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What are the Limits for My Investing and Spending Accounts?

What are the Limits for My Investing and Spending Accounts?

As we turn the page to the second quarter of 2022, it’s a good time to familiarize yourself with the changes to the more popular savings vehicles. It is imperative to understand the basics of these accounts to avoid mistakes, as the penalties can be quite onerous. This is not an exhaustive list, but it is a good place to start. 

The list is broken up into the appropriate categories of employer-sponsored plans, personal retirement plans, healthcare and spending accounts, and educational accounts.   

Employer-Sponsored Plans

401(k), 403(b), and most 457 plans have a new maximum employee contribution limit of $20,500, up from $19,500 in 2021. The overall maximum annual additions into defined contribution plans (which include 401(k) and 403(b) plans) increased from $58,000 to $61,000. 

Individuals aged 50 and older are allowed an additional $6,500 of contributions. Note that the “age 50 catch-up” amount did not increase from 2021 to 2022.

Personal Retirement Plans

IRA and Roth IRA contribution limits are unchanged at $6,000 for people under the age of 50 and $7,000 for individuals 50 years old and older. 

The traditional and Roth IRA income phase-out ranges are also increasing. 

Healthcare and Spending Accounts

Health Savings Account contribution limits increased from $3,600 to $3,650 for individuals and $7,200 to $7,300 for families. 

The HSA catch-up contribution for individuals 55 years old and older is an additional $1,000. This is unchanged from 2021.

The  Health Care Flexible Spending Account (FSA) limit has increased to $2,850 in 2022 – up from $2,750 in 2021.

The Dependent Care FSA limit in 2022 has reverted back to $5,000 for a married couple filing a joint tax return. The American Rescue Plan temporarily increased the limit to $10,500 in 2021.

529 College Savings Plan

529 plans do not have contribution maximums; however, contributions are considered completed gifts for federal tax purposes, and in 2022 up to $16,000 per donor ($15,000 in 2021), per beneficiary qualifies for the annual gift tax exclusion.

The Coverdell IRA contribution limit is $2,000 per student, per calendar year. 

The annual changes to contributions and income limits are not consistent year-over-year; therefore, understanding the changes and how they affect your specific situation is important. It is a good idea to check your contribution levels early in the year as payroll adjustments and/or automatic contributions into your IRA accounts may be required periodically.

Three Things To Know About Portugal’s Non-Habitual Residence (NHR) Program

Three Things To Know About Portugal’s Non-Habitual Residence (NHR) Program

One of the major developments in my practice has been the considerable uptick of expats considering (and consummating) a move to Portugal. Having lived briefly in Lisbon years ago, it’s been a true pleasure to see Portugal not just register on the American expat heatmap, but to become an epicenter of sorts. Portugal’s Non-Habitual Residence (NHR) tax program is a key driver behind this trend.

One of the more negative aspects of American expat life in Europe tends to be the cost of living. This is often the case when it comes to housing, goods, transportation, etc., but it is even more true when it comes to TAXES. Both income taxes and wealth transfer taxes (gift, estate, or inheritance taxes) tend to be much higher in Europe than in the United States. Because the United States uniquely practices “citizenship-based” taxation, this basically means that U.S. federal tax rates are the floor for an American’s global tax liability. However, when a U.S. expat takes up residence in a country with higher tax rates, the new residence country’s tax rates become a higher ceiling. Portugal has managed to attract American expats by substantially lowering that ceiling for a 10-year period of time, and they’ve been wildly successful in attracting U.S. expats as a result.

But before you go buy that dream home in the Algarve, Cascais, Porto, or Cintra, you should get very well acquainted with the NHR program and make sure you understand its details, requirements, and limitations. We’ll get you started on that homework by discussing three important aspects of the program.

