I have just begun the process of withdrawing my IRA money, with the intent to deplete the IRA within 10 years and move all funds out of the U.S. I have a time-limited tax-advantaged situation in that I’ve moved to Italy and am eligible for a flat 7% tax on all worldwide income, with no U.S. withholding on the way by, for up to 10 years. Yes, I am (somewhat newly) a non-resident alien for US tax purposes.
I had intended to reinvest all the withdrawn funds in Vanguard LifeStrategy 60-40 Accumulating ETF. This mirrors what I’m holding in my IRA at Vanguard in the U.S. currently. Except now I’m hesitating, as this ETF is denominated in EUR. I am not sure I want to exchange all my USD for EUR, as I don’t yet know if we will be in Europe forever. I do know I’ll never move back to the US after renouncing my citizenship, so I’ll spend the funds eventually either in EUR or CAD. I do like a simple asset allocation ETF and that would be my choice once I properly understand any currency issues.
I am obviously a bit of a dunce at currency exchange stuff. Are there any considerations pro or con about buying EUR-denominated stocks with USD funding?
Thank you for your insights.
Vanguard LifeStrategy - currency decision
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Re: Vanguard LifeStrategy - currency decision
A fund's or ETF's denomination currency makes no difference to your long term returns. And its trading currency only makes a difference to the extent that you may have to convert from whatever currency you hold now into its trading currency before purchase (and also perhaps after sale). Full explanation in this wiki page:
Non-US investors and ETF currencies - Bogleheads
Ideally, in your situation you would purchase ETFs traded in USD, and then later on forex into EUR, CAD or whatever on sale and when you want the proceeds. That minimises the number of currency conversions you suffer.
However, LifeStrategy ETFs only trade in EUR, so if you want those then you have to convert your USD to EUR before purchase. If it turns out you will spend in EUR then it's a wash -- forex cost upfront or at the tail end makes no difference. If however you will spend in CAD or other non-EUR, you will have had to engage in two lots of forex, USD to EUR, and later EUR to CAD (say).
So ... what is the probability that you will spend in EUR, and how strong is your motivation for wanting EUR traded LifeStrategy ETFs compared to a (perhaps equivalent) collection of individual and USD traded ETFs?
Re: Vanguard LifeStrategy - currency decision
Thanks, Ted, this is helpful. You confirmed that my understanding of the currency exchange issue is correct. Your question is of course the horns of the dilemma. I don’t know yet if we’ll be here for life, and trying to plan way out into the future with imperfect information is hard. Will we be able to stay in Italy once we are older? I am betting that we will stick out the ten-year low tax period. After that, my crystal ball gets cloudy. However, since it seems unlikely I will need USD specifically, it’s either exchange USD to EUR now or to CAD later.
I still have plenty of CAD in Canadian retirement funds, so I think USD to EUR for the IRA funds at this point will be ok. I may still choose a lower-cost 2 or 3 fund option but I’m leaning towards the Vanguard all in one for old-age simplicity, even at a somewhat higher cost. The Vanguard LifeStrategy mutual fund in the US has an expense ratio of only .13%, so the .25% for the Ireland-domiciled ETF is double that…but still low.
Thanks for helping to clarify my thinking.
I still have plenty of CAD in Canadian retirement funds, so I think USD to EUR for the IRA funds at this point will be ok. I may still choose a lower-cost 2 or 3 fund option but I’m leaning towards the Vanguard all in one for old-age simplicity, even at a somewhat higher cost. The Vanguard LifeStrategy mutual fund in the US has an expense ratio of only .13%, so the .25% for the Ireland-domiciled ETF is double that…but still low.
Thanks for helping to clarify my thinking.
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Re: Vanguard LifeStrategy - currency decision
1. simplicity is good. What holding a single fund (that does its own rebalancing) does is prevent you from making behavioural mistakes at times of market uncertainty.Vogatrice wrote: ↑Tue Aug 03, 2021 6:49 am Thanks, Ted, this is helpful. You confirmed that my understanding of the currency exchange issue is correct. Your question is of course the horns of the dilemma. I don’t know yet if we’ll be here for life, and trying to plan way out into the future with imperfect information is hard. Will we be able to stay in Italy once we are older? I am betting that we will stick out the ten-year low tax period. After that, my crystal ball gets cloudy. However, since it seems unlikely I will need USD specifically, it’s either exchange USD to EUR now or to CAD later.
I still have plenty of CAD in Canadian retirement funds, so I think USD to EUR for the IRA funds at this point will be ok. I may still choose a lower-cost 2 or 3 fund option but I’m leaning towards the Vanguard all in one for old-age simplicity, even at a somewhat higher cost. The Vanguard LifeStrategy mutual fund in the US has an expense ratio of only .13%, so the .25% for the Ireland-domiciled ETF is double that…but still low.
Thanks for helping to clarify my thinking.
We get posters here who exited in 2008 (smart) but then listened to all the pundits saying there would be hyperinflation, devaluation of the dollar etc, and didn't get back in (bad move).
It would have been easy to lose one's nerve in March of 2020 as the market reacted to the revelation of the damage from Covid. Yet financially that would have been a very bad move, potentially.
Vanguard will do the rebalancing for you. Yes there is a cost (10 basis points i.e. 0.1%, on $100k is $100 pa).
2. If you don't need USD I would agree that EUR would be a better bet. You are going to make the currency transaction once, and lose on it - so it's worth seeing how you could do that most cheaply. You may have Canada Pension Plan rights? That provides a degree of hedging against possible future exposure.
I am unfortunately quite bearish on Canada. The country has at least 2 (3) enormous strategic problems:
1. dependence on commodity exports and in particular high cost, dirty oil. Whilst commodities generally will remain in demand with growth in emerging markets, producing the dirtiest oil on the planet (and some of the most expensive) is just not a good place to be. I read Dieter Helm's Burnout, about the post fossil fuel future and the transition, and when he was talking about Russia and Saudi Arabia I kept wincing and thinking "Alberta".
(I have a whole subset of concerns re deindustrialisation of Ontario and Quebec and unsustainable financial positions of those provinces).
2. scope of the housing bubble. Mind, I have been wrong for 10 years (at least) about this one. But I saw Toronto and Vancouver as hugely overvalued, and now that has spread to just about any Canadian city.
2b if you will is the huge consumer debt loads taken on to buy those houses, and to furnish them, and to help kids buy their homes, etc.
I think it is in for a rough 10 years. Reminding me of the early 1990s. However I have been saying that for a long time, and I have not been right yet. At least they got their vaccine rollout right (eventually).
3 is the problem of climate change. Although in theory a country cursed with the Canadian winter should be better off, it's clear the Arctic warming must faster than the planet as a whole has geo-strategic implications, but also big ones in terms of sustainability of infrastructure built on permafrost etc. You could say 3 is both a challenge and an opportunity, I suppose.