One of the recurring questions I get from our US readers and clients is, “Since the IRS has to know everything you do ‘offshore’ anyway, why should you even bother?”
In a way, I think the question misses the point. Yes, laws like FATCA make it much more difficult – although not impossible – for US citizens to hold legally non-reportable assets internationally. But the larger point is that all the other advantages of “offshore” still exist. And if you haven’t already taken the plunge, I think 2015 will be an especially good year to do so.
The reason is subtle but very powerful: the soaring US dollar. In just the last six months, the US dollar has gained:
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12% against the euro;
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11% against the Swiss franc;
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9% against the British pound;
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15% against the Canadian dollar;
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15% against the Australian dollar;
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13% against the New Zealand dollar;
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6% against the Singapore dollar;
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22% against the Norwegian kroner;
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13% against the Mexican peso; and
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60% against the Russian ruble.
I could go on, but you can no doubt see the trend. Indeed, over the last six months, the US dollar has outperformed every major currency in the world except the Chinese renminbi, which the Chinese central bank completely controls.
What that means is that your US dollars will buy you 12% more euros, 15% more Australian dollars, and a whopping 60% more Russian rubles than they would have only a few months ago. Conversely, if you held these foreign currencies in your portfolio, you would have experienced a correspondingly large loss, at least on paper.
Because the US dollar is so strong, you can buy more international stocks, bonds, real estate, or whatever you want overseas at the most advantageous price (in dollar terms) than in the last several years.
Now, you might be thinking, “What if the US dollar continues to rise?” And that, of course, could happen. After all, the US is the world’s largest economy, and compared with a lot of other countries, the US looks quite attractive as a haven for international investors.
But if you live in the US, it’s a very different matter. Sure, you could keep all of your eggs in one basket and just buy US assets. But currencies move in cycles, and the US dollar won’t remain king of the hill forever. If you’re ready to speculate on non-US assets and want in on the opportunity to purchase them at a significantly less expensive price (in US dollar terms) than you could have only a few months ago, there couldn’t be a better time to do it.
Then, of course, there are all the other reasons to go offshore:
- Access to investment and business opportunities not available in the US. A handful of US brokers can execute trades on some foreign exchanges. Interactive Brokers, for example, lets you trade on exchanges in 20 countries. But if you want to trade on other exchanges, you’re out of luck. And if you’re looking for advice on what to buy and sell, you’re out of luck as well. SEC rules forbid US brokers from discussing with their clients any security not listed on a US exchange. The bottom line: If you’re serious about investing outside the US, you need to use a non-US bank or broker to do it.
- Reduced portfolio risk. It’s been proven time and again during the last few decades that globally diversified investment portfolios carry significantly less long-term risk than those concentrated in only one market. When you invest in different international markets, you diversify across different markets, currencies, and legal systems.
- Asset protection. There’s no sugarcoating it: The US is by far the world’s lawsuit leader. About 90% of the world’s lawsuits are filed in the good ol’ US. And here’s another fact: Domestic strategies and structures to protect yourself against frivolous lawsuits aren’t always effective. For that reason, internationalizing yourself with the right offshore “structure” is a great way to gain protection from the US lawsuit industry. It can also protect you from less common threats as well, like civil forfeiture.
- Increased privacy. In the US, almost every piece of personal information that you might want to keep private is for sale. At the click of a mouse, investigators, identity thieves, stalkers, and just about anyone else can locate your assets. Outside the US, the picture is very different. Most countries – even those without so-called “bank secrecy laws” – prohibit banks or securities brokers from releasing customer data except under very strict rules. The wholesale data sharing between banks, information brokers, and the government that’s routine in the US simply isn’t allowed in other countries.
- Investment continuity. The attacks of September 11, 2001, demonstrated the vulnerability of the US financial infrastructure. US securities markets closed for four days after the attack. During this time, US investors with only US brokerage accounts were locked out. But US investors with foreign accounts could trade foreign securities on foreign exchanges. Even this brief disruption of the US securities markets led to a widespread, albeit short-lived, investor panic. And there’s no assurance that a future attack on the US financial infrastructure wouldn’t lead to a longer suspension of trading. It’s only prudent to maintain “nest egg” positions in politically neutral international havens.
- Tax savings opportunities. Mention “tax savings” and “offshore” in the same breath, and the Average Joe thinks you’re actually talking about tax fraud or money laundering. But the fact is, legitimate ways to save taxes offshore do exist. For instance, you can invest your IRA offshore and get the same tax benefits as you would domestically. You can also buy variable annuities and cash-value life insurance polices outside the US, with the same tax benefits. And you have access to an entire world of investment opportunities – not just in the US. If you live outside the US full-time, you can exclude up to $100,800 of your earned income from any US tax liability (2015, adjusted annually for inflation). You can double that exclusion if your spouse accompanies you offshore and also generates earned income.
What are you waiting for? The strengthening dollar has significantly reduced the foreign exchange risks of international investments for Americans. There’s no better time than now to “go offshore”!
Mark Nestmann
Nestmann.com
