Investment Planning [Germany ex-pat in US]

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Topic Author
Morgi87
Posts: 9
Joined: Tue Apr 02, 2019 1:45 pm

Investment Planning [Germany ex-pat in US]

Post by Morgi87 » Mon Apr 08, 2019 9:38 am

Hi Team Boglehead,

I came along this forum just recently a few month ago and I'm very grateful to have it as a source for our financial planning. Since my family and I have a bit of a unique situation, I decided to bring up our case and ask for some more advice directly here in the forum.

Here are some facts to our situation:

Our family consists of my wife (31), myself (32), our son Neo (18month) and our 2.son to be born in June. We are living in NYC for since 2015.
My wife is an American Citizen (originally from Bulgaria), I am a Green Card Holder with German citizenship.
I am running my own business and my wife is supporting me, while we are taking care of our two chilren.
End of last year, I have opened an individual 401k's, roth 401k's and roth IRA's for our business and opened accounts for my wife and myself. F

My original idea was to max out all potential retirement investment options based on Bogle's investment strategy. Our accounts are with TD Ameritrade, so our portfolio is built with the offered fee free etf funds and bonds: SPTM, SPTW, SPAB, SPEM.

After maxing out the retirement accounts, the plan is to either invest more money into an investment account, maybe an UGMA for our children, and putting money aside for a potential house purchase.

Here is the dilemma in my thought process:

We are very uncertain about where we want to be in 5, 10 years or in our retirement at this point. Potentially, we would like to see our children grow up in Germany to some degree and with that move in the next 5-10 years. On the other hand, if my work continues to go well, and we are building everything around here in NYC, it will also be hard to leave everything behind and start from Scratch again.

However, one of my thoughts would be to build financial freedom through the next 10years, move with that asset to Germany and then rebuild a similar busines without much financial pressure (+ having the benefits of our educational and health system in Germany). In that particular case, it would be probably a bad idea to continue putting money into retirement accounts. At the same time, if that idea/plan doesn't work out, we lose all the tax benefits of the retirement accounts in iterim.
I also thought through the scenario of splitting investment money into retirement acc's and normal investment acc, once we leave to Germany use the money from the investment account and let the retirement acc's grow until retirement. However, if we then decide not to retire in the United States, will still lose the tax benefits, since Germany does not accept those retirement accounts.

Also, in addition, I haven't my decision yet, if I should apply for American citizenship or not (mostly based on tax reasons in case we would move back to Germany). With that in mind, and considering the fact, that there is also a risk of divorce, no American citizenship and living back in Germany only, without the flexibility of coming to USA, I am a bit confused what the right option in regards to retirement might be.

There are many different scenarios, and maybe we can go through them more in detail at some point. For right now, I would be happy to hear if someone has been in a similar situation or knows similar cases and to hear their stories.

I hope it was not too confusing and I'm happy to respond to any follow up questions.
Thanks to all of you for your help.

D.

Topic Author
Morgi87
Posts: 9
Joined: Tue Apr 02, 2019 1:45 pm

Re: Investment Planning [Germany ex-pat in US]

Post by Morgi87 » Thu Apr 11, 2019 9:08 am

Ping

Anyone some thoughts on this, some advice or a link to a helpful thread?

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prudent
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Re: Investment Planning [Germany ex-pat in US]

Post by prudent » Mon Apr 15, 2019 6:32 pm

Hi and welcome. I wonder if there are so many variables in your question (as you stated, "many different scenarios") that it is difficult for someone to offer guidance.

QuantOfAsia
Posts: 44
Joined: Sun Apr 14, 2019 7:57 pm
Location: Hong Kong

Re: Investment Planning [Germany ex-pat in US]

Post by QuantOfAsia » Mon Apr 15, 2019 8:09 pm

Dear Morgi87,

Sounds like an exciting though complex set of "good choices" ahead of you whether to spend more of your future in the US vs Germany vs elsewhere.

