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  • Thun Financial Advisors Research ©| 2017 1

    Thun Financial Advisors Research 2017

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


    clients by combining an index




    ning. We guard our clients’





    Top Ten (Twelve) Investment

    Mistakes Made By Americans


    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-


    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


    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-


    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