lucky you, because we're about to learn something. If you don't live abroad, you may not know this, but there used to be plenty of investing options for expats. But in 2010, that all changed when the Foreign Account Tax Compliance Act, or FACTA, came into law. FACTA made it really tricky for Americans to maintain foreign bank accounts. At the same time, it became very difficult for Americans living abroad to maintain American-based brokerage accounts.

After FACT had passed, American citizens who had brokerage accounts with, let's say, TD Ameritrade, Vanguard, and Fidelity found their accounts shut down. But even though there are fewer options now, there are some options for Americans living abroad who want to invest. To talk over these options, I wanted to bring on a special guest, David. Welcome to Money Rehab. It's great to be here, Nicole. So I'd love for you to introduce yourself to our listeners. Can you talk a little bit about what you do? My name is David Kinsey. I'm the Director of International Wealth Management

at Creative Planning and Tune Financial Advisors. Our firm is a leading U.S. registered investment advisor. Many people have heard of Creative Planning. The Toon Group is the international group within Creative Planning that works specifically with clients outside of the United States. And I was the founder of the Toon Group. It was an independent registered investment advisor until a few years ago when we became part of creative planning. So that makes you the perfect person really to come on the show and help me tackle a question that we got from a listener. She has several really good questions, actually, and I'd love to go over each of them if you don't mind. So first, how can an American

resident living abroad open a brokerage account? Right. So this is becoming an increasingly difficult problem for Americans residing outside the United States. It's been a long progression of a sequence of regulatory changes, both in the United States and outside the United States, that at every stage, really starting back in 2001 with the Patriot Act in the United States after 9-11, and then changes in regulatory environment in Europe and more in the U.S. that have resulted in first European and non-U.S. institutions closing accounts for Americans. And now, really in the last several years, there's been a big push among U.S. financial institutions to refuse to service clients outside of the United States, whether they're American citizens or not, or to restrict what they can do or what services they will provide.

And right now in the United States, what you find is most financial institutions will simply refuse to work with you outside of the United States. There are some exceptions to that. I'm sure we'll talk about that. For the institutions that will work with you, as say an American in Europe or an American in Asia someplace, they may only do it in a limited manner. They may only work with you if you have a certain amount of assets, say above $5 million. They may work with you in one country, but not in another country. They may limit the types of investments you're eligible to make and so forth. So on the investment side, investment accounts are particularly restricted for a whole lot of reasons I'm sure we can get into.

Bank services, just regular bank accounts, are generally less restricted, although a lot of U.S. financial institutions won't even do that for a non-resident of the United States anymore. So is opening a brokerage account living in certain areas easier than others? You mentioned living in Asia or living in Europe. So can some people have an easier time if they're living in a particular country than others? Yes, that's true. So it's really a hodgepodge of overlapping rules and regulations that depend on the country of residence regulation of securities and investment accounts. It depends upon U.S. regulations. It depends upon what other activities a particular institution may have already been involved in. So what you find is there's very few rules, general rules about this. You have to go institution by institution and see what their policies are for that country. So for example, our firm, Creative Planning, works with a variety of what we call custodians. These are the financial brokers that hold the assets that we manage for our clients.

They're primarily Charles Schwab and Fidelity, Pershing and TD Ameritrade. Like a good fiduciary does. Exactly right. And so we're always working with those institutions. And I can tell you that Charles Schwab probably in some ways is the most open to working with clients outside the United States, but they have a whole, you know, met matrix of yes, this country under these circumstances, no, this country never in this country. Yes. Okay. But only certain instruments. So it's very hard. And that was one of the problems when listening to the listeners' great question, that it would be hard to answer it based upon that because we don't know where she is.

