The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: dred on March 05, 2016, 02:23:04 AM
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Hey folks,
Im the new guy and not sure whether this fits better in the tax section or here, but feel free to move it ;-)
Our situation is quite complex so here is a short intro on the status quo:
My wife is from the US and moved to Germany 3 years ago. She used to be self-employed with her own US company as freelancer, but has a normal full time job since a year at a german company. Her income from her own business is around 1k USD only. Her regular income is about 65k EUR.
Im German and have a fulltime job (approx. 120k EUR). We are both living and working in Munich. We are married since 1,5 years (US marriage & registered in GER).
Current investments:
She has a traditional IRA account with vanguard (12k in Vanguard 500 Index Fund Investor shares & Vanguard STAR Fund) and round about 50k in cash still sitting in various accounts in US banks. She receives her salary on her GER bank account.
I focus my investment on a well diversified ETF portfolio (World portfolio) with focus on low-cost and tax efficiency. My funds are in a free bank account and meet my desired asset allocation. Currently about 150k Eur.
Investment ideas - this is where your help is appreciated ;-)
In principle, we both would like to build our future on a well diversified ETF portfolio. Since FACTA is a real bitch for US citizens living abroad there is no (realistic) possibility that she can invest her money in a portfolio which is non-US based.
Therefore, Im confronted with the following questions:
1) Which bank/broker can you recommend and would allow her to open a new account (her IRA is with Vanguard, but they dont let her open a normal investment account)?
2) Which ETF is advisable to cover all investable assets either WORLD or US? In principle it would be great if there is an ETF which covers MSCI World incl. small caps or something similar for the US markets. Other asset classes could then be covered by a higher weight factor in my portfolio, if needed. Just to make sure she can invest in 1-2 funds only to have limited complexity.
3) Im well familiar with the tax situation in GER but its tricky to become an expert in US taxes. What are they key aspects to look for when selecting the bank and/or the ETF?
How to make sure that capital gains are taxed as late as possible or at least considered qualified tax?
4) As far as I know, its in any case beneficial to max out her IRA because thats fully deductable, right?
5) Is there a general rule on how to file the US taxes? Currently, we are filing as married couple in GER but separately in the US.
In any case, the focus is to have a simple solution in terms of (tax) administration.
Im happy to share my GER portfolio if you guys are interested.
Any advise is greatly appreciated!! :-)
EDIT: Almost 60 reads but not a single reply? Should I have avoided mentioning that Im German ? :P
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Hi dred,
I wish I had some piece of advice that might help. I think your situation is probably more complex than most of us on this forum have the knowledge to help with. But I did want to respond...hopefully to bump your question back to the top of the thread so that someone with experience investing while living overseas can respond ;-)
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Hey folks,
...
EDIT: Almost 60 reads but not a single reply? Should I have avoided mentioning that Im German ? :P
The Americans nowadays have a much higher opinion about Germans than vice-versa.
The moral superiority complex that so many Germans show against the US is not existing on the other side of the pond. ;-)
Im a German living in the US and I was never been made to feel as welcome as I did here.
With that said I have friends that are US Citizens + are tax residents in Germany.
FACTA is a pain in the ... for all US citizens living abroad and the reason that nearly 5.000 US expats revoked their US Citizenship last year.
Regarding your situation my US friends with residence in Germany ended up with a worldwide online brokerage like Interactive Brokers that especially adapted to US expats living abroad. You can buy everything there from nearly every stock exchange in the world with very low fees.
https://www.interactivebrokers.com/en/index.php?f=13416 (https://www.interactivebrokers.com/en/index.php?f=13416)
You real problem is something else: Your wife's tax situation regarding funds (Mutual and ETF's)
Your wife will get a tax penalty in the US for buying European based ETS's (for example the Vanguard VUSD ETF from Irland)
and a tax penalty in Germany (Google: Intransparente/schwarze Fonds) for buying US based ETF's.
She can only avoid that if she buys individual stocks for herself in her taxable accounts and the fund investing is done through you (and her 401k/IRA)
Have a nice day!
