Beginning Investing for US Expat in Germany

[Merkmal85]

Country of Residence: Germany, but I still have US mailing address and bank accounts.

International Lifestyle: I'm not planning to move any time soon; certainly not within the next 10 years. I will likely settle down here, but I suppose I'd like some flexibility. My dream would be to live summers in Germany, and somewhere warm in Europe during the winter. May not be possible in my circumstances, but some problems can be solved creatively.

Currency: USD and EUR

Emergency funds: Yes

Debt: $17,000 Student Loans at 0%; I'm not making payments currently, as I'm on an income-based repayment plan and my income is below the threshold. (all for my US bachelor's degree; my master's in Germany is practically free)

Age: mid 30s

Desired Asset allocation: Not sure
Desired allocation to stocks outside your of country of residence: Not sure

Hello,

I have a bit of a unique situation and was hoping someone here could offer some tips or resources. I'm trying to include information that seems to be relevant to the decisions I am making.

After losing everything in the 2008 US housing crash, and having my health crash around the same time (taking some major life reorganization), I'm just getting started investing. My income sources currently are Social Security Disability (SSD) and a small part-time job in Germany. I've been slowly working on a degree here that will allow me to return to work within the next 5 years.

I'd decided to start with index funds, and am of course learning how complicated this is for a US expat. I started the part-time job in 2021, but haven't filed US taxes for it; my income from the part-time job is below the standard deduction, and my SSD income is non-taxable. My understanding is, since I have a US registered address, and I haven't filed taxes with foreign income, it should still be possible for me to start an account with a US domiciled broker. As a backup, a friend recommended I set up a joint account with a US family member, with me named as 100% beneficiary.

My thinking is that I could start a normal account with Charles Schwab. My understanding is that with no taxable income, I cannot start a Roth IRA, which would have been my first choice. I have around $6000 I've saved outside my emergency fund that I'm looking to invest now, and I'm thinking I'll start contributing about $500 per month going forward. This would allow me to reach the threshold of $25,000 for a Schwab international account by the time I start working properly again in 3-5 years. At that point, I could transfer my holdings to that account, and hopefully start contributing more.

Does anyone see any problems with this plan? Anyone have any better ideas?

[Harmanic]

You will be better off taking some time to read about expat investing. Andrew Hallam has written several books on the topic, such as "The Global Expatriate's Guide to Investing: From Millionaire Teacher to Millionaire Expat" and the newer "Millionaire Expat: How To Build Wealth Living Overseas" which was just published this year and should be up to date. I read a couple of his books awhile ago and they seem to be well researched.

[Merkmal85]

You will be better off taking some time to read about expat investing.

I appreciate the recommendations. I'll look into those books for sure.

[typical.investor]

Glad to hear you are feeling better.

I'd decided to start with index funds, and am of course learning how complicated this is for a US expat.

Ok, you have no idea ...

I started the part-time job in 2021, but haven't filed US taxes for it; my income from the part-time job is below the standard deduction, and SSD is non-taxable. My understanding is, since I have a US registered address, and I haven't filed taxes with foreign income, it should still be possible for me to start an account with a US domiciled broker. As a backup, a friend recommended I set up a joint account with a US family member, with me named as 100% beneficiary.

Ok ... this is complicated ... and I don't want to discourage you ... but anyway here goes.

My thinking is that I could start a normal account with Charles Schwab. My understanding is that with no taxable income, I cannot start a Roth IRA, which would have been my first choice. I have around $6000 I've saved outside my emergency fund that I'm looking to invest now, and I'm thinking I'll start contributing about $500 per month going forward. This would allow me to reach the threshold of $25,000 for a Schwab international account by the time I start working properly again in 3-5 years. At that point, I could transfer my holdings to that account, and hopefully start contributing more.

Does anyone see any problems with this plan? Anyone have any better ideas?

The international account is useless to you.

The first problem is getting a brokerage account that lets you buy US domiciled funds. Some US brokers such as Interactive Brokers and Schwab International can open accounts for expats overseas BUT (and this is the complication ...) they can not sell you US domiciled funds due to EU restrictions (US ETFs don't have the proper documentation for European retail investors).

