Did I mess up? Invested with Vanguard US as an expat

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lewiscapeen
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Did I mess up? Invested with Vanguard US as an expat

Post by lewiscapeen »

Hi everyone! Grateful for any help.

I'm a US person who is an expat in the UK since early 2020. This was a job opportunity I did not really expect and I took it as I've always wanted to live in Europe. Before this, I had opened up an account at Vanguard where I so far deposited $9,000 dollars (basically from my savings from previous years) as my friend who works at a bank told me that it was just wasting away on the bank. So, I bought funds in VTSAX, VTIAX, and VTBLX. Then I received this job opportunity and off I went.

Anyways, now I'm in the UK and the company offered me a tax counselor to help. Great stuff. We were finalizing the process, but then I sent an e-mail, wondering if my investment holdings had to be reported. I never check how the investments go, figuring it was best to not worry about them except for perhaps once a year for rebalancing, so had almost forgotten about them. But I thought perhaps I had to pay tax on any dividends I might have accumulated? I then received an e-mail back asking a load of questions and some queries on PFIC, which I had no idea on what that even was.

I'm trying to read up on it now, and it seems I'm not allowed to have US holdings as an expat? Or that it's basically impossible? Am I screwed and what should my course of action be? Like do I have to pay massive taxes on the gains? Should I just sell it all now? Any help is appreciated as I'm in quite over my head (sorry, I know nothing about investing).
sean.mcgrath
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Re: Did I mess up? Invested with Vanguard US as an expat

Post by sean.mcgrath »

Hi Lewis,

Welcome to the Forum! The US does not mind that you hold investments in the US. The PFICs are for the other way around, if you invest in funds in Europe (I contributed to the PFIC article on the Wiki and have one -- I do not recommend it!).

The issue that US expats in Europe do end up with is being blocked from having investment accounts in the US. The risk is to end up in a Catch-22 where you cannot invest anywhere. An existing US account creates no issues that I am aware of in either place. You will need to file taxes in both places and potentially pay some on the investment, but there are no fundamental restrictions, and Vanguard will send you the 1099 DIV for your US taxes as usual.

Good luck,
Sean
TedSwippet
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Re: Did I mess up? Invested with Vanguard US as an expat

Post by TedSwippet »

Welcome.
lewiscapeen wrote: Wed Jun 03, 2020 12:18 pm ... So, I bought funds in VTSAX, VTIAX, and VTBLX. ... I then received an e-mail back asking a load of questions and some queries on PFIC, which I had no idea on what that even was.
PFIC is a US tax law that punitively taxes non-US domiciled funds and ETFs held by US persons. There's a wiki page on it here:

Passive foreign investment company - Bogleheads

However ... the funds you list are all US domiciled, so that won't apply to these holdings. It would apply to the funds or ETFs you are most likely to buy in the UK though, but from the sound of things you haven't done that, at least not yet.

Assuming these holdings are in a taxable account and not a 401k or IRA, what you might run into with VTSAX, VTIAX and VTBLX is difficulties with them not having 'UK reporting status', so that your capital gains on these would be taxed at UK income tax rates. Using the UK's 'non-dom' tax status could help here (not my area), and/or converting these to ETFs -- quite a few Vanguard US domiciled ETFs have 'UK reporting status'. There's a list in this wiki page:

Vanguard US domiciled ETFs that are HMRC reporting funds - Bogleheads

Finally, you can find more about US expat tax in this section of the wiki:

Outline of Non-US domiciles - Bogleheads

You'll need to take particular care with any UK based investments. In practice, you may find it hard to open accounts anyway, as post-FATCA, many UK brokerages and platforms have implemented a blanket policy of refusing accounts to US citizens. Your best bet going forwards is likely to be sending money to Vanguard US (swallowing the forex loss) and investing there in PFIC-clean ETFs that meet the UK's reporting regime.
international001
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Re: Did I mess up? Invested with Vanguard US as an expat

Post by international001 »

Do you know if that is something exclusive for UK or there is something similar for the rest of Europe?

I'm wondering how it works in practice. Let's say you have those Irish accumulation ETFs in Europe and you go to work to US for just a couple of years.
Is IRS reported if you don't pay PFIC taxes? Can you discount those taxes in Europe once (perhaps many years in the future) you sell those ETFs?
Topic Author
lewiscapeen
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Re: Did I mess up? Invested with Vanguard US as an expat

Post by lewiscapeen »

sean.mcgrath wrote: Wed Jun 03, 2020 12:47 pm Hi Lewis,

Welcome to the Forum! The US does not mind that you hold investments in the US. The PFICs are for the other way around, if you invest in funds in Europe (I contributed to the PFIC article on the Wiki and have one -- I do not recommend it!).

