How to Correctly Move Your Money Out of the US

There are many reasons to diversify your life outside your home country... and for an increasing number of Americans especially, wealth protection is one of them.

International Living’s primary focus is lifestyle and living opportunities around the world. But my brief includes opportunities to put assets in countries where they might be safer from economic and political threats at home. From opening a foreign bank account to storing valuables in foreign vaults, I cover it all.

Often, however, people I talk to about these strategies wonder why it's necessary to go to those lengths. It’s possible to invest in foreign assets indirectly, for example using exchange traded funds (ETFs) on the US stock market. For the more adventurous, putting funds in foreign investment funds also seems like a clever idea.

Those approaches can be useful… but there are important caveats.

First, when you invest in ETFs or “ADRs”—stock certificates of foreign companies that trade on US exchanges—you don't actually own any foreign assets yourself.

The foreign assets held in ETFs, for example, are owned by the US fund managers. You're just buying a piece of their action. Anything that affects the US economy and financial system will hit those assets too, even if the foreign investments remain perfectly stable.

ADRs, on the other hand, are certificates issued by US financial institutions standing for a financial interest in foreign shares they own. You don't own a piece of the foreign company at all. Again, if the US financial system takes a hit, your investments can go south even if the foreign companies don't.

What about investing directly in foreign instruments similar to US mutual funds? This takes a bit more legwork than ETFs or ADRs, but it's definitely doable. When you invest in such instruments, you’re closer to owning foreign assets yourself, although they're usually mediated by the foreign fund manager.

The problem is how the US tax system treats these assets.

The big guns of the US financial sector have more influence in Washington than any other industry. They've lobbied hard to protect themselves from foreign competition.

The IRS calls foreign companies whose income comes primarily from investments passive foreign investment companies, or PFICs. Under a 1986 tax law, Congress explicitly discouraged Americans from investing in them. They are subject to strict and extremely complicated rules that don't apply to US funds. The IRS estimates that the associated paperwork will take about 40 hours to complete. Inheritance benefits that apply to US investment funds are disallowed for PFICs. Worst of all, gains from PFICs are taxed at significantly higher rates than US funds.

So does that mean you can't invest in these funds at all? Not at all, but it's important to do it the right way.

One option is to buy a foreign private placement life insurance policy or annuity and use that to invest in foreign funds. Investment gains to these instruments are subject to foreign tax law, not US. You don't need to report on their ownership of PFICs at all.

But the easiest way is simply to invest in PFICs through a Roth IRA. Because Roth IRAs are post-tax, there's no tax filing required, even if you buy PFC's with them. Of course, most of the popular IRA custodians in the US won't let you do this, but I have exclusive contacts with specialist custodians who will do so with pleasure.

So if moving some of your money outside the US without doing so yourself sounds like an attractive proposition, drop me a line, and I'll show you how.