There are a number of things you can do, but they are all pretty complicated. The easiest by far, is to open a brokerage account in your name (not joint for ownership reasons) at at US brokerage in the US and buy ETFs there. I say ETFs because they are more portable and mutual funds technically are not to be sold to expats. Ok, sure the brokerage won't know you are an expat, but if they find out it will be easier to more ETFs and less likely they will panic about selling you something they shouldn't. It's fine for brokerages to sell ETFs to expats but many won't because your country of residence has rules they are supposed to follow (case in point - EU regulations) and that is a hassle.

I suggest getting a mail forwarding service and using it for the mailing address at the brokerage. This will keep stuff from going to the relative whose address you used. Even if you request electronic only, things like change of address or email or phone notifications will go by mail. So too will transfer confirmations. My relatives didn't always forward things in a timely manner and some of the stuff that got sent out I didn't necessarily want them to see...

You have a US address so I would use that and I would not tell them I am in Germany. It would complicate it for them.

Ok, so just get a US account as a first step and if you can't we can discuss the other possibilities (options that settle in shares, individual stocks, an LLC for investing, futures) but they are more difficult. The main issue with a US account, is that you may not have a tax statement for the German authorities. Another issue is currency. Interactive Brokers has better currency rates than Schwab, but I don't know if you could hook up a German savings account move Euro in and then buy US domiciled funds in USD. It'd be ideal if you could. I'm not sure if they'd flag you for being in the EU though.

Once you have an account, remember that you can contribute to a ROTH or IRA with US taxable income. Understand that all your income is US taxable. So you can make ROTH contributions. However, if you exclude foreign income using the FEIE (foreign earned income exclusion), you can not use that income for ROTH/IRA contributions as it is not US taxable. If you make over the exclusion limit, you can with the excess.

To make this more complicated, some expats in Germany report it is best to not use the FEIE at all, but rather pay income taxes to both Germany and the US. Then on the US return, you claim German taxes as a credit (so you aren't double taxed). Because their German taxes were high, it worked out the best.

I found it easiest to use a program like TurboTax to run different scenarios. I'd prepare my taxes using the FEIE and also using the foreign tax credit to see which way worked best. And I'd also do it using a IRA vs a ROTH.

Do know that once you start taking the FEIE, you can't stop and restart. If you take it, then stop, you have to wait something like 5 years before using it again. So you can't make a year to year determination on what is best.

I don't know what's in Hallam's books today, but I have argued against his advice in the past because he didn't seem to be that familiar with the requirements of US persons. Maybe it's changed.

[typical.investor]

I'd decided to start with index funds, and am of course learning how complicated this is for a US expat. I started the part-time job in 2021, but haven't filed US taxes for it; my income from the part-time job is below the standard deduction, and SSD is non-taxable.

What is SSD?

I would 1) file 2) not use FEIE and 3) contribute to a ROTH.

And every year I would take another look at my tax return to see if FEIE is more useful than a tax credit. If the FEIE is significantly more beneficial than the tax credit, I would stop making ROTH/IRA contributions. This means that I would not make contributions until I have analyzed my taxes for the year, but you could always make a Jan contribution for a year and if it turns out the FEIE looks more beneficial, reverse the contribution (a hassle) or simple take the credit again that year and from the next know you should use FEIE and not make ROTH/IRA contributions unless over the FEIE limit (100k+).

[TedSwippet]

I'd decided to start with index funds, and am of course learning how complicated this is for a US expat.