The issue that US expats in Europe do end up with is being blocked from having investment accounts in the US. The risk is to end up in a Catch-22 where you cannot invest anywhere. An existing US account creates no issues that I am aware of in either place. You will need to file taxes in both places and potentially pay some on the investment, but there are no fundamental restrictions, and Vanguard will send you the 1099 DIV for your US taxes as usual.

Good luck,
Sean
Thanks so much, Sean! What a relief then. One follow-up question, as you mentioned that the account has to be existing before becoming an expat. So I believe I'm fine then, as I invested before moving, but do you know what the test is for when you become an expat. Is it when you've landed in the other country? What if you have moved, but come back before the end of the tax year, does that mean you can open an account the moment you set foot back in the US? Wondering both from a theoretical point of view as well as for when I return to the US and would potentially want to open another account.

And noted on the PFICs. I read the wiki and those does truly sound awful to have for a US person!
Topic Author
lewiscapeen
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Re: Did I mess up? Invested with Vanguard US as an expat

Post by lewiscapeen »

TedSwippet wrote: Wed Jun 03, 2020 12:50 pm Welcome.
lewiscapeen wrote: Wed Jun 03, 2020 12:18 pm ... So, I bought funds in VTSAX, VTIAX, and VTBLX. ... I then received an e-mail back asking a load of questions and some queries on PFIC, which I had no idea on what that even was.
PFIC is a US tax law that punitively taxes non-US domiciled funds and ETFs held by US persons. There's a wiki page on it here:

Passive foreign investment company - Bogleheads

However ... the funds you list are all US domiciled, so that won't apply to these holdings. It would apply to the funds or ETFs you are most likely to buy in the UK though, but from the sound of things you haven't done that, at least not yet.

Assuming these holdings are in a taxable account and not a 401k or IRA, what you might run into with VTSAX, VTIAX and VTBLX is difficulties with them not having 'UK reporting status', so that your capital gains on these would be taxed at UK income tax rates. Using the UK's 'non-dom' tax status could help here (not my area), and/or converting these to ETFs -- quite a few Vanguard US domiciled ETFs have 'UK reporting status'. There's a list in this wiki page:

Vanguard US domiciled ETFs that are HMRC reporting funds - Bogleheads

Finally, you can find more about US expat tax in this section of the wiki:

Outline of Non-US domiciles - Bogleheads
Thanks so much! The links helped a ton. Two follow up questions if you would be so kind:
1. You mentioned buying in the UK. I was wondering if there is a hard rule for this. Like, let's say I live in the UK, but go back to the US for vacation: can I buy them there without worry? Just wondering what exactly determines you being in the UK/expat status and whether it's purely based on physical presence or something else. Because if it's just physical presence it seems a bit too easy to game. If it's when you've moved to the UK, can't you just always say that you've bought bought the funds at an earlier date? Or that the vacation was actually a genuine attempt at moving to the US, but that you then changed your mind again? That sounds weird too. Not planning on buying any extra funds for the time being, but I'm curious to the workings of this.

2. So, maybe I'll have to consider converting them to ETFs then...although I'll check in with the tax advisor first before doing so. Would that avoid the potential problems, however? Because again, that seems a bit easy to game: "Oh, just quickly convert these funds so you avoid the tax we were going to levy! No problems at all!" It just seems too easy? Then again, I'm here on a website asking for advice on this, so I guess it's easy if you start looking into it, but very few actually do so...
TedSwippet
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Re: Did I mess up? Invested with Vanguard US as an expat

Post by TedSwippet »

lewiscapeen wrote: Wed Jun 03, 2020 7:20 pm 1. You mentioned buying in the UK. I was wondering if there is a hard rule for this. Like, let's say I live in the UK, but go back to the US for vacation: can I buy them there without worry? Just wondering what exactly determines you being in the UK/expat status and whether it's purely based on physical presence or something else. Because if it's just physical presence it seems a bit too easy to game. If it's when you've moved to the UK, can't you just always say that you've bought bought the funds at an earlier date? Or that the vacation was actually a genuine attempt at moving to the US, but that you then changed your mind again? That sounds weird too. Not planning on buying any extra funds for the time being, but I'm curious to the workings of this.
By "buy in the UK", I meant what you would find offered to you by a UK platform or brokerage, not your physical location at the time when you buy them. Where you happen to be at that instant isn't relevant. It's where you are resident that matters. That's the UK for now, even if you are on vacation in the US (or Spain, or Mongolia, or ...) when you trade.

