US College Grad in DE: Advice

[kiia]

I’m a recent college grad (engineering) with US+EU citizenship planning to stay in Germany indefinitely as my fiancé is German. Starting a new job as an engineer making €63k which isn’t much coming from the US but the company will buy me a car for private use and pay for insurances and everything. I also am in a situation where I’ll pay half the taxes I usually would so roughly only €10k.

I’m just about to start my career and I am wondering how to go about investing/saving. I would greatly appreciate it if somebody could give me some advice. What do people do for investing here? What’s the best way for me to invest? Should I transfer euros to USD to invest in the American market? I would plan on pretty much just investing in the S&P 500 and keeping some USD in HYSA’s for emergency use.

Is there anything I can take advantage of in my situation? Any tax credits to look into? Honestly I’m just looking for some advice. Thanks in advance.

EDIT: Also for whatever it’s worth, it’s not difficult for me to maintain a residence or anything in the USA. All my family lives there, still have my residence and stuff at my parents, still have a US phone plan I can get free texts with here when needed for dual verification

 

[frhi]

@kiia Any investment accounts must be in USD with a US residential address. If you can use your parents place, that's good. You likely want to open accounts before moving if it's possible. You can't let your brokerage find out you're in Europe or they'll close your account.

 

[kiia]

@frhi Yup, I already have an account with Chase and Fidelity and I’ve been here for three years. However I was wondering if it’s practical/makes sense to convert euros to dollars for investing or if there’s a traditional alternative that people do here instead that would be better

 

[frhi]

@kiia You can't invest in euros directly because of US compliance and tax reporting laws.

 

[kiia]

@frhi Can you expand on that? Can I not open up an account here and invest in the local market with euros? Or are europeans able to somehow invest directly in the American market with euros? Shouldn’t I be able to do everything the same so long as I report everything correctly?

 

[frhi]

@kiia You cannot open an investment account in Europe. The banks won't take you, if they did it would be a tax nightmare. You can invest in Europe from your US based investment accounts.

 

[tessal]

@frhi IB works from abroad. They do restrict what you can purchase, since not all EFTs are legal to own as a US person.

 

[kiia]

@tessal Hi do you have any literature recommendations for me regarding what's not legal for me to invest in? Is it primarily stuff to do with sanctioned countries?

 

[tessal]

@kiia https://www.quantifiedstrategies.com/can-european-investors-buy-us-etfs/ for some overview of issues holding US ETFs in EU

Generally anything from the EU which includes interest will fall under PFIC and most likely not be available (https://www.irs.gov/businesses/corporations/foreign-account-tax-compliance-act-fatca, https://en.wikipedia.org/wiki/Passive_foreign_investment_company)

Sanctioned stuff I have less experience with, though.

 

[stephendisraeli]

@frhi

The banks won't take you, if they did it would be a tax nightmare.

You might find a bank or brokerage provider, especially if you also have EU citizenship.

However, the risk of a tax nightmare is completely real. See "PFIC" and "form 8621". EU-based brokerage providers will not warn someone with US tax residency about the consequences of investing in funds that are legal for sale to retail investors in the EU.

 

[kiia]

@stephendisraeli Is this something actually enforced for average joes? Although I take it that it doesn't matter as you probably don't want to take risks with retirement plans

 

[stephendisraeli]

@kiia

Is this something actually enforced for average joes?

Not filing form 8621 as required means that the US tax return stays open for auditing indefinitely. The statute of limitations on audits does not begin to run. It might get audited right away, or in a decade, or in three. Or never.

Now, how the IRS might learn about possible PFIC ownership is another matter. The FATCA treaties require the reporting of account balances and interests/dividends received, but no details about the contents of a brokerage account. Though, anyone with a grudge against the PFIC owner and the knowledge of the situation could report this to the IRS.

Though, if there were no plans of ever enforcing this for average Joes, I would assume they would have installed sensible, useful de-minimis clauses, and not the mostly useless and possibly dangerous one that is actually present.

Although I take it that it doesn't matter as you probably don't want to take risks with retirement plans

No, you don't, as late reporting of PFIC ownership locks you into the abysmal section 1291 taxation, which may result in effective tax rates in excess of 100%.

 

[stephendisraeli]

@kiia

What do people do for investing here?

Unfortunately, if you do what everyone else does, your US tax return will turn into a toxic dumpster fire and you will be subject to harsh punitive taxation and ridiculous reporting requirements from the US tax side.

What’s the best way for me to invest?