But we can give her some general advice. So Charles Schwab tries to be open. Charles Schwab is open to Americans and non-Americans outside the United States for a lot of countries. But it's not the majority of countries. And then, for example, Fidelity is actually open for a much larger list of clients, but only if they are working through a US-based independent advisor like our firm Creative Planning. They are not open at all for a retail, what we call a retail investor, who's trying to do it themselves. Whereas Schwab, actually, in that respect, although their total list of countries is more restricted, they are, in many cases, open to working directly with a client in, say, Germany. An American in Germany can call up

Schwab and open an account and start buying individual stocks and bonds, but not mutual funds or ETFs, for example, whereas at Fidelity, they couldn't. And we can talk about other institutions, and they have different, similar couldn't. And we can talk about other institutions, and they have different similar kinds of restrictions. But those two institutions are the most common ones that we're able to use. Morgan Stanley, for example, I can tell you that they have a restricted list of countries. And generally, for those countries, you've got to have more than $5 million, right? So if you're a random American with five hundred thousand or or even even two million dollars, for example, Morgan Stanley is going to be simply a no go. And I'm not picking on Morgan Stanley. That's that's typical of most financial institutions.

Hold on to your wallets, boys and girls. Money rehab will be right back. Now for some more money rehab. now for some more money rehab okay so this definitely sounds like a whole matrix you have to look up depending on where you are what investment you want who services that investment how much assets under management you have and all sorts of other things this definitely confirms we are living in a matrix, David. If not an actual matrix, we definitely have a financial one for expats. I read that more and more brokerages are now really hunkering down on this. They used to allow expats to open brokerage accounts, but that number has shrunk in recent years. Why is that? That's a great question. Well, a great example of that is Wells Fargo, who was quite big. They were servicing clients, Americans and non-Americans

all around the world. And we were very familiar with that. We were competing with them. And suddenly out of the blue in January of this year, they said, you know what? That's it. We are servicing nobody outside of the United States. And thousands and thousands of Wells Fargo clients in every country you can think of, Germany, Singapore, Japan, Colombia, Mexico, have had their accounts closed. And it doesn't matter how much money they have or any other circumstances. Their accounts are being closed. That was a boon for us to some extent because a lot of those clients came to us. And I think we can do a much better job for them in any case. But the fact is that's what's going on. And it's not just Wells Fargo.

You can say the same thing about a lot of other financial institutions. Well, would Wells Fargo be with all the craziness that Wells Fargo has going on? Is that part of all the regulations going on with them? I'm sure that the calculus at Wells Fargo is the same one, maybe not as absolutist as it was at Wells Fargo. But Wells Fargo was quite big outside the United States, right? So that's what makes it a kind of a remarkable event. A lot of other financial institutions really never were that big into it to begin with. But they're all making the same calculation. We have lived in a world where cross-border regulation, tax compliance,

both from the U.S. side and from the international side, from non-U.S. countries and their regulatory regimes, has only gotten tighter and tighter and tighter. And they're looking at this and saying, this is a minefield. This is a minefield. We're going to get ourselves in trouble with the regulators in Germany, or we're going to get ourselves in trouble with the regulators in Germany, or we're going to get ourselves in trouble with the regulators in the US for not having proper due diligence for the so-called KYC rules, know your client rules. They're very hard to really comply with all of these rules. If you've got a client in Germany, you're probably having to do those comply with the German rules while you're simultaneously trying to comply with the U.S. rules on the U.S. side. And they say to themselves, how many clients have we got outside the United States? It's a small, small part of their overall business. And they say,

instead of devoting the resources and the time and taking on the risk that something's going to happen here that we didn't understand, let's just not service any of them. Another piece of our listeners question was whether she can use money earned abroad to contribute to an American retirement account. I'm assuming she's thinking of an IRA or Roth IRA. Can you unpack that? Sure. That's a very basic question we deal with here every single day. And the basic answer is yes. And the basic answer is yes. Under the right circumstances, there is absolutely no reason that an American living abroad, earning salary for work living outside the United States, you are probably availing yourself of something called the foreign earned income

exclusion on your U.S. tax returns. Because, well, the starting point for all of this is the fact that Americans are taxable on their worldwide income on the basis of their citizenship. So even though you no longer reside in the United States, you have to continue filing and paying taxes in the United States, right? And why do we contribute to an IRA? We generally contribute to an IRA to avoid having to pay the tax now and defer it until we're in retirement when presumably the tax rate's going to be lower. So does that calculation still work? Well, the first step is if you are, as an American abroad typically is, taking advantage of the foreign earned income exclusion and they are excluding all of their earned income, that would be if they're earning less than the $109,000 limit for the foreign earned income exclusion. exclusion, they have no non-excluded earned income. And if you have no non-excluded earned income, you are not eligible to make a contribution to an IRA. You have to have non-excluded earned income to contribute to that IRA. But what about a Roth if you pay tax now?

