updated 2:11 PM CET, Oct 31, 2023

AARO expat survey: U.S. expats struggle even more than folks back home to save for retirement

Saving for one's retirement is never easy; life is expensive, and time flies.

But as a survey of more than 400 U.S. expats, carried out last  October and November by the Association of Americans Resident Overseas (AARO) reveals, it's particularly difficult for Americans who are living outside of the U.S., who struggle with a range of issues, including retirement account providers suddenly deciding that they no longer wish to service American expatriate clients.

Doris Speer 3Here, in her tenth report based on last year's survey, Doris Speer – the AARO board member who carried out that survey, with input from other AARO executives – looks at the specific issues that Americans resident overseas struggle with, in their efforts to save for their retirements... 

In previous articles, we addressed why so many of those we surveyed said they'd found it difficult to maintain retail and investment bank accounts in the U.S. (Article No. 4), and retail bank accounts in your current country of residence (Article No. 7). In this article, we focus on the difficulties our survey respondents report having with their defined contribution retirement accounts in both the U.S. and in the countries where they now live.

We will do this by examining the issues through the eyes of a typical American in mid career, who wishes to move overseas to work for a non-US employer.

Our hypothetical potential expat wonders how this move could affect her retirement planning.

US Retirement Accounts

Service can be refused, amounts will be lower  Has your US provider refused service

The first question our American expat has is whether she could maintain her current U.S. 401(k) and IRA accounts, and count on them to get her all the way through retirement.

The answer is “maybe, maybe not.”

Many of our survey respondents (21%) have told us that the institution holding their U.S. retirement accounts (such as a 401(k), IRA or other tax sheltered account) had liquidated or threatened to liquidate the account, or placed restrictions on the account.

One of them said they had “had to liquidate retirement accounts inherited from my mother because of my foreign address.” Another said “Fidelity client since 1978. Have U.S. address, but when they found out I had a foreign address as well, they massively restricted my account, which meant I had to move my IRA elsewhere. This was in 2013.”

Our expat in the planning stages needs to be prepared for the possibility that her financial institution may force liquidation of, or restrict, her IRA account at some point.

To be sure, a significant number of our survey respondents (79%) did say that they were managing to maintain their U.S. retirement accounts. But many could be subject to minimum balances and/or higher fees to do so.

Further, they cannot build them up, because one generally loses the ability to make contributions to U.S. retirement plans while one is working overseas.

A few key points to be aware of: 

        • 401(k) plans are sponsored by employers. One either has to either be working for a U.S. company that offers a 401(k), or be self-employed and set up a solo 401(k) oneself. Since our expat will no longer have a U.S. employer, she will not be able to contribute any longer to her 401(k)

        • In order to contribute to an IRA while living abroad, one needs to have income leftover after deductions, and be able to apply some of one's foreign earned income exclusion (FEIE). If our American expat-to-be excludes all her income with the FEIE, she cannot contribute any longer to her IRA

So, our expat-to-be's account balances would increase only to the extent of earnings on her investments once she moves overseas.

Another issue to be aware of is that overseas Americans must live with exchange rate risk on their U.S. retirement accounts.  balances.

In the responses we received on this matter in our survey, one person provided this dispiriting advice: “We have lost a lot of potential for retirement savings because of this – the only savings we have is in a 401K, which means it is [U.S.] dollar-based, so, as we will most likely stay in France, the amount will fluctuate and be dependent on exchange rates, etc.”

Which institutions don’t want us?

Our survey respondents named 10 U.S. institutions that they said had either liquidated or threatened to liquidate their accounts, or placed restrictions on these accounts.

Each of the institutions that received at least two citations by our survey respondents is listed on the chart below, on which we note how many times each was cited.

U.S. institutions that refused service on retirement accounts Fidelity emerged as the “worst offender” with eight citations. (Survey respondents' comments included Fidelity “made me leave” and “Fidelity Investments – account frozen”.)

Three institutions comprise the “Other” category, with one citation each: Prudential, Wells Fargo and Ameritrade. Wells Fargo is in the process of exiting its international accounts business, so there will soon be more account terminations there.

Our American expat-to-be is getting nervous, now, as her 401(k) is with Fidelity and her IRA is with Wells Fargo.

Why do they do it?

“Why do these companies liquidate our accounts?” she asks.

As you can see in the next chart, below, the reason most cited by the companies in question is the American expat account-holder's lack of U.S. address, telephone number, or taxpayer identification number (56%).

One respondent said they were told that they would have “needed [to be able to show] U.S. residence 183 days [out of the] year.”

