As I mention in my last post, I currently live in London, England. However, as an American citizen living abroad, reaching financial independence becomes more difficult as I describe below. So what does that mean for folks who want to be financially independent? I’m going to run down the steps I’ve gathered from information sources around the net and speaking to several advisors. Hopefully this helps you with your investments like it did for me.
(Disclaimer: Please note the standard disclaimer here applies. I am presenting my own experiences that have been presented to me by others who have researched this topic. I have done my best to distill it down as a simple action plan. However, as I illustrate below, there are a surprisingly large amount of people willing to trade their time to help you. Please do consult a professional with your situation.)
The Main Problem – Taxes
If you could boil it down to one problem, though, it would have to be taxes. Unlike most countries in the world, the United States government taxes its citizens and residency card holders even when they are not living in the US. (Side note: the only other country that does this is Eritrea.) So Americans working and living abroad have to worry about taxes in two different tax jurisdictions. Also because of the tax reporting requirements of American citizens living abroad, most investment companies (even American ones like Vanguard), don’t want to deal with Americans living abroad. There are also all sorts of tax rules involving investing in index funds in other countries, which can negate the gains (I don’t want to go into it here, because I don’t really understand it well, but look up Passive Foreign Investment Company when you get the chance).
The FI community starts with a do it yourself attitude, and while admirable, this is not a place for it. Your UK taxes will be easy as the government does your taxes for you. However, you are going to want help filing your tax returns in the US from one of the US expat tax firms out there (there are a few of them out there).
Maximize your pension contributions
From what I’ve seen, retirement accounts around the world tend to be pretty similar. Generally, they all work on the same basic principles: take a portion of your earnings and then pay them into an account where it can grow and remain untouched until you stop working. There can be, however, differences for what they are called in various countries, their tax treatment, etc. Because of these differences, the IRS doesn’t know how to treat all of these different types of retirement accounts around the world.
Fortunately, the United Kingdom does have a tax treaty with the US that covers the UK pension scheme. According to Thun Financial Advisors, an American firm that helps Americans abroad with investing:
Unlike many tax treaties the United States has with foreign countries, the U.S.-UK treaty addresses pensions comprehensively, with rules related to contributions, earnings, and distributions. For example, while living in London, an American can deduct, for U.S. tax purposes, contributions to their UK pension plan. This deduction is only available while the U.S. taxpayer resides in the United Kingdom.
So like an American with a 401K/403b at work, you should strive to contribute as much as you can. Like the US workplace retirement plans, the government will provide tax relief on what you contribute. As like the states, your employer will likely also match a small percentage of your contributions. For most of us in 2018, it should be £40,000 a year contribution limit. For those who want to retire early, though, the bad news is that your pension funds are locked away until age 55 and there is no way to get the money out early like the 72t or Roth IRA ladder as in the States.
Don’t Get an ISA
So the pension takes care of the 401k equivalent, but what about an IRA equivalent? The closest to equivalents to those would be the Individual Savings Accounts or ISA. Sadly, the tax treaty does not cover these, so it is best to avoid these.
Transfer Money Back to the US
As mentioned before, investment companies do not really take on American expats, with the notable exception of Interactive Brokers. (I’ve never used their service, but the Bogleheads’ wiki has a good breakdown). Because of this, you will likely have to find ways to keep your American investment accounts open and invest with those. There are a few apps that can facilitate transferring money between different currencies, but I like Revolut the best for its simple interface.
There are a few US expat financial advising companies out there such as Thun Financial Advisors and Tanager Wealth Management. They will not manage your investments unless your investable assets are over $500000 USD, but they will take phone conferences and email questions for those of you that ask. I’ve emailed them a few times myself about random questions I had about the topics above and they have responded helpfully to these requests.
Is there anything else I missed anything else about US expat finances? Any other questions you guys have about it? Let us know in the comments below.