Before going too far down any route, it will be worthwhile taking the time to read and understand the US/Germany tax treaty:

Germany - Tax Treaty Documents | Internal Revenue Service

While reading, pay close attention to the 'saving clause', protocol article 1 paragraph 4, which eviscerates large parts of the treaty for US citizens. Specifically on Roths, I found only one mention in the treaty, and it appeared unpromising:

aa) The Federal Republic of Germany recognizes qualified plans specifically listed in clause aa) of subparagraph a), other than Roth IRAs, as arrangements that correspond to pension plans referred to under section 1 of the German law on employment-related pensions (Betriebsrentengesetz). The Federal Republic of Germany shall provide the corresponding relief under section 3 No. 63 of the Income Tax Act

That is, Germany apparently does not recognise Roth accounts as tax-deferred, but would treat them as ordinary unwrapped trading accounts. Possibly useful article for IRAs in general in Germany:

401(k)-Plans and German taxation

Also, look for any punitive German tax rules relating to US domiciled or other (to Germany) offshore fund holdings. Maybe nothing, but do look. For example, the UK has a 'reporting funds' tax regime that makes many non-UK and non-EU domiciled funds and ETFs rather tax-inefficient. Finally, background reading, if you've not already found it:

Tax issues specific to US persons living outside the US - Bogleheads

What is SSD?

My guess: Social Security Disability.

[Merkmal85]

Thanks so much for the thoughtful reply!

What is SSD?

Once you have an account, remember that you can contribute to a ROTH or IRA with US taxable income.

Sorry. I was referring to my Social Security Disability income. From what I've read on the IRS website, disability benefits are only taxable above a certain threshold, which I don't meet. This means the only way I would have qualifying income would be to not claim the FEIE, and either pay double taxes or claim the foreign tax credit.

To make this more complicated, some expats in Germany report it is best to not use the FEIE at all, but rather pay income taxes to both Germany and the US. Then on the US return, you claim German taxes as a credit (so you aren't double taxed). Because their German taxes were high, it worked out the best.

This is an interesting idea. My worry about that: If I claim a foreign tax credit, would that not be something that a broker could see, and possibly close my account based on this?

The international account is useless to you.

...I don't know if you could hook up a German savings account move Euro in and then buy US domiciled funds in USD. It'd be ideal if you could. I'm not sure if they'd flag you for being in the EU though.

My thinking here was that an international account would be more useful later, when I don't want to worry about getting flagged. I guess if it's working with my normal account / US address, there would be no reason to switch anyway.


Thanks again for the response. Some great points to think about.

[Merkmal85]

Before going too far down any route, it will be worthwhile taking the time to read and understand the US/Germany tax treaty:

Thank you! I will definitely spend some time with that.

...Germany apparently does not recognise Roth accounts as tax-deferred...

Very important to know. I really appreciate the resources.

[typical.investor]

To make this more complicated, some expats in Germany report it is best to not use the FEIE at all, but rather pay income taxes to both Germany and the US. Then on the US return, you claim German taxes as a credit (so you aren't double taxed). Because their German taxes were high, it worked out the best.

This is an interesting idea. My worry about that: If I claim a foreign tax credit, would that not be something that a broker could see, and possibly close my account based on this?

No, the broker isn't going to see your tax return.

The international account is useless to you.

...I don't know if you could hook up a German savings account move Euro in and then buy US domiciled funds in USD. It'd be ideal if you could. I'm not sure if they'd flag you for being in the EU though.

My thinking here was that an international account would be more useful later, when I don't want to worry about getting flagged. I guess if it's working with my normal account / US address, there would be no reason to switch anyway.
[/quote]

Well, it is kind of easier to have the Schwab International account, but since they can't sell you US domiciled ETFs due to EU regulations it is effectively useless.

As for German taxation on the ROTH, I am unclear about when it would be taxed. Some places say only on withdrawal (so it can grow until then). See for example viewtopic.php?p=5057066#p5057066

https://scheller-international.com/blog ... ation.html

Withdrawals from Roth-401(k) plans or Roth IRA should also be covered by the German provision (withdrawal minus attributable contributions) even without the ruling since contributions have been made out of taxed income (ie after tax). These plans are not favorable for persons who are tax resident in Germany because in the USA the withdrawals are tax free but not so in Germany.

I don't know the exact tax brackets in Germany, but my image is that you could use the foreign tax credit so you are effectively only paying income tax to Germany, contribute to a ROTH and it will grow tax sheltered, then pay taxes on the gains in withdrawal. Will you be in Germany then? Maybe you don't know so having the ROTH in case you end up in the US would be good. I don't know if Germany has an exit tax or what would trigger it though.

