Thun Financial Advisors Research ©| 2017 1

Thun Financial Advisors Research 2017 Ø

Thun Financial Advisors 3330 University Ave. Suite 202 Madison WI 53705 www.thunfinancial.com Skype: thunfinancial

i

clients by combining an indexȢa

w

r

ning. We guard our clients’

o

d

w

growth.

Top Ten (Twelve) Investment

Mistakes Made By Americans

Abroad

Editor’s Note:

We realize that our “top ten” mistakes lists twelve mistakes. At

the risk of excluding a mistake of which readers should be

aware, we’re leaving twelve top-ten worthy mistakes to avoid.

1) Buying foreign mutual funds. Foreign mutual funds may seem at-

tractive to an American living abroad. However, in the view of the IRS, a

foreign mutual fund is considered a Passive Foreign Investment Compa-

ny (PFIC) and is a tax nightmare for U.S. tax filers. If you are a U.S. citizen

or a U.S. permanent resident who has been living and working outside

the U.S. and investing your savings through a non-U.S. financial institu-

tion, you need to understand PFICs quickly. PFICs are subject to special,

highly punitive tax treatment by the U.S. tax code. Not only will the tax

rate applied to these investments be much higher than the tax rate ap-

plied to a similar or identical U.S. registered investments, but the cost of

required accounting/record-keeping for reporting PFIC investments on

IRS Form 8621 can easily run into the thousands of dollars per invest-

ment each year.

2) Doing Nothing. Many American expats find themselves so over-

whelmed by the complex rules and many horror stories they have heard

about investing while living abroad that they are cowered into taking no

Thun Financial Advisors Research ©| 2017 2

action at all. However, remaining in cash will not

provide for a comfortable retirement for yourself

or a college education for your kids. Investing effi-

ciently and compliantly while living abroad can be

daunting, but it does not have to be overwhelming.

A little research can go a long way. Qualified advi-

sors can be found. Do not give up. This is too im-

portant.

3) Not understanding the underlying currency

exposures of their portfolio. Expat investors of-

ten mistake the currency in which their brokerage

firm reports the value of their investment with the

fundamental currency denomination of those

same investments. For example, many foreign

public companies list their shares in both their

home country and in New York. The New York

listed shares will trade in dollars, but that does not

make them fundamentally U.S. dollar investments.

The U.S. listed shares will simply track the perfor-

mance of the shares on their primary exchange.

Similarly, the performance of a U.S. listed mutual

fund that invests in foreign currency bonds will be

determined by the fate of those underlying curren-

cies. It is irrelevant that the fund trades in New

York in dollars. The corollary is that truly multi-

currency investment portfolios can be constructed

through a U.S. brokerage firm that lists all invest-

ment values in dollars. What matters is the curren-

cy denomination of the underlying investments,

not the “reference currency” of the brokerage

statement.

4) Overinvest in your country of current resi-

dence. Fortunes have been made in all corners of

the Earth, and rapid growth and opportunities

may seem limitless one day … and disappear the

next. It can be particularly easy to become intoxi-

cated with “change” or “progress” when you are

presently profiting from it and have the “edge” of

living and breathing in the local market. The laws

of diversification are universal, and the penalties

of failing to obey those laws are equally universal.

Take profits in the local market along the way and

re-deploy them into other (i.e., stable, boring)

markets just in case your bullish long-term thesis

turns out to be … too darn bullish!

5) Failure to properly report foreign financial

assets on U.S. tax return. Following IRS report-

ing requirements is an important concern for

Americans living and investing abroad. Virtually

all foreign financial assets that are not being held

in a domestic (U.S.) financial institution are subject

to numerous reporting requirements. These re-

porting requirements include, but are not limited

to, timely filling of a FinCEN Report 114 (FBAR),

IRS Form 8938 (Statement of Specified Foreign

Financial Assets), and IRS Form 8621 (Information

Return by a Shareholder of a Passive Foreign In-

vestment Company or Qualified Electing Fund).

Cost of compliance with these regulations often

makes otherwise attractive investments ineffi-

cient, if not outright unsuitable, for a U.S. investor.

In light of FATCA, risk of non-compliance should

only further steer any and all U.S. investors to-

wards keeping their financial assets in a domestic

institution, where none of these requirements ap-

ply.

6) Fail to properly report for U.S. tax purposes

a foreign business entity. Americans with own-

ership stakes in foreign entities have complex IRS

reporting requirements. Failure to properly report

ownership interests in Controlled Foreign Corpo-

rations (CFCs), Foreign Partnerships, and Foreign

Trusts can lead to substantial IRS penalties. For

example, failure to file Form 5471 for a CFC typi-

cally results in penalties in excess of $10,000 per

form and opens the taxpayer’s entire return to an

audit indefinitely. While in the past it has been dif-

ficult for the IRS to discover ownership infor-

mation on foreign corporations, this is currently

becoming much easier through FATCA and inter-

Thun Financial Advisors Research ©| 2017 3

governmental agreements. Enforcement for these

violations will only increase in the future. Many

American entrepreneurs starting companies

abroad unknowingly dig themselves into a deep

tax reporting and compliance hole by starting to

deal with these issues many years after launching

their businesses.