Roth is the same thing, right? So you have to have non-excluded earned income from which to defer that income into that IRA or that Roth. I mean, I feel for these folks because they're trying to do the right thing and they have to jump through all these different hoops. The listener mentioned that she pays U.S. taxes every year and has an American bank account. Does that help her case at all? Well, you know, this is a very complex situation And that's why our firm has thrived by helping people figure out these rules and still come up with effective portfolio strategies. And, you know, we do a whole presentation on the original issue here, which is getting

accounts opened. Where can we get U.S. accounts open? How should we save and invest through which institutions? And as I often say, while that is the one that gets everybody's attention because it's the first big roadblock they run into, we can solve that problem. I mean, working with our relationships with Schwab and Fidelity, for example, we have the ability to open up accounts for clients in any country and do all the things that we want to do. So we're able to get past that hurdle. I say getting past that hurdle is relatively easy, especially if you're doing it with us.

getting past that hurdle is relatively easy, especially if you're doing it with us. The real complexity, the real hard part comes when we have to make investment and financial planning decisions, filtering it through two simultaneous tax jurisdictions that were not designed to work with each other, right? Because all the investment options that you as a resident of Germany have are probably very, very problematic from the U.S. tax perspective. Simultaneously, a lot of the investment options you have in the U.S. are potentially problematic for German taxes. So clients often get themselves in this very difficult situation we call the catch-22, where you take some action, say, for German tax purposes to reduce your tax liability in Germany, only to have it result in a punitive outcome in the US

or vice versa. And Germany is just an example. You can say the same thing about all the big developed countries, UK, Western Europe, Japan, Australia. A lot of times it's a lot easier in some countries. You go to countries that don't tax income from outside their country, investment income, and that they have very, very lax regulation of offshore accounts and stuff like that. Hong Kong, Singapore, countries in Latin America, there it's a lot easier, right? Because you kind of default back really only to the U.S. issues. back really only to the U.S. issues. But if we're talking about where you see the big concentrations of Americans abroad and foreigners who want to invest in the U.S., you know, we're typically France, Switzerland, Germany, the U.K., Japan, Australia, all these countries, you're automatically in this complex interaction between the local tax and the U.S. tax. So what would be some of the other financial

missteps you see Americans make when they move abroad? It sounds like one of the big ones is trying to contribute to a tax-advantaged account in the United States. We're not actually advantaged living abroad. Right. That's a common one, although I will say sometimes it does work, and sometimes we do make those contributions. But you have to go you have to really understand all the rules and find out whether or not it works in both countries tax for both countries tax purposes. And in some countries it does work, because one of the things you need to know as an American abroad, as you begin working, is the United States has double tax treaties with a lot of different countries. Right. And those tax treaties all have a provision in there where they talk about how, among many other things, there's always one section that talks about how the other country

is going to agree to treat the pension systems of the other treaty country, right? And the newer double tax treaty countries, say the UK or Canada or Germany, have very clear rules about how that's done. And it spells out when it will work and when it won't work and so forth. So that's helpful. But in many countries, those treaties either don't exist or those treaties are very, very old and they weren't you know, they don't deal with modern pension pensions the way they should. Hold on to your wallets, boys and girls. Money Rehab will be right back. Now for some more Money Rehab. What are some other pieces of advice that you would give Americans who are considering moving abroad or need to move abroad because their

company sends them there? Right. Well, a couple of things. If you have sufficient assets, I would strongly recommend you speak with a firm like ours. There are only a few firms in the United States that really specialize in this and buys, but I think we're the best. We really are. And start planning this well ahead of time. If you are young, right, as the listeners who called in indicated they were and they're probably starting out. And I talk to people like that all the time. And we try to do everything we can for them. Here at our firm, Creative Planning, Tune Financial, we do a lot of public educational webinars. All of those webinars are recorded. You can find them on our website. I encourage people to go watch them. Some of them are just informational. They've got a little bit

of marketing in them, but this is a great place to start. If you don't have enough money to work with a firm like ours, which I understand is going to be the case when you're young and starting out. How much money do you need? $500,000 to work with our firm. Although we do have an emerging wealth group through our parent company, they can take as little as $100,000. But I understand there's lots of people who are not at that level. They can do this themselves. I would encourage them to open up an account at Charles Schwab.