Respondents said the major retirement account holders have also been giving, as reasons, the fact that they are overseas (38% of repondents who'd been told to take their accounts elsewhere reported being told this), and/or because of company policy (34%).

This is the same issue that, as discussed, came up in our  Article No. 4 (the one having to do with U.S. retail bank and investment accounts, where, as we noted, 40% of the survey's respondents said they'd had a U.S. bank refuse their business).

Some U.S. institutions, meanwhile, reject overseas Americans’ U.S. retirement accounts in order to reduce their legal and financial exposure from (1) banking laws in the American's current country of residence, and (2) money laundering rules.

We summarize these points below.

(To read the full discussion on our website, in our fourth article, "AARO 2020 Advocacy Survey Results
Article 4: Outing the US Banks – Which ones dump us and why?", click here.

European regulations

For those American expats who live in Europe, two sets of European regulations are the problem that needs to be dealt with: The Alternative Investment Fund Managers Directive (AIFMD) and the Markets in Financial Instruments directives (MIFID 1 and MIFID 2).

These regulations impose onerous requirements on non-European financial professionals who market their products to European residents, so they prefer to reject automatically the accounts of American clients living in Europe.

“Know Your Customer” laws

Also affecting the accounts of expatriate Americans, meanwhile, has been a proliferation of anti-money laundering regulations (also known as “know your customer” (KYC) rules), not just in Europe but around the world.

KYC rules often discriminate against non-resident accounts, considering them to be high risk, which triggers enhanced due diligence. For this reason, many U.S. financial institutions have found it not worth their while, from a cost-benefit analysis standpoint, to maintain non-U.S.-resident clients.

This problem, not surprisingly, entraps those expatriate Americans who wish to maintain their existing U.S. retirement accounts.

Non-US Retirement Accounts

Our American expat-to-be now understands that she will no longer be able to contribute to her U.S. retirement accounts while working overseas, and that she will be subject to exchange rate risk if she retires overseas.

And she is also now really worried that her U.S. IRA portfolio will be liquidated once she is overseas.

So she would like to explore whether she could open a non-U.S., defined-contribution retirement account and, if yes, should she do so (i.e., how would the IRS treat it).

Many of us have them; many
want them, but …

Do you have or want a non US retirement accountAs you can see by the chart (left), 28% of our survey's respondents report having at least one non-U.S. retirement account. An additional 14% who don’t have one would like to have one, for a total of 42%.

But there is great incentive not to have one, as one of the survey's respondents pointed out: “Although there is a tax treaty, we are not able to benefit from many of the tax deductible vehicles available to French residents/citizens… because we would end up paying taxes in the U.S. on those – for example, French retirement accounts.”

Overseas Americans, therefore, face many more challenges to retirement planning than their counterparts living in the U.S., because non-U.S. retirement plans are, as this survey respondent noted, often subject to very heavy reporting requirements and punitive taxation.

Reporting is complex

Meanwhile, it is not always clear to overseas Americans, or even, often, to their tax preparers, how non-U.S. retirement plans should be reported to the IRS.

The process for determining this can be complex, time-consuming, and therefore costly.

So it is understandable that, for those who do have non-U.S. retirement accounts, 68% of our survey respondents said they find the U.S. reporting of them to be either complex, or very complex. (See chart, right.)    How do you find on US retirement account reporting

This is because not only must one report such accounts on their FBAR (Foreign Bank Account reports) and on Form 8938s, under the Foreign Account Tax Compliance Act (FATCA), if the amounts in the accounts exceed the relevant thresholds, but reporting is greatly magnified if the investment is deemed to be a so-called "passive foreign investment company" (PFIC), or if the account is deemed to be a "foreign trust."

For the purposes of this article we will focus on PFICs.

Participation is taxable by the U.S.

One survey respondent summarized the PFIC problem eloquently, in a sentence: “We have paid tens of thousands of dollars to the U.S. in taxes on our non-U.S. retirement account.”

More than one third (34%) of those who participated in the survey, meanwhile, said that they were aware that they have lost, or will lose out on, expected tax advantages on their non-U.S. retirement accounts. But it is concerning that a large minority of these respondents, 41%, do not even know this yet. (See the chart, below.) 

Have you lost tax advantagesAs we will discuss below, it is likely that some in this 41% may learn to their dismay that they have, in fact, not only lost tax advantages, but may also face punitive treatment by the IRS.

As most of us know, participation in a defined contribution retirement plan in the U.S., (such as a 401(k), traditional IRA, Roth IRA, etc.) provides many tax advantages.