Not ideal but perhaps better than a taxable account. I also don't know if there is a German 401(k) retirement plan that might work. This gets really complicated quickly but for the same reason you need to hold US domiciled funds, you would need a pension plan that you can't control (ie make decisions on the actual investments) https://www.greenbacktaxservices.com/bl ... port-them/

[Lazerr]

My German tax advisor deemed growth and rebalancing in a third country retirement plan (pre tax, entirely employer funded) to be non-taxable for Germany based on German law, i.e. regardless of the tax treaty in place with that country.

Obviously it is not a Roth, IRA or 401k, but that assessment still bodes well in general.

[Merkmal85]

Well, it is kind of easier to have the Schwab International account, but since they can't sell you US domiciled ETFs due to EU regulations it is effectively useless.

Fair enough. Seems like from what I'm reading, getting flagged as being overseas wouldn't necessarily close my account anyway, just bar further contributions... So it seems that's certainly not a good reason to choose Schwab over other options.

I don't know the exact tax brackets in Germany, but my image is that you could use the foreign tax credit so you are effectively only paying income tax to Germany, contribute to a ROTH and it will grow tax sheltered, then pay taxes on the gains in withdrawal. Will you be in Germany then? Maybe you don't know so having the ROTH in case you end up in the US would be good. I don't know if Germany has an exit tax or what would trigger it, though.

I don't have any plans to return to the US. With real estate prices doing what they're doing in the areas I would want to live, it seems like moving back to the US would be such a financial hit that it just wouldn't be worth it. Still I suppose it is possible... and it doesn't really seem like there are any big downsides to a ROTH IRA compared to other options (I've been trying, but can't imagine a circumstance wherea standard IRA would provide any benefits). There's also the chance that the tax treaty will be amended to recognize a ROTH at some point in the next 30 years, though I wouldn't bank on that.

It's also possible that I'll retire somewhere else altogether, in which case the ROTH may pay off after all. Guess I'll have to enter that into my calculations.

I also don't know if there is a German 401(k) retirement plan that might work. This gets really complicated quickly but for the same reason you need to hold US domiciled funds, you would need a pension plan that you can't control (ie make decisions on the actual investments) https://www.greenbacktaxservices.com/bl ... port-them/

Something else to chew on for sure. Thanks again for the input.

[Merkmal85]

My German tax advisor deemed growth and rebalancing in a third country retirement plan (pre tax, entirely employer funded) to be non-taxable for Germany based on German law, i.e. regardless of the tax treaty in place with that country.

Obviously it is not a Roth, IRA or 401k, but that assessment still bodes well in general.

Interesting, thanks for the input.

[typical.investor]

Well, it is kind of easier to have the Schwab International account, but since they can't sell you US domiciled ETFs due to EU regulations it is effectively useless.

Fair enough. Seems like from what I'm reading, getting flagged as being overseas wouldn't necessarily close my account anyway, just bar further contributions... So it seems that's certainly not a good reason to choose Schwab over other options.

That's true, but it depends on the broker who flags you. Vanguard froze me and I could sell, transfer out and have dividends reinvested. I couldn't even buy a money market fund though.

For me it was nerve wracking thinking at the time I could get my taxable account liquidated. I was able to transfer to Schwab International though and Vanguard never liquidated.

Schwab is easier to use than Interactive Brokers I think. And the Schwab debit card is foreign transaction and ATM fee free. IBKR's has a small fee.

You could open a Schwab US account. I don't think they will flag you unless you tell them. Worst case, you could easily transfer over to Schwab International but you'd be looking at the EU regulation restriction.

The real question is if you could open a IBKR (Interactive Brokers) account and transfer euro from your bank in, convert and their great rates, and then purchase US ETFs that you need for tax reasons. I wonder if they would flag you. You could try and if they did, transfer to Schwab US and only transfer USD in some other way (Wise or whatever is the best these days). That's your added cost ... conversion to USD to invest and then conversion back to EURO to spend. IBKR has the best rates in town so it might be worth it to try ...

