Moving abroad? Some things to think about before relocating

Most Americans take their easy access to the global financial system for granted. They make and receive payments using their bank account or similar account at another financial institution as a matter of course. Most also maintain savings of various sorts, perhaps a 401k with an employer, an IRA with a bank or mutual funds or ETFs with some other financial institution. Some borrow significant amounts to finance investments like the purchase of a car or a home or just to spread the cost of large expenditures over months or years. And if they travel, online access to their account(s) and the plastic that is used every day to make payments in the United States nearly always serve their needs on foreign shores.

But anyone planning to relocate outside the United States is likely to find that financial requirements are more complex, and options more limited, than they were at home. It would be wise to take little for granted.

First, it is a mistake to try to manage payments in two countries with separate currencies with just one bank account. An expat will normally need basic banking services, i. e. the ability to make and receive payments, in both his new host country and the US. Even if funding is US source, and a credit card provides all the access to an American bank account needed when traveling, access to local banking will be needed after relocation. Rent, taxes, utilities and much else will usually need to be paid by direct transfers in local currency. US source income, such as pensions and IRA distributions, can easily be transferred to accounts in most host countries. And the Social Security Administration will pay benefits directly into a foreign account.  At the same time, even if funding will have a host country source (e.g. a job), most Americans still occasionally need access to dollar accounts. Dealing with the federal government, whether meeting tax obligations in the US or collecting benefit payments such as for Covid stimulus will be much easier to manage with a dollar account.

Second, tax rules shape the financial landscape. The United States, uniquely among developed countries, levies taxes on the basis of citizenship, not residence, or source of income. This implies that Americans who install themselves abroad face the full weight of two, usually inconsistent, income tax systems. Thus, two sets of rules, two tax returns and two sets of reporting requirements.

Consequently, most expats would be wise to retain professional assistance competent in dealing with tax issues both in the US and in the future host country. He can assist in three ways:

• Managing taxes. Familiarity with exclusions, credits and features of tax treaties is essential in minimizing any double taxation. This can often be avoided.
• Filing returns. Tax filing is usually much more complicated for Americans living abroad than it is for either US or host country residents each in their own country. Assistance will be helpful for many expats.
• Information reporting. There are numerous financial information reporting requirements, not all included in tax returns or even tax related. These only rarely affect Americans living in the US but apply to overseas Americans.  Awareness and compliance with these requirements are important since untimely or inaccurate filing, notably as regards financial accounts (i.e. FinCEN 114, often called an FBAR), can carry very heavy penalties. Professional assistance is often wise.

Third, the tax code impinges strongly on expats’ financial options by treating most collective savings vehicles (such as mutual funds) and defined contribution retirement plans outside the United States punitively. This effectively makes them uneconomic for Americans and they are often not offered. For the most part expats are wise to maintain their savings vehicles in the United States. They should not transfer their savings in bulk to their new host destination without a clear and satisfactory picture of how they will be treated under the US tax code.

Fourth, two global regulatory regimes applying to financial institutions impede most American expats’ access to financial services. One, affecting access to accounts outside the United States, is the campaign against offshore tax evasion. Since the passage of the “Foreign Account Tax Compliance Act (FATCA)” in 2010 around 110 countries have entered into “Inter-governmental Agreements” or made similar declarations with the United States. These require non-US financial institutions to report any American-owned accounts above $50,000 in aggregate. Penalties for oversights or violations can make it impossible for them to operate, so compliance with American reporting requirements is nearly universal, notwithstanding the high cost this entailed. This reporting regime has made Americans unattractive clients and many banks will accept them only on a restricted basis, if at all.

A result of this situation is that just finding a local bank account has become a challenge for American expats. For the most part this problem is soluble. There is no law or regulation anywhere, to my knowledge, prohibiting Americans from having bank accounts. The decision to accept American clients is left to banks as a business decision and, given FATCA, business logic often says “no”. Efforts to open a local bank account often meet rejection which can be disheartening. But different banks face different situations and their assessments of business logic can vary. Some remain open to expat business and happy to expand their deposit base. And in the European Union the Payments Directive assures legal residents access to some kind of basic banking services, even if not their preferred choice. Persistence in the search for an account is often rewarded.

The other global regulatory regime which impinges on American expats’ access to financial markets, this time mainly inside the United States, is the ‘Know-Your-Customer” regime. This is a global framework designed by the Financial Action Task Force (FATF), essentially the US Treasury and 38 other Ministries of Finance, intended to fight money laundering, counter the financing of terrorism and prevent other types of illicit activity. The FATF framework deems non-resident accounts to be “high risk” and mandates “enhanced due diligence” on the part of a bank regarding the activity of such accounts. What this involves is left to banks but, in simple terms, it often means general harassment of non-resident account holders. From a bank’s perspective, American expats trying to maintain accounts at home become cost centers unless they have large accounts that compensate. Common results include high minimum account requirements, significant fees that serve to exclude clients of ordinary means. and/or demands for account closures, involving threats to liquidate IRAs ¹It is common for people changing jobs or retiring to roll 401k assets over into IRAs. This transfers direct control from the former employer to the beneficial owner of the assets. Anyone planning to relocate abroad and considering such a rollover should note that so long as the assets are in the 401k plan they are likely to be treated by the bank as a domestic account. An IRA will be a non-resident account. At AARO we have seen multiple cases of forced closures and threatened liquidations of IRAs held by expats. We have not seen any such problems related to 401k assets.

References

1. It is common for people changing jobs or retiring to roll 401k assets over into IRAs. This transfers direct control from the former employer to the beneficial owner of the assets. Anyone planning to relocate abroad and considering such a rollover should note that so long as the assets are in the 401k plan they are likely to be treated by the bank as a domestic account. An IRA will be a non-resident account. At AARO we have seen multiple cases of forced closures and threatened liquidations of IRAs held by expats. We have not seen any such problems related to 401k assets