Suppose you go off and open a trading account with Barclays bank in the UK, say. In that UK based account, you could hold unit trusts (the UK equivalent to US mutual funds), investment trusts (closed-end funds), shares, and ETFs. However, for you as a US citizen, the unit trusts and investment trusts will fall foul of the (foul) PFIC rules, as will any ETFs that are not US domiciled. And because of an EU regulation known as PRIIPs, Barclays cannot sell you US domiciled ETFs, nor can any UK based investment platform. So you are stuck with local UK investment options; individual shares, or immense hassles with US PFIC tax rules.

Because you have a US based investment provider though, you can instead send money back to them and then invest as if still in the US. And provided you do that right (and also, that your US based investment provider doesn't summarily close your account for not being US resident -- a few have, but Vanguard don't seem to, at least not regularly), you can also avoid the UK's much weaker, though still annoying, equivalent to PFIC, its 'reporting regime'. Vanguard US can let you buy US domiciled ETFs because they are not bound by PRIIPs. That regulates the broker, not the investor.

For what it's worth, you will find yourself unable to open accounts with many UK investment providers anyway, because you are a US citizen. For example, from Vanguard UK:

https://www.vanguardinvestor.co.uk/need ... an-account
If you're a UK resident we can welcome you as an investor. You're able to apply for an account with us if you have your main home in the UK and you don't pay tax in another country. If you live elsewhere or pay tax in another country (e.g. US citizen or US tax resident) then unfortunately we can't accept your application.
The cause of this is a US extraterritorial tax law known as FATCA.
lewiscapeen wrote: Wed Jun 03, 2020 7:20 pm 2. So, maybe I'll have to consider converting them to ETFs then...although I'll check in with the tax advisor first before doing so. Would that avoid the potential problems, however? Because again, that seems a bit easy to game: "Oh, just quickly convert these funds so you avoid the tax we were going to levy! No problems at all!" It just seems too easy? Then again, I'm here on a website asking for advice on this, so I guess it's easy if you start looking into it, but very few actually do so...
You don't avoid tax. What you do avoid is a punitive additional tax for holding what are (to the UK) opaque 'offshore' funds. (Strictly, you might want to sell these funds and repurchase as ETFs, rather than convert within Vanguard US; there is a fiddly UK tax thing whereby a holding that was at any time not 'reporting status' is always not 'reporting status', so sale and repurchase will head that off.)

With non-reporting funds, capital gains are taxed at income tax rates. However, capital gains in normal funds (UK domiciled, UCITS, and everything offered through UK platforms, which automatically have UK 'reporting status') are taxed at normal capital gains rates, and these are lower than income tax rates. By holding ETFs with UK 'reporting status' you simply get the usual UK capital gain treatment, same as any other normal UK investor.

The tl;dr here is: hold on tightly to your Vanguard US account, and while in the UK, use that account to invest only in US domiciled ETFs that also have UK 'reporting status'. That way, you get to use index funds while avoiding the worst of the US and UK tax rules for 'offshore' funds. There is nothing dodgy or underhand about this. It complies with all the US, EU and UK laws, rules and regulations.

Other final notes. Pay close attention to the myriad US tax reporting rules for non-US accounts. FinCEN 114 (FBAR), FATCA form 8938, and so on. Be aware that utterly vanilla UK things like an ISA are of limited use to you, because what the UK relieves in tax the US will simply take instead. You even need to pay close attention to the UK pension that your employer has to open for you; the US/UK tax treaty is actually pretty good when it comes to pensions, but it is not perfect.
sean.mcgrath
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Re: Did I mess up? Invested with Vanguard US as an expat

Post by sean.mcgrath »

lewiscapeen wrote: Wed Jun 03, 2020 7:07 pm Thanks so much, Sean! What a relief then. One follow-up question, as you mentioned that the account has to be existing before becoming an expat. So I believe I'm fine then, as I invested before moving, but do you know what the test is for when you become an expat. Is it when you've landed in the other country? What if you have moved, but come back before the end of the tax year, does that mean you can open an account the moment you set foot back in the US? Wondering both from a theoretical point of view as well as for when I return to the US and would potentially want to open another account.