Using a 401(k) as an example, neither employee pre-tax contributions nor employer matching contributions are taxed as income at time of contribution, nor are investment earnings in the account taxed.

Taxation occurs at withdrawal during retirement, when one is expected to be in a lower marginal tax bracket.

Many other countries and non-U.S. companies offer retirement plans and vehicles with similar tax benefits to their residents or employees.

But, as we will discuss below, many of these non-U.S. retirement vehicles are not recognized under U.S. tax law.

Transfers and rollovers trigger taxation

In the U.S., transfers of retirement savings from one qualified plan to another, such as a direct rollover from a retirement plan to an IRA, are exempt from U.S. tax. But overseas Americans in non-U.S. retirement plans face U.S. tax consequences transferring these plans when they switch jobs.

Overseas accounts could be deemed PFICs

What are PFICs?

If a non-US company meets either of the below criteria, it is considered by the U.S. IRS to be a passive foreign investment company:

      • 75% or more of its income is "passive" income (including interest, dividends, rents, capital gains, royalties, or annuities)

      • At least 50% of its assets are held to produce passive income

Simply put, PFICs are non-U.S. registered pooled investments, including mutual funds, hedge funds, money market accounts and insurance products.

Investments held in a bank account might also be deemed to be PFICs if they are held in a money-market fund rather than simply a deposit account.

Because PFICs are foreign registered funds, not U.S. funds that invest in foreign investments, our American expat-to-be’s IRA at Wells Fargo (considered by the IRS to be a U.S. fund), even though it is invested in European stocks, is not a PFIC. However, if she were to open an account at UBS, holding identical investments in a UBS fund, that fund would be considered to be a PFIC.

Likewise, an investment in an Ireland-registered fund that invested in U.S. stocks would also be a PFIC.

Why are PFICs an issue?

The U.S. imposed additional reporting requirements and burdensome taxation on PFICs as part of the Tax Reform Act of 1986. But it was the signing into law of FATCA in 2010 that brought increased transparency, and thus greater information-sharing and ultimately, enforcement of the PFIC regulations, with respect to non-U.S. accounts held by Americans.

Because of FATCA, the likelihood that the IRS will discover unreported PFICs has increased dramatically, and American expats who do not report their overseas investments are therefore at a high risk of encountering tax, interest and penalties.

Onerous reporting and taxation of PFICs

Again, the comment of one of last year's survey's respondents says it all: “I cannot invest in mutual funds in France because [it would be] too hard to report.”

FATCA requires expats (or any American who owns an investment deemed to be a PFIC) to file a Form 8621 for every one of these investments they hold, every year.

This form requires complex record-keeping and accounting, and is very time consuming to complete.

Even the IRS knows this; it has estimated that each Form 8621 takes 22 hours of someone's time to deal with per year. 

Tax rates for PFICs, meanwhile, are punitive compared to similar investments held in the U.S., by U.S.-resident Americans.

PFIC income will generally be taxed at the highest rate possible, plus an interest charge.

One of last year's survey respondents evidently knew this from experience: “Certain investments (SICAVs) in my Plan Epargne Entreprise and Plan Epargne Retraite were considered PFICs, and heavily taxed by the IRS," they wrote.

PFIC income distributions and capital gains are taxed at the highest marginal rate (in other words, neither the lower capital gains tax rate, nor your own lower marginal rate, is deemed to apply).

An interest charge is applied to deferred gains for the entire time that they are held in the PFIC.

For some investments, this can add up to 50%-plus of taxation.

If our American expat-to-be decides to hire a U.S.-based financial adviser who is well versed in international investment accounts, she can structure the investment to reduce this tax rate somewhat. But this will cost her dearly.

Filing a Form 8621 for three or four PFICs could trigger a tax preparation bill of thousands of dollars.

Treatment of three non-U.S.
retirement investment vehicles

Now, let's say our American expat-to-be's non-U.S. employer has given her the choice to work in one of the following three countries: France, Australia and the UK. As a result, she says she'd now like to know about how the retirement investment vehicles on offer in these three countries, and the way the U.S. would tax them, compare.

Australia: Superannuation Scheme ("Super")

Australian employers are required to contribute to what Australians call the Super on behalf of their employees, who are required under the law to be enrolled in such a fund.

These employees have the option of making additional voluntary contributions, from either pre- or after-tax income.

The employer’s contributions, as well as the employee’s pre-tax voluntary contributions, are taxed at a rate lower than the rate that would otherwise be applicable and, after age 60, withdrawals are tax-free.

However: the Australian Super is not recognized under U.S. tax rules.