Most “Non-Portugal-Source” Income Is Not Taxed In Portugal 

If you opt into the NHR Program, which you must do after obtaining a residence visa and before you’ve completed your first year as a tax resident, much of your income from foreign sources are excluded from Portuguese income tax. There are important caveats or exceptions. First, the program changed in 2020 (March 31) regarding foreign pension income (e.g., IRA, 401k, defined benefit pensions, etc.). For those entering the NHR program after March 31, 2020, Portugal will tax foreign pension distributions at the flat rate of 10%. For Americans, this is a change with little consequence, as the Portuguese tax on pensions produces a foreign tax credit that can be used to reduce the remaining U.S. tax liability from those distributions. Also, U.S. Social Security payments and payments from a U.S. federal, state, or local government pension (e.g., a transportation authority pension, the federal TSP, a state government pension, or public school system retirement plan) are only taxable in the U.S., by treaty

Second, U.S.-based portfolio income (intangible personal property), including dividends and capital gains in taxable brokerage accounts (i.e., not pensions), may still be taxed in Portugal at the Portuguese standard tax rate of 28%. The issue is somewhat unclear under the program, but most Portuguese tax preparers tend to take the conservative position that these sources of income are taxable and not excluded under the NHR program. We would encourage you to find and consult with a tax preparer in Portugal to make the final determination on that issue. 

Finally, I would point out that income from consulting or other services performed for businesses outside of Portugal may also be excluded from Portugal’s income tax during the NHR period. For this very reason, Portugal has become a haven not only for U.S. retirees but also for the so-called “digital nomads” working remotely for U.S. (and non-U.S.) companies.

Working in Portugal Is Still Tax-Advantaged While in the NHR Program

The NHR program is not just for retirees, independent contractors/consultants, and digital nomads. If you decide to work in Portugal while participating in the NHR program, Portugal-sourced earned income is taxed at a flat 20% rate instead of those higher progressive Portuguese income tax rates. This might exceed your U.S. federal effective tax rate, or not, depending on your individual income levels. Nonetheless, it is certainly a tax break from standard progressive income tax rates that apply to earned income in Portugal. Moreover, the foreign-earned income exclusion (FEIE) and foreign tax credits from Portuguese income tax paid on earnings should substantially reduce, if not altogether eliminate, U.S. federal tax liability. 

“Non-Habitual” Resident Is Not A Particularly Apt Name For This Program

The term “non-habitual resident” implies someone who transits between Portugal and their home country or suggests that NHR participants are merely visiting. However, to be clear, you can buy a home in Portugal (not required, of course), declare Portugal your adopted permanent home, and still qualify for the NHR tax status. The tax benefits of NHR expire after 10 years, but nothing precludes a longer stay and, in fact, I’m sure the Portugal tax authority would appreciate it if many stayed and began paying normal Portugal income taxes thereafter.

Moreover, to qualify for the NHR program, you must first obtain a residence visa and become a tax resident of the country. After you become a Portuguese resident, and only in the first year of tax residency, you may then opt into the NHR program. Beware that you may need to make a significant investment (financial commitment) in Portugal to obtain a residence visa – unless you hold an EU passport – which might simplify the process considerably. In fact, if you qualify for citizenship in another EU country, obtaining such dual citizenship might expedite the process or alleviate some of the financial requirements. Consulting with one of the many immigration services skilled in the Portuguese residence programs is an essential step in the process.

Portugal has become a premier destination for expats, including American expats, looking for a home in Europe that is both comfortable and affordable. The NHR program’s intriguing benefits are worthy of serious consideration to both young globetrotters and retirees alike. As always, please feel free to reach out to Walkner Condon to discuss your specific situation.

American Moving to Germany – Gimme Some Truth for US Expats Podcast

American Moving to Germany – Gimme Some Truth for US Expats Podcast

Thinking about moving to Germany as an American? Well, you’re definitely not alone.

We continue our country-specific journey for U.S. expats with another stop in Western Europe. Though we haven’t dedicated a lot of written content previously to Germany, we know from visitors to our website that it’s right up there among top destinations. Including the U.S., it ranks as our third-highest source of visitors, behind only the U.K., which was our first country-specific destination on Gimme Some Truth for Expats. And, several sources back that claim up, listing the number of Americans in Germany as more than 200,000.