And noted on the PFICs. I read the wiki and those does truly sound awful to have for a US person!
Hi Lewis,
I didn't say that it has to be existing. The issue is that they are often blocked from investing in one / opening one once they are known to be expats. I don't know of any legal requirement or official tests from the investor's perspective; it's more a question of whether, e.g., Vanguard will let you do so.
international001
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Re: Did I mess up? Invested with Vanguard US as an expat

Post by international001 »

Is it specific to UK? Every European country has their own list (if any)?

I'm also wondering how it works in practice. Let's say you have your irish accumulation funds and you go to work to US for a 2 years to work (become resident). You are supposed to pay PFIC to US, I guess. Does the IRS know if you don't?

When 10 years later you sell your ETFs in Europe you sell your ETFs, can you get any money back from what you paid to the IRS?
TedSwippet
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Re: Did I mess up? Invested with Vanguard US as an expat

Post by TedSwippet »

international001 wrote: Thu Jun 04, 2020 12:04 pm
Is it specific to UK? Every European country has their own list (if any)?
This list is specific to the UK, and its 'reporting funds' tax regime. I have no idea what other countries do.
international001 wrote: Thu Jun 04, 2020 12:04 pm I'm also wondering how it works in practice. Let's say you have your irish accumulation funds and you go to work to US for a 2 years to work (become resident). You are supposed to pay PFIC to US, I guess. Does the IRS know if you don't?
Yes, you are supposed to pay PFIC taxes, so a tax on unrealised capital gains (assuming you chose the least bad treatment, mark-to-market). The IRS may or may not know about these investments, depending on how well FATCA is working at that point.

There are actually a lot of things that occur outside the US and which the IRS probably does not know, but which you are supposed to include on your US tax return if you are a 'US taxable person'. This lack of visibility is much of the reason why the penalties for under-reporting 'offshore' income to the US range from $10k at the lowest to some amount that is higher than the maximum balance of the foreign account.
international001 wrote: Thu Jun 04, 2020 12:04 pm When 10 years later you sell your ETFs in Europe you sell your ETFs, can you get any money back from what you paid to the IRS?
No.

The IRS will not refund anything they have taken in tax on unrealised (deemed) gains if those imaginary gains turn out in future to have been just a mirage, nor will they give you a foreign tax credit for any non-US tax you have to pay on actual gains years in the future. Likewise, foreign countries will not allow a foreign tax credit for US taxes paid years or decades earlier, on imaginary gains that the US simply made up to create a fictitious real tax liability. The result of this scenario is double tax.
Last edited by TedSwippet on Fri Jun 05, 2020 6:21 am, edited 1 time in total.
international001
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Re: Did I mess up? Invested with Vanguard US as an expat

Post by international001 »

TedSwippet wrote: Thu Jun 04, 2020 12:45 pm The IRS will not refund anything they have taken in tax on unrealised (deemed) gains if those imaginary gains turn out in future to have been just a mirage, nor will they give you a foreign tax credit for any non-US tax you have to pay on actual gains years in the future. Likewise, foreign countries will not allow a foreign tax credit for US taxes paid years or decades earlier, on imaginary gains that the US simply made up to create a fictitious tax liability. The result of this scenario is double tax.
That's very good to know.

I was thinking on foreign country giving you a tax credit, like would happen with a regular stock with dividends. I don't know what you mean by ficticious, it's very real for US. But I guess it's very difficult to match both systems of taxations ;-)

One option could be to transfer the accumulation funds to distribution funds, perhaps then there is a chance to recover to at least get a tax credit for the distribution part.