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Thx retire for the bump! ;-)
zz_marcello: Great, thats some info which really helps! Unfortunately its not the answer I was hoping for :(
It seems that the only option left then is the "sketchy" option that I put her money in a German investment account which runs under my name only. But that she wouldnt have to report it while filing separetely.
Otherwise it would be not possible to file jointly in Germany which doesnt seem to be a practicable option at all.
But I didnt get your feedback regarding IRA. Do you mean that IRA are facing exactly the same issues or are they handled differently?
Im afraid its the first since its the same investment vehicle just through a different account?!
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Moin dred,
I am currently trying to figure all this out as well.
There are many issues that restrict Americans living abroad from properly planning a retirement (from what I've seen at least).
I will try to sum up the information I have in a future post; I am at work and need to gather up all the links I have but I don't want to get in trouble here. :) I'll try to get on that ASAP for you, but don't get your hopes up, I don't think I'll be able to give you much new information.
VG,
Bryan
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[Edit 2016-10-06: Updated to clarify some errors in my explanations, removed dead link to AssetBuilder website.]
Hey dred,
sorry it's taken so long; I've been quite busy this past week. But, as promised, I will round up what information I do have. As a disclaimer: I have not yet gone through with any large money transfers or investments.
Complying with IRS and Department of Treasury Requirements (Filing Income Tax / FBAR / FATCA):
I am not sure about the details of filing income tax since you are married, but your wife MUST file income tax returns every year in the US as a US citizen (Citizenship Based Taxation, https://www.americansabroad.org/taxation/ (https://www.americansabroad.org/taxation/)). I am not sure if you have to file in the US since you are married, but that would seem somewhat absurd. [Edit: Being married makes this complicated no matter what: https://www.americansabroad.org/nonamerican-spouse-us-tax-implications/ (https://www.americansabroad.org/nonamerican-spouse-us-tax-implications/)]
Another important issue to be aware of is declaring any financial accounts abroad as an American (not just ones living abroad, but any Americans). Your wife is required to file a Report of Foreign Bank and Financial Accounts (FBAR) with the US Dept. of Treasury for any financial account which exceeds if the sum of your "offshore holdings" exceeds $10,000.00 any time during a calendar year (meaning, if there are multiple accounts which exceeded that amount, each one must be listed in the FBAR). Don't panic: I assume that, with your combined income and moustachian way of living, her bank account where her monthly pay is sent has likely exceeded $10,000.00 at some point. I didn't know about FBAR and filed late for 2013 and 2014 , but I still haven't heard anything from the Dept. of Treasury. So, if your wife had any financial accounts money abroad which exceeded exceeding $10,000.00 at any point, be sure to file the FBAR immediately. (File online: http://bsaefiling.fincen.treas.gov/main.html (http://bsaefiling.fincen.treas.gov/main.html))
As for the Foreign Account Tax Compliance Act (FATCA), I have no personal experience. The idea is similar to FBAR: report any financial interests abroad. However, the threshold is different: $50,000.00 on the last day of the tax year or $75,000.00 at any time during the year, but the threshold is even greater for Americans abroad. Here is an overview of FBAR and FATCA rules: https://www.americansabroad.org/current-regulations-and-guidance/ (https://www.americansabroad.org/current-regulations-and-guidance/) (I didn't link directly to the .PDF on the page, I wasn't sure if you would be comfortable opening a file from a website you may not know). But it already sounds like you guys know full well what FATCA entails judging from your initial post. [Edit: this page directly from the IRS about the differences between FBAR and FATCA could be helpful as well: https://www.irs.gov/businesses/comparison-of-form-8938-and-fbar-requirements (https://www.irs.gov/businesses/comparison-of-form-8938-and-fbar-requirements)]
Another important issue for both the FBAR and FATCA: if you guys have a joint account, you (you and your wife) also have to file according to the above criteria which would definitely suck you personally (you, the German guy) into dealing with US tax law (rather than just your wife having to deal with all that).
The American Citizens Abroad website I linked to a few times is a good starting point for reading up on what your wife has to be aware of as an American living abroad.