Single stocks, mainly, as they do carry less risk of adverse tax treatment from the US side. And US-domiciled ETFs (ISIN starts with US) if you can find a way to acquire them. Purchasing them through a regular EU brokerage provides does not work, as US-domiciled ETFs do not fulfill the requirements to be legal to offer to retail investors in the EU. And US brokerage providers may not let you purchase these funds if the brokerage provider knows about your EU residence.

Is there anything I can take advantage of in my situation?

No, US citizenship is pretty much a financial disadvantage when not living in the US. You will need to file an additional tax return (the US one) compared to everyone else. The US tax return will be more complex and expensive due to additional languages, currencies and lack of US-specific forms. Banks and brokerage providers will be reluctant to do business with you. You have reporting requirements concerning your non-US accounts that carry ludicrously harsh penalties. And seemingly unobjectionable investment products like ETFs will bring nasty complications.

Any tax credits to look into?

The foreign tax credit available from the US side when you pay income taxes to Germany. Though this is not an advantage, but merely a way to mitigate double taxation, and it may not be a full mitigation in all circumstances.

 

[kiia]

@stephendisraeli And what does “everyone else” do? From my understanding most people here invest in pension schemes/insurances.

Aside from that, it sounds like I should just convert euros to dollars and invest as usual?

Is there anything worth looking into other than the usual “you’re fucked, and can go eat shit” spiel of being an American citizen abroad?

 

[five2one]

@kiia Open a brokerage account with Consorsbank. Buy individual stocks. Not much to it,

With regards to your statement "I’ll pay half the taxes I usually would so roughly only €10k." I am pretty sure your calculation is wrong here. That sounds like the amount of taxes you should be paying in the USA. If you live in Germany you will be taxed in Germany and therefore pay much more in taxes. How do you expect to avoid German taxes?

 

[kiia]

@five2one My personal situation allows me to take advantage of a ton of tax deductions.

 

[five2one]

@kiia What tax deductions reduce your tax 50%?

 

[kiia]

@five2one At least for this year I had a ton of deductions coming from double house hold deductions and I also had a ton of commuter/travel deductions that significantly worked to my benefit.

 

[stephendisraeli]

@kiia

And what does “everyone else” do?

Pay into the public pension system, which is mandatory for employees. Voluntary contributions can be made by non-employees. This should be safe for someone with US citizenship, but the future stability of the pension system is somewhat questionable according to some.

Contribute to employer-provided pension plans ("Betriebliche Altersvorsorge", "bAV"). This varies from employer to employer and is very roughly equivalent to 401ks, but also built on potentially expensive insurance products. This should also be safe for US citizens in most cases, as the money is not accessible before retirement and such plans can the be considered "qualified" plans by the US tax code and the tax treaty. It also depends on how much the employer contributes (15% is the statutory minimum as far as I know, some employers are more generous).

The third, private pillar does not look too bright, unfortunately:

Some get suckered into private pension insurance, which comes with high costs and is hence very profitable for the companies selling them (... yeah, happened to me too). Many of these products are not considered qualified plans by the US tax code, and hence carry the risk of PFIC and possibly foreign trust tax issues. Due caution and consideration is advised.

Investing in diversified (MSCI World, FTSE All-World) ETFs is currently the best bet, but the funds available in the EU are without exception tax poison in a US tax return. US-domiciled funds are only accessible via workarounds like options, lying to US-based brokerage providers about ones residence, or being rich enough to slip out of the "retail investor" classification.

As a US citizen abroad, you could still contribute to traditional and Roth IRAs, provided you find an provider that lets you open/keep such plans and contribute to them. However, only traditional IRAs are considered tax-advantaged in Germany according to the tax treat, as far as I am aware. A Roth IRA would hence be considered a regular brokerage account in the German tax return.

Is there anything worth looking into

Single stocks. These carry the least risk of tax issues, but are not to everyone's taste.

 

[kiia]

@stephendisraeli

lying to US-based brokerage providers about ones residence

Aren't we considered residents indefinitely by the gov? IIRC this is the basis of the legality of these restrictions and that we aren't subject to taxation without representation, as we are still able to vote in the elections of our previous residence. At the moment I have my parents added to my accounts; so as long as they're still alive and kicking there are no issues with my accounts. I have several siblings that I can continue this with as well when needed.

Any advice regarding getting started with a 401k? Why should I even use a 401k if my income isn't getting taxed by the USA to begin with? At present it looks like if I was MFJ I wouldn't even begin to pay taxes on capital gains until it was over 83k/yr, which is way more than enough for a good standard of living here before factoring in what my fiancé would get or I would get from other smaller mandatory insurances here.

Why do you say single stocks? Why not ETFs?

Thanks so much for your replies by the way. Very informative and helpful. Really hoping I can learn now from guys later in their careers so I can hopefully not make any (or many) painful mistakes.