In the words of Syl Michelin – Walkner Condon’s resident CFA® – Germany is generally a high tax jurisdiction. With that in mind, the journey to Germany centers a lot around the subject of taxation for Americans, whether that’s a short-term stay or a long-term stay. Syl is joined on the episode by Stan Farmer, CFP®, J.D., and Keith Poniewaz, Ph.D., as our full team of U.S. expat financial advisors dives into all things Deutschland when it comes to investing and managing their money.

3 Reasons to Look at Investing Internationally in 2022

3 Reasons to Look at Investing Internationally in 2022

In 2021, the U.S. stock markets hit record highs almost 70 times, and the consensus is that the U.S. market is largely “expensive.” Such a snap view is confirmed by a variety of valuation metrics: price-to-earnings ratios (P/E) and forward P/E being chief among them. Moreover, the bond market is poised to face a rough 2022 because there is a growing consensus that the United States Federal Reserve Board (also known as the “Fed”) will also increase interest rates, which historically has caused bond prices to fall. Between this seeming domestic “rock and a hard place,” there are some areas that continue to look like good deals: one of which is international equities.

In this article, I will cite three key reasons why investing now in international markets might be a good long-term investment: or, in other words, explain why the U.S. is expensive and the rest of the world is not.

Currency and the Almighty Dollar

The U.S. dollar is relatively strong right now – and indeed might get stronger in the near future because the U.S. may raise interest rates as soon as March. Indeed, the dollar posted its best year since 2015 in 2021, and the U.S. dollar index (DXY) was up 6.5% in 2021

However, overall a stronger U.S. dollar will make international goods and services more competitive (or allow manufacturers to make more money) in the longer run. How does that work? In short, a stronger U.S. dollar means it is less expensive to buy foreign goods and services. If the dollar is weak versus the euro (let’s say $1 equals 0.8€), for example, a purchase of an automobile that costs 30,000€ would equal $36,000, and the automobile will be compared to those similarly costing $36,000. If, however, the dollar is strong (let’s say $1 equals 0.9€) a 30,000€ automobile would only cost $33,000. A manufacturer can deal with this in a variety of ways– it can aim to sell more cars at less price (instead of 10,000 cars at $36,000 try to sell 15,000 at $33,000) or the same number of cars at the original $36,000 price, booking the currency gain of $3,000. In either case, the firm will be helped by the stronger U.S. dollar.

The U.S. dollar being strong also has the effect of meaning that just as the foreign currency could theoretically buy more car for less– a stock originally priced in euro can also be bought for less. Indeed, foreign market returns for U.S. investors were hindered by approximately 5.2% by currency headwinds last year due to the strengthening U.S. dollar according to JP Morgan.

An additional tailwind of a strong dollar for international markets is that it frequently promotes international travel, improving many economies that depend on tourism for a large chunk of their GDP. However, the ongoing pandemic may lead to this effect being muted. Should COVID progress to an “endemic” rather than a pandemic, we’ll likely see an increase in travel to foreign countries buoyed by pent-up demand for travel and the ability to buy more with less.

(For those who prefer a video explainer from the perspective of U.S. companies, look here for an overview from the WSJ

Rest of the world GDP growth 

One of the ongoing beliefs is that the U.S. economy (and accordingly its stock market) is doing better because the U.S. economy is doing better than the rest of the world. This is not necessarily the case.

In fact, between 2012 and 2019 the GDP growth rate of the rest of the world surpassed that of the United States by 0.5% per year – though this was admittedly a cooling down as the rest of the world grew at a rate exceeding the U.S. by 1.2% from 2001-2011 according to the JP Morgan Guide to the Markets. In fact, the last time the U.S. outpaced the rest of the world in GDP growth was from 1992 until 2000. Despite this growth advantage, U.S. large-cap stocks have outpaced the rest of the world (the MSCI EAFE index) by roughly 275% over the last 14 years. (JPM)

Valuations

This might be the most compelling case for looking at non-U.S. equities going forward – an international note we’ve hit on in our Gimme Some Truth podcast before in this episode. As I noted in the introduction, the U.S. (particularly U.S. large-cap stocks) is trading very high relative to its longer-term P/E measures. There are several reasons for this, but a key one is the low-interest rates in the United States and a very strong run for U.S. technology over the last 10 years. On the other hand, despite negative interest rates, valuations of non-U.S. stocks have not soared. 