As a result:

      • There are heavy reporting requirements

      • Employer contributions and employee pre-tax contributions are both taxable by the U.S.
      • Although the fund pays tax in Australia on the income earned in the Super, this tax is not recognized in the U.S., so the U.S. taxes it again

      • If the overseas American makes after-tax voluntary contributions, the Super can qualify as a trust -- triggering heavier reporting and tax requirements

      • If the American then moves her account to a new fund, this transfer could be treated as "constructive receipt", and therefore taxable by the U.S.

      • Withdrawals from the scheme will likely be taxable by the U.S.

UK: Individual Savings Account (ISA)

The UK allows its residents to invest their after-tax income in ISAs, up to a certain amount each year (an amount roughly similar to U.S. employees’ 401(k) contributions).

Earnings from ISAs, as well as withdrawals, are tax-free in the UK.

The ISA is not, of course, recognized by the U.S.; therefore, the income generated by the account (interest, dividends and capital gains, even if no cash is distributed) is considered taxable by the U.S.

In addition, the mutual funds held in the ISA account will often qualify as PFICs, triggering the associated reporting and taxation mentioned above.

France: Assurance Vie (AV)

In France, although not a retirement plan per se, the AV is the most popular vehicle for tax-advantaged investment. It is also useful for inheritance and succession purposes.

Payments into the AV are made from after-tax income; income generated in the account is tax-free in France.

Withdrawals are taxed by France at lower rates, but some withdrawals (and up to a certain amount) are tax-free.

The U.S. regards the AV as a PFIC, requiring the plan-holder to enter into the complex reporting requirements and taxation regime mentioned above. (As one of the respondents who participated in last year's survey observed, “Income from French 'Assurance Vie' savings and investment accounts is taxable in [the] U.S. before and in addition to French taxes.")

The dilemma overseas Americans face

At this point, our American expat-to-be understands that, because of her proposed move overseas, the amounts in her U.S. 401(k) and IRA, although they would not be adversely taxed, would likely be much smaller at retirement than if she were to remain stateside, and that she would face exchange-rate risk on them.

She accepts this as a necessary tradeoff to having her dream job overseas. Still, she is increasingly worried that her IRA might one day be liquidated, due to the KYC requirements.

On the non-U.S. side, meanwhile, she is horrified that her retirement planning would be handicapped by the extraterritorial application of U.S. laws to non-U.S. retirement accounts.

Contributing to a non-U.S. plan, if she could even do so, would be essential for her to mitigate her stalled U.S. retirement plan contributions. But she now knows that this would create onerous reporting, high tax preparation costs, and penalizing taxation.

Summing it all up, our expat-to-be realizes that she will simply have fewer resources available to her in retirement, because of her move overseas.

And she is wondering why.

Why does the U.S. treat its citizen "ambassadors" so differently from those of its citizens who remain at home?  And, why can't Americans who live abroad at least enjoy the same tax benefits given to others in the countries in which they now live? 

AARO’s advocacy

There is no single, ready answer to all these issues American expats face in their efforts to save for their retirements, beyond the fact that that change is needed, and to achieve this, advocacy is required on many fronts.

For U.S. retirement accounts, AARO is calling for changes in U.S. laws and regulations that would require U.S. financial institutions to provide services to U.S. citizens who are resident overseas – while satisfying their KYC requirements – in order to correct the injustice now being caused by them rejecting American expats on the sole basis of their overseas addresses.

As explained above, U.S. legislation, taxation, and banking practices combine to make it increasingly difficult for Americans who work overseas to save for their retirement in non-U.S. retirement accounts.

American citizens who live and work abroad are, as a result, unfairly burdened by a complex citizenship-based taxation system (CBT) that is unique in the world, with high tax preparation costs and the risk of double taxation, while receiving little of the benefits provided to citizens residing in the U.S.

AARO’s mission is to urge Congress and the Biden administration to pass new tax legislation, and to simplify financial reporting requirements in such a way that the difficulties currently being faced by Americans abroad would be eased.

Finally, AARO advocates ending CBT, and aligning the U.S. with a tax system based instead on residence, as is used by the rest of the world.

From this would follow the replacement of the FATCA reporting regime with the OECD's Common Reporting Standard, now widely used internationally.

The Association of Americans Resident Overseas (AARO) researches issues that significantly affect the lives of overseas Americans and keeps its members informed on these issues.

Founded in 1973 and headquartered in Paris, AARO is an international, non-partisan association with members in 46 countries. 

To view this article on AARO's website, in pdf form, click here.