The good news is that US 401(k) plans are some of the best and most cost effective retirement structures on the planet. If you do go back to Germany (or another country), I would double-check the tax treaty on how US pensions would be treated / taxed in your country of residence at that time. I haven't checked Germany's recently, but in most cases I've seen it worthwhile to keep investments in the 401(k) even after moving outside the US until at least age 59 1/2, and often beyond that.

Even more important than the tax planning, it seems you have the healthy habit of saving and buying world class index funds regularly.

Topic Author
Morgi87
Posts: 9
Joined: Tue Apr 02, 2019 1:45 pm

Re: Investment Planning [Germany ex-pat in US]

Post by Morgi87 » Mon Apr 22, 2019 6:34 am

Thank you for taking your time to respond.

I take your advice and look more in detail into the law situation in Germany in regards to foreign 401K plans. Independently from that, I decided to continue growing our 401k's as the limit allows.

Storamin
Posts: 31
Joined: Sun Jan 15, 2017 6:25 am
Location: Düsseldorf, Germany

Re: Investment Planning [Germany ex-pat in US]

Post by Storamin » Sat Apr 27, 2019 12:55 am

As I read your post, it occurs to me that most important questions are not actually investment or tax planning questions but life questions. No one here can really answer those. There are of course positives and negatives from a tax planning perspective.

In Germany it is significantly cheaper and easier to raise kids from child birth thru college (and hopefully getting them out of the nest). If you move to Germany, would your wife give up her US citizenship and get German citizenship? If not, you would want to keep assets in your name and away from the US government. No ifs ands or buts about it - divorce would expensive and difficult. But I haven't seen many divorces that weren't both. As a long term German resident with US citizenship I will never give up my US citizenship for the sole fact that I can always travel to and work in the US and getting a visa in Germany is simple for me. Germans getting a visa in the US is much more difficult.

You are incorrect when you say that Germany does not accept US tax accounts. If your wife would keep US citizenship, you may have to factor in the US government anyways.

How regular 401ks and IRAs are treated in Germany is covered by the DTA between US and Germany. What my understanding is that an individual 401k or IRA will be treated similar in Germany as in the US. Contributions are generally tax deducted when contributed, and then earnings + contributions are taxed at ordinary rates when distributed. This is somewhat unfortunate since the German tax rate is higher than the US tax rate. You are contributing money and deducting the US tax percentage (lower than in Germany) today, and then paying the German tax rate later (higher than the US).

Roth 401ks and Roth IRAs are not mentioned in the DTA, so you are running a bit of a risk that they will be misunderstood in Germany.
Roth 401k and Roth IRA contributions are taxed and then never deducted. Earnings grow tax free until distribution and then the German government will probably go after them. It may be so that the roth account will be treated like a regular brokerage account for German reporting purposes. The problem is that the Roth portion is not discussed during the DTA, so theoretically, the German government could come after your Roth and treat it as a regular 401k or IRA which would really penalize you. If you keep detailed records of your contributions, it could be treated like a regular brokerage.

The other problem is that Germany instituted a new rule for Stocks in 2018. Since you are a German national - would you like to read up about that and provide me some guidance? It taxes the theoretical or actual gains and you pay taxes during the life of ownership of securities, not only at the time of sale. The german government was unhappy people were holding securities and delaying tax payments until sale. If you live in Germany this will impact your taxable accounts.

If you do plan to move to Germany you should read up on trust tax treatment. They are not common in Germany and would be a pain to deal with.

What are the alternatives? Not much as long as you are covered under US tax reporting. As a US citizen or permanent resident or green card holder it is best to invest in securities that are not PFIC. For you as a German citizen when you are NOT under US taxes, you could go with Vanguard ETFs listed in Ireland which would give you similar market performance and make your tax reporting earlier in Germany but extremely more difficult in the US. Most retirement accounts in Germany are junk anyways.

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