Indeed, relatively speaking, valuations for non-U.S. stocks are deeply discounted compared to the U.S. Again, according to the JP Morgan Guide to the Markets, the rest of the world’s forward price-to-earnings ratio (FPE) was at 14.1 versus the S&P 500’s 21.2 FPE. This is compared to a 20-year average of 13.3 FPE versus 15.5 FPE for the U.S. In other words, the rest of the world is trading at a 32.7% discount versus U.S. FPE, which is significantly off of its 20-year discount of 13.2% discount. Moreover, the rest of the world is yielding higher than the U.S. right now. On average, the U.S. has dividend yields about 1.6% less than the rest of the world (compared with a 1.1% average difference over the past 20 years).

Such data also apply as we look from region to region. For instance, Japan, despite macroeconomic forecasts of 3.2% growth next year, is currently trading below its 25-year forward P/E ratio. 

In short, even if we take into account that the rest of the world tends to trade at lower valuations historically, the rest of the world is trading at a discount in terms of price to earnings. 

There is an old saying in investing that the market can stay wrong longer than you can stay solvent. While we don’t go that far in our risk-taking, the 14-year ongoing out-performance of U.S. large caps has exceeded the longest previous period of out-performance by approximately 6.5 years and growing (the rest of the world outperformed the U.S. for 7.3 years from approximately 2001-2008; the longest period of U.S. out-performance was a little over six years during the 1990’s dot com boom). It is impossible to predict when the shift will occur, but from a long-term perspective, the rest of the world is looking like a better and better deal.

Keith Poniewaz, Ph.D.

Moving to Spain as an American: Financial Factors to Know

Moving to Spain as an American: Financial Factors to Know

When it comes to top destinations abroad for Americans and U.S. expats, Spain is certainly one of the favorite choices. There are roughly 40,000-50,000 Americans residing in Spain, depending on the source you reference.

For Americans moving to Spain, or thinking about such a move – whether it’s for temporary work for a U.S. company, a job that is based in Spain, or retirement – there are many financial components to consider. It’s not just as simple as leaving your U.S. finances behind when you board the plane.

Walkner Condon’s Keith Poniewaz, Ph.D., walks you through several of the key financial considerations to be aware of if you’re planning a move or even just thinking about one.

A financial advisor who works with U.S. expats, Keith covers Foreign Earned Income Exclusion (FEIE), trusts and inheritance, why the location of your investments matters, and more.

Is relocation from the U.S. to Spain in your future? You can schedule a meeting to discuss your details more in-depth with our team of U.S. expat financial advisors below.

What is the Best Brokerage for Expats?

What is the Best Brokerage for Expats?

One of the challenges for expats that leave the United States and want to invest elsewhere is that the traditional investment options available to them in the United States may not be available. (For more information on this topic, read our white paper on the topic). As a result, there are a couple of custodians in our experience that are more “friendly” than others, a more exhaustive ranking of which can be found in this article from Barron’s.

Please note that most U.S. brokerages do not accept clients internationally, or will often freeze or restrict purchases in customer accounts whenever they learn that the account holder has moved abroad. It is best to ask your financial advisor or contact the brokerage house directly to do some due diligence on your particular situation before moving forward with any of these options. For instance, some expats believe that they can just use a P.O. Box or a friend’s address, but in many cases, it is not that simple (and potentially not legal either!). It can leave the expat with very few comfortable alternatives.

Rather than provide an exhaustive evaluation of various brokerages, we’ll provide commentary on the two brokerages that we believe, from our perspective as advisors dedicated to working with international clients and communicating with hundreds (perhaps thousands) of expats around the world and provide the most coverage for investors living overseas: Charles Schwab and Interactive Brokers.

These two brokers stand apart in our opinion based upon two key criteria for U.S. expat/international investors:

1. Their overall international footprint (the countries that they are “open” to servicing residents; and

 

2. That their international footprint applies whether the account holder works with an advisor (an “institutional” client) or goes it alone (a “retail” client). 