[Merkmal85]

The real question is if you could open a IBKR (Interactive Brokers) account and transfer euro from your bank in, convert and their great rates, and then purchase US ETFs that you need for tax reasons. I wonder if they would flag you. You could try and if they did, transfer to Schwab US and only transfer USD in some other way (Wise or whatever is the best these days). That's your added cost ... conversion to USD to invest and then conversion back to EURO to spend. IBKR has the best rates in town so it might be worth it to try ...

I've been reading that IBKR makes transfers really easy in both directions, which is a plus. For the next couple of years at least, I'll be transferring more money from my US > GER account than in the other direction. I imagine this would make it pretty easy from either Schwab or IBKR.

Seems like a lot of people recommend IBKR over Schwab for lower costs and more transfer options, but as you mention, Schwab is easier for a beginner to use and has some advantages like no-fee ATM withdrawls. These are really the two I'm weighing right now.

[radioactive]

I may as well jump in as a long-term German resident.

I have accounts with a few brokerages, each has their own advantages and disadvantages. If you are just starting out, it's probably easiest to use a Schwab account, and do SEPA bank transfers to Schwab's Citibank account in Frankfurt (see here for the account number), just list your name and account number in the Verwendungszweck. Transfers usually show up same day, and are at the immediate forex rate when it hits your account, and not a daily rate. I find IBKR's interface a bit too complex for the my peon brain, and susceptible to my psychological blocks such as "... I want the EUR to go up just 0.1% more before I convert".

There are many articles regarding IRA, Roth and FTC vs FEIC, for example this on.

As TedSwippet mentioned, I found it worthwhile to read both the protocol and technical explication of the tax treaties. The protocol is a bit dense and hard to parse, however the technical explanation is surprisingly non-technical and explains things in much more common language. As a minimum, I suspect that your social security payments will be subject to Progressionsvorbehalt, where Germany will not tax this amount, but consider it as income when taxing any German sourced income.

As a last item, there's an English speaking forum with it's own finance section, the topic of Roths and such come up with some regularity.

[Merkmal85]

I may as well jump in as a long-term German resident.

Thanks much for the response and resources! I was able to get an account opened with IBKR. Schwab was requiring a US phone number, which I no longer maintain.

I didn't file German taxes last year (when I started working a bit again), as my understanding is that it's not necessary when earning under a certain amount. Of course, taxes were automatically deducted by my employer. This year is looking a lot more complicated, and I'm toying with finding a professional to help me for the first year.

[Gold and a Pager]

Before going too far down any route, it will be worthwhile taking the time to read and understand the US/Germany tax treaty:

Germany - Tax Treaty Documents | Internal Revenue Service

While reading, pay close attention to the 'saving clause', protocol article 1 paragraph 4, which eviscerates large parts of the treaty for US citizens. Specifically on Roths, I found only one mention in the treaty, and it appeared unpromising:

aa) The Federal Republic of Germany recognizes qualified plans specifically listed in clause aa) of subparagraph a), other than Roth IRAs, as arrangements that correspond to pension plans referred to under section 1 of the German law on employment-related pensions (Betriebsrentengesetz). The Federal Republic of Germany shall provide the corresponding relief under section 3 No. 63 of the Income Tax Act

That is, Germany apparently does not recognise Roth accounts as tax-deferred, but would treat them as ordinary unwrapped trading accounts. Possibly useful article for IRAs in general in Germany:

401(k)-Plans and German taxation

Protocol Article 18A, paragraph 16 explicitly names Roth IRAs as a pension plan for the purposes of the treaty. Section 3 No. 63 of the German Income Tax Act looks like it deals with how much employer contributions to a pension plan can be deducted, which is not an issue with Roth IRAs.

My understanding, therefore, is that as a German tax resident, only the distributions from a Roth IRA are taxable in Germany, but it is otherwise a recognized pension plan and what happens in the contribution phase is not taxable in Germany. The savings clause doesn't really affect anything since it deals with the US imposing taxes (Roth IRAs have none if you're taking a normal distribution).

Would it be better to just invest in a normal German brokerage account and not deal with all of this? Yes, but if you want ETFs/a diversified portfolio, I don't know an easier way to do it.