If they're moving to most countries, that's going to work. They can even change their address. And they're also free to leave their U.S. address, a U.S. address, I should say, on those accounts. Not all financial institutions want them to do that. A lot of them will encourage them not to do that. But if you are not asked about it, it's perfectly OK for you to continue to use that U.S. address. you are not asked about it, it's perfectly okay for you to continue to use that U.S. address. So I really appreciate you giving advice that is reserved for folks who have a lot of money under management. That's very aspirational for a lot of listeners who may make, let's say,

you know, a hundred grand a year and they're just opening up a brokerage account, what would you suggest to start with? So I'm going to the UK for a couple of years with my company. I open a local bank account or what would I do as a first step? And then I open up or use my Schwab, call the number, try to make sure I'm doing all the things right. Right. So let's take the UK. It's a great example. We have hundreds of clients in the UK. Every country is different. So what I'm going to say won't necessarily apply in the same way in Germany or Japan, but it's pretty close in a lot of ways. If you move to the UK, you definitely want to open up a local UK bank account. You're going to need a place to have your pounds from your salary deposited. You're going to have a UK pension account, employer UK pension account,

employer-sponsored pension account, because every employee in the UK is required to be offered a pension scheme and everyone will have it. You should take advantage of that. Just like in the US, you get an employer match, you get a local tax benefit, which you want to take advantage of. And fortunately, that account, that UK pension will be covered by treaty. So it's not creating a big tax problem for you in the United States. We talked about the passive foreign investment companies, the mutual funds from the UK that would create a problem for you. If you own it within that UK pension, no problem. Yes, it may be a passive foreign investment company, but it's in the wrapper

of that employer sponsored plan. So it doesn't matter. So that's good. And then what do you do with that pension when you come back? You can't really roll it over. If it's the UK, if it's Switzerland, they'd allow you to cash it out and take the money. If it's the UK, you're gonna have to leave it there until you're 55 years old and then you can get it. So not really much you can do about that. But the next step would be, however, is don't make the mistake of saying, okay, I want to save above and beyond my UK pension contributions and open a UK brokerage account. That's where you stop and say, okay, now I want to go and get an account open in the US, figure out how to do that. A lot of tricks to do that. You get that account open in the U.S. and now you wire your British pounds back, have them converted to dollars and start buying ETFs.

I love it. This is an area that I've never had to deal with. I went to study abroad when I was in college, but haven't since then. So I really appreciate the education. You know, I would say thank you so much, Nicole, for having this topic brought to the attention of your listeners. Because for many of them, this is something that may come up in their lives. Either they themselves will move abroad or they'll have a relative. And it is perplexing to people and frustrating and mistakes are made here. and frustrating and mistakes are made here. So by you bringing attention to this, you're helping out so many people that you may not realize it, but believe me, the people will always become, oh, you know, my brother needs to listen to this because he's in the UK and I know he's

struggling with this. So thank you so much for shining light onto this topic. For today's tip, you can take straight to the bank. Even though I'm all for DIY investing, when it comes to investing abroad, it's probably best to DI with a professional. Even though you'll need to pay to work with a financial advisor, it may pay for itself by saving you from major fines

that you may incur if you try to navigate U.S. tax law solo and make some missteps. For folks who are new-ish investors, I linked Charles Schwab's investment offerings for expats in the show notes. If you've already dipped your toe into the investing pool, check out the link to Toon's financial site also in the show notes. to Toon's financial site, also in the show notes. Money Rehab is a production of iHeartRadio. I'm your host, Nicole Lappin. Our producers are Morgan Lavoie and Mike Coscarelli.

Executive producers are Nikki Etor and Will Pearson. Our mascots are Penny and Mimsy. Huge thanks to OG Money Rehab team, Michelle Lanz for her development work, Catherine Law for her production and writing magic, and Brandon Dickert for his editing, engineering, and sound design. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.