The tools tend to differ for overseas investors utilizing a U.S. brokerage (even when that brokerage is receptive to the non-resident account holder). As products that are offered by prospectus and technically “issued” by the managing firm of the product, domestic U.S. mutual funds are generally off-limits to all investors with a non-U.S. address (even if they are U.S. citizens). Accordingly, those looking for efficient means for diversification will have to look to Exchange Traded Funds (ETFs). ETFs have exploded in popularity in recent years and offer, in many cases, a low-cost, tax-efficient, diversified manner in which to invest. However, more recent regulations in the European Union have restricted, or at least limited, access to ETFs for European Union residents

Accordingly, being able to utilize a U.S. brokerage still often comes with limitations and will often require additional effort, skill, and/or attention than many retail investors may desire. The regulatory landscape, as it has evolved, has certainly required us to utilize a variety of strategies to ensure our clients are appropriately invested. We’ll now provide a brief overview of what our top choices for U.S. brokerages serving the overseas markets bring to the table for their retail and institutional clients. We’ll consider the strengths and limitations generically but would advise that the right choice for an investor will vary depending on both the specific country in which the investor lives, as well as their personal preferences and experience with managing their investments.

Interactive Brokers

Interactive Brokers (IB) has built its reputation as an alternative to conventional Wall Street firms and the champion of the individual investor by offering a truly global platform where individuals can trade not just on the U.S. exchanges, but around the globe on most of the world’s leading stock exchanges. In addition to individual stocks and bonds, customers of IB can purchase ETFs and, most importantly, transact in foreign currencies with very low-cost forex trading. These features can provide tremendous value to investors that live abroad and who earn their living and spend their earnings and savings in foreign currencies. In a sense, IB opened up a truly global institutional-class trading platform for retail investors.

Investors living in “difficult” jurisdictions (meaning countries where other brokers, including Schwab, will not accept clients) would be well-served to check out Interactive Brokers. IB clearly stands alone as the most accessible brokerage platform for international access to the U.S. and most foreign exchanges. There are still places where IB won’t work, including countries where the U.S. Treasury Department’s Office of Foreign Asset Control has slapped it with sanctions, and even a few “friendly nations,” but IB is open for business in more countries than any other reputable brokerage firm. 

Unfortunately, world-class access isn’t always matched with world-class customer service. Interactive Brokers receives a lower score when it comes to getting assistance on the phone, though this has actually improved with time. When there are issues with wire transfers or ACH overnight transfers, it can be frustrating to get actual help from a human being at times. Another caution for relatively inexperienced investors is that the trading platform might seem overly complex for many (particularly the downloadable trading platform known as “Trader Workstation”). 

Moreover, although the commissions are low (or even free, depending on account type), basic features widely available elsewhere, such as news streams and real-time quotations, require monthly subscriptions for IB clients.

Americans should also be very, very careful when purchasing investments on overseas exchanges to avoid the tax consequences of owning Passive Foreign Investment Companies (PFICs). This is one of the great pitfalls that expats must avoid or face daunting tax and reporting issues that are best avoided altogether. PFICs include ALL foreign-registered mutual funds AND ETFs. Often, for every large and liquid ETF that trades in the United States, there are several foreign-registered ETFs that trade on overseas exchanges and which bear the identical name to their U.S. counterparts. U.S. tax residents should be very careful to avoid purchasing ETFs on foreign exchanges in taxable brokerage accounts. Unfortunately, while all foreign-registered ETFs are PFICs, not all PFICs are ETFs (or mutual funds). There are many publicly-traded foreign companies and other entities that generate enough passive income to meet the definition of a PFIC. In this sense, IB’s incredible access to foreign markets can be a dangerous tool in the hands of the inexperienced and/or unaware. For even more information on this, check out our white paper, “Why is it so Hard to Open Investment Accounts for American Expats”. 

