Can a US citizen living abroad invest in mutual funds?

The short answer: yes.

But the possibility of mutual fund investing abroad doesn’t mean there are no complexities and restrictions involved.

Investing in US?mutual funds is becoming more difficult for Americans residing overseas. Charles Schwab and other large financial firms have recently stopped letting them purchase these products amid regulatory changes and restrictions.

401(k)s have some exceptions, but this shift impacts many accounts, including brokerage accounts.

The reasons are the difficulty?of managing accounts for US expats overseas as well as various legal hurdles.

According to non-profit org. ACA (American Citizens Abroad) Inc., US financial institutions have historically let foreign customers?keep US mailing addresses, which puts them in a legal limbo.

But growing international pressure?and possible penalties have forced companies to re-evaluate their vulnerability to risks.?This?has resulted in opting to limit new mutual fund investments for American expats, per the ACA.

The Alternative Investment Fund Managers Directive and other recent European laws place additional limitations on unregistered funds. Such backdrop?makes?it even harder for US mutual fund businesses to sell their products overseas.

How can I invest while living abroad as a US citizen?        

Although foreign mutual funds are?accessible to US citizens, they are categorized as Passive Foreign Investment Companies (PFIC).

To be considered a PFIC according to the IRS, a foreign corporation must get?at least 75% of its gross income from passive sources, including capital gains, dividends, interest, royalties, and rents, during the tax year; or at least half of the business' assets must either be passive assets themselves or be held for the purpose of generating passive income.

Since they?get a large amount of their revenue from passive sources, the majority of foreign mutual funds are regarded as PFICs.

US citizens may face complicated tax issues when investing in a PFIC because ordinary income taxes are applied to?gains and distributions instead of?the lower capital gains rates. This naturally leads to an increased tax bill.

If an expat already owns PFICs and the shares frequently trade on a national securities exchange, they might wish to execute?a mark-to-market election?to possibly elude?the stricter PFIC rule, PwC said.

Meanwhile, the qualified electing fund election views the PFIC as a structure in which the owners, not the business, pay taxes. This helps avoid?some?of?the?brutal?taxes?as it enables income to be reported on the investor's US tax return.

US expats are exempt from reporting their foreign mutual funds should the aggregate value of all PFICs at year-end be less than $25,000 for single filers and $50,000 for joint filers, and there are no extra distributions or gains from sales.

Sure, US citizens overseas are permitted to make some types of investments, but direct US mutual funds investing is a no-go while buying into foreign mutual funds can be quite problematic for tax reasons.

Expats need to consider some practical alternatives/substitutes like ETFs, which might not have the same barriers.

If you are looking to invest as an expat or high-net-worth individual, which is what I specialize in, you can email me ([email protected]) or WhatsApp (+44-7393-450-837).

This includes if you are looking for a second opinion or alternative investments.

Some of the facts might change from the time of writing, and nothing written here is formal advice.

For updated guidance, please contact me.