7) Pay high fees for a non-U.S. investment that

could have been bought through a U.S. broker

for much less. At the retail (individual or family)

level, there is virtually no investment available an-

ywhere in the world that cannot be purchased

cheaper through a U.S. discount brokerage firm.

Investment expenses (brokerage fees, trade com-

mission, advisory fees, mutual fund fees, etc.) are

substantially lower in the United States than they

are anywhere else in the world for the same or

very similar investments. Furthermore, the range

and liquidity of investments available to retail in-

vestors through U.S. brokers is vastly greater than

it is everywhere else in the world.

8) Buy non-U.S. tax compliant insurance. Any

non-U.S. registered insurance products that hold

cash value – policies that can be redeemed for

some amount of cash immediately – almost never

qualify under U.S. tax rules as “insurance.” Hence,

they do not benefit from any of the tax advantages

that can sometimes make insurance a good long-

term investment – primarily tax deferral. Without

this protection, your “insurance” policy is nothing

more than a foreign investment account in the

eyes of the IRS. In addition, it is probably a foreign

trust and loaded with Passive Foreign Investment

Company (PFIC) investments. Such investments

and their tax reporting requirements are absolute-

ly tax toxic for U.S. taxpayers.

9) Contribute to non-qualified foreign pension

plan. American citizens living abroad often partic-

ipate in foreign pension plans sponsored by their

employers. Foreign pension plans generally have

beneficial tax treatment under local country of res-

idence law and employers often make valuable

pension contributions. However, even in light of

all these benefits, American expats must remain

aware that not all foreign pension plans receive

favorable tax treatment under U.S. tax law. Most

foreign pension plans are not qualified under dou-

ble taxation treaties and participation in a non-

qualified foreign pension plan can have negative

tax consequences. For example, local tax benefits

may be nulled by U.S. tax treatment and double

taxation could occur in the worst case scenario. A

high risk of failing to report these assets further

adds complexity to planning a retirement with a

foreign pension. Americans living abroad should

beware of the tax treatment of both contributions

to, and distributions from, these foreign plans in

order to avoid headaches in the future.

10) Rely on your legacy U.S. estate plan. Your

U.S. estate plan may not travel well. Laws regard-

ing wills, trusts, and who can lawfully inherit your

wealth upon death may be different in your new

country of residence, and, as a result, you may find

that your legacy estate planning strategy either (1)

is no longer legal valid, or (2) even worse, triggers

taxes that render the strategy completely counter-

productive. When you relocate to a new country,

it makes sense to consult with an estate plan ex-

pert that understands U.S. estate planning, estate

planning in your jurisdiction of residence, and the

potential interaction of tax treaties and foreign tax

credits on the distribution of your wealth.

11) Sticking with your old U.S. tax preparer

even after moving abroad. Many competent U.S.

tax preparers will mistakenly believe that they can

continue to prepare your tax returns even after

you move abroad. But beware: quite often, even a

very good domestic tax preparer may be out of

their depth when preparing expat returns. Too of-

Thun Financial Advisors Research ©| 2017 4

Thun Financial Advisors Research is the leading provider of financial planning research for cross-border and American

expatriate investors. Based in Madison, Wisconsin, David Kuenzi and Thun Financial Advisors’ Research have been featured in

the Wall Street Journal, Emerging Money, Investment News, International Advisor, Financial Planning Magazine and Wealth

Management among other publications.

“Thun Financial Advisors is a Creative Planning, LLC company. Creative Planning, LLC (“Company”) is an SEC registered investment adviser located in Overland Park, Kansas. This commentary is provided for general information purposes only and should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.”

Contact Us Thun Financial Advisors 3330 University Ave Suite 202 Madison, WI 53705 608-237-1318

Visit us on the web at

www.thunfinancial.com

david.kuenzi@thunfinancial.com

ten, the tax preparer with little or no expertise in expat tax prepa-

ration will fail to do even the most basic research on special report-

ing requirements, relevant income tax treaties, the application of

foreign tax credits, etc. We’re not telling you that your existing tax

preparer is purposefully misleading you, but we are certainly sug-

gesting that finding out years from now that your tax preparer con-

fidently continued to prepare your returns without considering the

requirements of X, Y, and Z can be hazardous to your financial

health.

12) Not understanding U.S. retirement account contribution

rules when you have foreign earned income. Many Americans

who move abroad incorrectly assume they can no longer contrib-

ute to U.S. retirement accounts such as IRAs, Roth IRAs, or 401ks.

Others make the mistake of continuing to contribute without un-

derstanding the special rules that affect the eligibility of Americans

abroad to continue to contribute. Finally, those eligible, often con-

tribute without making a full analysis of the local tax implications

of a contribution and unwittingly set themselves up to be double

taxed on the income contributed because they did not fully under-

stand the complex interaction of their local tax obligations and

their U.S. tax obligations.