Investing:
Having your wife invest abroad is a bad idea not just because of FATCA (if filed correctly, ther is no penalty/tax/etc.), but also because of Passive Foreign Investment Company (PFIC) rules. Long story short: income from a PFIC counts as normal income and not capital gains and will be taxed as such (read: up to 40% tax rate) (http://thunfinancial.com/why-americans-should-never-ever-own-shares-in-a-non-us-incorporated-mutual-fund/ (http://thunfinancial.com/why-americans-should-never-ever-own-shares-in-a-non-us-incorporated-mutual-fund/)). There are ways around this it seems, but I haven't looked into it as an option as it all seems like more trouble than it's worth with both PFIC and FATCA.
As an American abroad, it is near impossible to open an account in the US. The ACA-website has information about this as well as other forums (https://www.bogleheads.org/forum/viewtopic.php?t=110773 (https://www.bogleheads.org/forum/viewtopic.php?t=110773)) There isn't a law against letting Americans abroad open accounts on US soil; it sounds like it's company policy since the companies don't want to risk get pulled in to dealing with foreign tax and reporting requirements. I am surprised to hear that your wife cannot open a further account with Vanguard despite already being with them though based off of other experiences I have read.
As for other options, a company called AssetBuilder caters to Americans living abroad, but I haven't been able to find much information on them outside of their website (https://assetbuilder.com/expat-investors (https://assetbuilder.com/expat-investors)) and Andrew Hallam (https://andrewhallam.com/ (https://andrewhallam.com/)) who looks to be in pretty tight with the company. [Edit: I can't seem to find any more info for Expats at AssetBuilder anymore. I am not sure if they ended that service.] [Edit: Charles Schwab allows US-Citizens abroad to open brokerage accounts with them.] One source of information I have not yet tapped into is Thun Financial Advisors (http://thunfinancial.com/ (http://thunfinancial.com/)). They manage high net-worth individuals (>$500,000.00), but I e-mailed them an got a reply that they would be willing to answer a few questions for my particular situation. They also have a bunch of information on their website which I haven't finished sifting through.
As for retirement accounts: one cannot use the tax relief from retirement accounts (IRA, 401(k), etc.) when excluding foreign earned income on US tax returns through the Foreign Earned Income Exclusion (FEIE, I think it is Form 2555 in when filing US tax returns). I haven't looked into the possibilities (FEIE & taxable investment account or claiming foreign tax credit in the US and investing into an IRA), but there seem to be options out there that only a small number of people are familiar with (https://www.bogleheads.org/forum/viewtopic.php?t=158193 (https://www.bogleheads.org/forum/viewtopic.php?t=158193)).
One real crazy idea if you guys are planning on staying in Germany: live off your wife's income and invest your income completely since you have your side of the equation figured out. ;-)
Money Transfer:
Since your wife is making money in Germany and probably will want to invest in the US, there is the problem of getting money from here to there. I have only done wire transfers from my German bank to my US bank for medium amounts of money (max. 6000€). I don't think there is any problem with wiring larger amounts, but anything over 10,000.00 (EUR or USD) raises flags and requires extra paperwork (to combat money-laundering) from what I hear. The rates for wiring money should stay flat as well (DKB charges 18€ outgoing, US Bank charges $20 receiving for example) meaning a larger amount results in a relatively small fee. Another option is a forex company such as XE, World First, or Oanda. However, as I said at the beginning, I have not tried this out myself other than medium amounts of money to pay off student loans.
I'm sorry I can't offer you any definitive answers, but I hope some of the info I have is able to help you guys along some more. Check out the websites I've linked to, they have a bunch of information (ACA for compliance with US regulations, Thun for compliance and investment options, search "expat" in the Bogglehead forum to find even more).
Good luck you two.
Cheers,
Bryan
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Hi dred,
I just stumbled upon a big post in the Bogleheads wiki dealing with investment and taxation information for Americans abroad: https://www.bogleheads.org/wiki/Taxation_as_a_US_person_living_abroad (https://www.bogleheads.org/wiki/Taxation_as_a_US_person_living_abroad)
It might also be worth checking out.
Cheers,
Bryan