Or cash it out and move your reinvestments to US and then perhaps back home.
TedSwippet
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Re: Did I mess up? Invested with Vanguard US as an expat

Post by TedSwippet »

international001 wrote: Thu Jun 04, 2020 5:31 pmI don't know what you mean by ficticious, it's very real for US.
Strictly, the capital gain is fictitious, but the US tax liability on it is not. Under PFIC mark-to-market, you have to pay US tax on a pretend gain that may not materialise in future -- or if it does, will be taxable in future in another country -- but you must pay it now with real money.
Last edited by TedSwippet on Fri Jun 05, 2020 7:33 am, edited 1 time in total.
sean.mcgrath
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Re: Did I mess up? Invested with Vanguard US as an expat

Post by sean.mcgrath »

TedSwippet wrote: Fri Jun 05, 2020 6:18 am
international001 wrote: Thu Jun 04, 2020 5:31 pmI don't know what you mean by ficticious, it's very real for US.
Strictly, the capital gain is fictitious, but the US tax liability on it is not. Under PFIC mark-to-market, you have to pay tax on a pretend gain that may not materialise in future, but must pay it now with real money.
In addition, it is more volatile than you might expect. My PFIC is in Euros and I have to file US in Dollars. I thought I had a handle on covering the mark to market, but currency rates are actually the determining factor in my mark to market (it's a bond fund). It has made the exercise more messy than I had hoped.
mitchel
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Re: Did I mess up? Invested with Vanguard US as an expat

Post by mitchel »

I am planning to convert my Schwab account from US type to International, and this conversion will be irreversible due to my permanent relocation to another country that does not have a tax treaty with the USA (i am a non-US citizen either).

Question: will it make sence to buy mutual funds in advance before I move because the MFs will not be accessible to me once I convert the account? My strategy is to "set and forget" with the investment horizon about 15 years or so. Targeting for low volatile conservative instruments with the ROI >4% per annum (if higher I won't refuse though). Currently shortlisted SWTSX + SWPPX

Also I do not want to monitor the rates daily or even weekly (like I do now) because the offered position in large reputable company requires heavy efforts but the career+salary growth is promising, whereas the rest of time I am willing to dedicate to my family
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typical.investor
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Re: Did I mess up? Invested with Vanguard US as an expat

Post by typical.investor »

mitchel wrote: Sat May 15, 2021 1:33 am I am planning to convert my Schwab account from US type to International, and this conversion will be irreversible due to my permanent relocation to another country that does not have a tax treaty with the USA (i am a non-US citizen either).

Question: will it make sence to buy mutual funds in advance before I move because the MFs will not be accessible to me once I convert the account? My strategy is to "set and forget" with the investment horizon about 15 years or so. Targeting for low volatile conservative instruments with the ROI >4% per annum (if higher I won't refuse though). Currently shortlisted SWTSX + SWPPX

Also I do not want to monitor the rates daily or even weekly (like I do now) because the offered position in large reputable company requires heavy efforts but the career+salary growth is promising, whereas the rest of time I am willing to dedicate to my family
Why wouldn't you simply use SCHB and VOO? You will always have access to them. They are more tax efficient than SWTSX + SWPPX if held in a taxable account, or if your new country of residence doesn't recognize tax sheltered US accounts as tax sheltered for their purposes.

And if you don't have a tax treaty, it may make sense to open an account with Interactive Brokers, transfer your assets there, and invest in Ireland domiciled funds. I mean have you looked at estate tax implications?
TedSwippet
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Re: Did I mess up? Invested with Vanguard US as an expat

Post by TedSwippet »

mitchel wrote: Sat May 15, 2021 1:33 am I am planning to convert my Schwab account from US type to International, and this conversion will be irreversible due to my permanent relocation to another country that does not have a tax treaty with the USA (i am a non-US citizen either).
There is a bit of information on leaving the US in this wiki page:

US tax pitfalls for a non-US person moving to the US - Permanently leaving the US
mitchel wrote: Sat May 15, 2021 1:33 am Question: will it make sence to buy mutual funds in advance before I move because the MFs will not be accessible to me once I convert the account? My strategy is to "set and forget" with the investment horizon about 15 years or so. Targeting for low volatile conservative instruments with the ROI >4% per annum (if higher I won't refuse though). Currently shortlisted SWTSX + SWPPX
Whether or not ETFs are available to you seems to vary, but as a general rule, ETFs are much easier to manage, transfer and so on when crossing borders.

That aside, once you are a US nonresident alien living in a country without US tax treaties, you face substantial US estate tax risk and will very likely overpay US tax on all US domiciled funds and ETFs. As already suggested by typical.investor, you should move your money out of anything and everything that is US domiciled, and instead invest in equivalent non-US domiciled ETFs. The wiki offers more information:

Outline of non-US domiciles - Investing from outside of the US
mitchel
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Re: Did I mess up? Invested with Vanguard US as an expat

Post by mitchel »

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