Finally, it should also be noted that for residents of the EU, Interactive Brokers has blocked access to U.S.-registered ETFs. Given the dangers of foreign-registered ETFs, discussed above, this leaves Americans in the EU with the daunting task of constructing their portfolios with individual securities (e.g., stocks and bonds) rather than getting their diversification through ETFs. For unsophisticated investors, or even sophisticated investors that don’t have the time or inclination to manage their own stock and bond portfolios, this is a major impediment that must be considered. IB has also made it more difficult for advisors on the IB platform to service EU-resident clients, which is particularly unfortunate given the restrictions on trading ETFs and the aforementioned complications with portfolio construction. It’s an evolving regulatory landscape that has not always been navigated with aplomb.

Charles Schwab

The online brokerage universe has consolidated tremendously over the past few years, and perhaps the greatest single consolidation has recently arrived with Schwab’s acquisition of T.D. Ameritrade. Schwab was one of the first retail brokers to go online many years ago and today is one of the largest brokerage firms in the world. It services retail clients who do not work with advisers, it has its own advisory services business, and it is a leading institutional platform for independent advisors (including our firm and thousands of other independent firms) on the Schwab Alliance platform. 

Schwab offers a wide menu of ETFs and no commissions on ETF trades. It’s a very robust U.S. platform with thousands of dedicated customer service personnel to assist customers of all three varieties mentioned above. The technology platforms that customers can access at Schwab are very user-friendly as well, though perhaps not cutting edge in their technological innovation (the capital has clearly gone more to M&A than R&D!).

More importantly for international investors, including U.S. expats, Charles Schwab has maintained, even expanded, account services for residents outside of the United States over the past few years. Of all the “big” brokerage firms, Schwab stands out for its international ambitions in an era where so many of its contemporaries have closed the accounts of expats and other foreign resident customers. Furthermore, Charles Schwab stands apart from the other majors in expanding the country menu for clients both on the retail and the institutional platform. While Fidelity offers some expanded accessibility on the institutional side to foreign residents working on its advisory platform, it has been prominently chastised in the expatriate community for kicking retail customers living outside of the United States to the proverbial curb.

However, even Schwab’s international ambitions have their limits, so Schwab may or may not provide the ideal solution for the expat/international customer, depending on individual circumstances regarding the customer’s residence and/or whether the customer works with an advisor (institutional client vs. retail client). If you want to see whether you live in a permitted country, Schwab provides a convenient link to try to open an international account: 

OPEN SCHWAB INTERNATIONAL ACCOUNT

From there, you can simply go to the drop-down menu of countries on the page and select your residence country to determine whether you can complete an application or whether Schwab is unavailable for residents in your country at this time. 

For clients living in the EU and working with U.S. independent advisors on the institutional platform, Schwab offers a key advantage: access to U.S.-registered ETFs. Unfortunately, retail Schwab customers with EU addresses will be blocked from purchasing U.S.-registered ETFs. Accordingly, just as with IB, retail customers in the Eurozone are considerably hampered by the EU rules that foreclose access to simplified diversification offered by ETFs (and mutual funds).

This is by no means intended to be an exhaustive examination of the advantages and limitations of the best brokerages for expat and/or international investors who hold, or wish to open, accounts in the United States. Rather, it is our intention to provide an introduction to the brokerages that we have found to be the best solution for the largest number of foreign investors, particularly U.S. expats. As with most things related to investments, individual results and experiences will vary. Moreover, the regulatory landscape is fluid and ever-changing. As independent advisors who are dedicated to serving the international community from the United States, we aim to educate and inform this community on a variety of topics of which the ability to hold investment accounts ranks prominently for reasons that hopefully are now quite obvious. The decision on finding the right brokerage (or simply any U.S. brokerage) is not a one-size-fits-all proposition, but one that requires analysis of the investor’s needs, preferences, wealth and, of course, residence status. If you would like to have a conversation with one of our advisors to see if we would be a good fit for your particular situation, we invite you to learn more about our international team by visiting our website.

The Walkner Condon U.S. Expat Team

UPDATE: This piece was originally published on Nov. 1, 2019. It has been revised to reflect changes in the international/U.S. expat investing environment to give you the most up-to-date information.