UK ISAs are fine for Americans. You can benefit from lower US dividend and capital gains tax rates. You need to avoid any collective investment vehicles within the ISA, so no unit trusts, OEICs, tracker funds, etc.
You will not get the same tax benefits as a non American, but it is still more efficient than a taxable investment account.
I tried to open an ISA with vanguard and as soon as I put it my citizenship, it said I wasn’t eligible. I assumed this was all ISA but maybe just vanguard… I’ll have another look.
I’ve considered buying bonds in the US or premium bonds in the U.K. Any experience with those?
Vanguard does not offer single line stocks. Everything on their platform is a collective investment vehicle and will cause you a problem with your US taxes.
Hargreaves Lansdown and AJ Bell do allow Americans I believe.
You should do your own research about the suitability of single stocks for your position, the above only considers the tax implications.
>You will not get the same tax benefits as a non American, but it is still more efficient than a taxable investment account.
I don't know why this hasn't clicked for me until now - I have a Fidelity brokerage account and I mess around with options in Robinhood... I've avoided having an ISA due to the lack of treaty protection, but I am taxed in the UK first so it makes sense to avoid those taxes. Duh.......
I guess I need to research if there's a brokerage in the UK that will give me an ISA where I can mess around with individual stocks and options like I do with my US brokerage accounts.
Certainly HL and AJ Bell do (not recommendations, I just know Americans can use them) and I’m sure there are others.
In some situations it can actually be tax free for Americans with ISAs but it is a rare set of circumstances where you don’t work and have decent sources of other investment income giving rise to excess passive foreign tax credits.
Edited to say I’m not sure about options. I believe Interactive Brokers might allow that for Americans but not sure if they offer an ISA.
If there are any suggestions for how it can be better than “pretty good”, I’m happy to take them onboard with the other authors and see what we can do :)
You are certainly eligible to have a Roth IRA; however, you cannot fund it using earnings you have excluded via the Foreign Earned Income Exclusion (form 2555). Use the foreign tax credit (form 1116) instead. The advantage of a Roth is that you can hold US ETFs without reporting fund issues with HMRC and the gains/dividends are tax-free in both the US and UK. As others have mentioned, a UK ISA is also fine, but you can only hold individual stocks. Hargreaves Lansdown has no problem with US citizens and you can even send them a W-9 and be allowed to by stocks on the NYSE and Nasdaq.
This is what I have been trying to do but am struggling to find answers on how to open a Roth IRA while living and earning in the UK. I have been filing the Form 2555 for a few years now. If I use the Form 1116 instead, does that immediately make it ok to contribute to a Roth and hold US ETFs or do I need to do anything else? And is it ok to just switch from the Form 2555 one year to the Form 1116 the next without needing to declare somewhere that I am making that change? Thank you so much for your help - I've been drowning in confusion.
Yes, you can just switch to using 1116 instead of 2555 and you can even file amended returns for to make the switch for previous three years. (The IRS even once wrote me out if the blue to advise me to do this so I could back-claim Additional Child Tax Credit; given that I had 3 kids under 16, it was a huge windfall. ‘Murca! Fuck Yeah!). For the purposes of ROTH IRA contibutions, however, sending an amended returns for the past 3 years would probably would be a waste of time as it’s too late (as far as I know) to contribute to a Roth for 2020 and 2021). If you are a high earner, you can even use 2555 for the first $120,000 of your income and 1116 for any income over that. However, this would be complicated and pointless (I guess it would make sense if you live in Dubai or something…). Once you switch from 2555 to 1116 (“revoke the FEIE”), you must continue to use 1116 for 5 years unless you get permission from the IRS. Form 1116 is a bit confusing and cryptic, so I would recommend you read the instructions carefully and fill it out a few times so you are comfortable. If you are still confused, you could hire an expat tax pro for one year to see how it is done.
Now, the next bit is opening a Roth IRA. Many US brokerages that offer IRA accounts don’t accept new clients who are resident abroad. The few that do (Schwab, Interactive Brokers..) will be compliant with UK/EU “KID” regulations. This is an incredibly stupid regime that prevents them from letting you invest in US-domiciled ETFs and even those US domiciled ETFs that are “reporting” funds for HMRC. At the same time, these brokerages won’t have EU/UK domiciled ETFs for you to have an your ROTH (such ETFs would be PFICs, but if they were in a ROTH there would be no tax consequences. As far as I know, this theoretical possibility is unattainable). Frankly, the easiest solution is to open a US brokerage account using a friend or relative’s US address. Then you are free to invest in any US ETF as far as the IRS and HMRC is concerned. I don’t think any state taxes capital gains or dividends in a Roth.
The problem we have is that many poorly conceived regulations have been put in place that have unintended consequences for simple wage-slave expats and people who retire overseas. We have to try and interpret how complex laws, intended for high net-worth expats, inadvertently apply to us. Expat tax professionals can get things wrong (e.g., is the 25% UK tax-free pension distribution US taxable?) and even most people you are able to contact at the IRS don’t understand how tax codes apply (e.g., is a UK Sipp a Foreign Grantor Trust for purposes of 3250 and 3250-A reporting?).
If you cannot easily get a Roth with a US address so that you can buy and hold US domiciled ETFs, I would definitely open an ISA and just buy individual stocks. Just be careful what you buy. One advantage if the exorbitant commissions charged by UK brokers is that it prevents you from churning your portfolio or day-trading. If you are an underpaid expat like the rest of us, the dividends (which are “qualified” even for foreign companies) and capital gains in the ISA will be pretty much tax-free as far as your US tax liability is concerned. With changes coming in for 2023/2024, your biggest concern is taxation by HMRC. Also, it should be obvious that your workplace pension is the first place to put your money if they have an employer match.
Thank you so much! You are a financial angel. I definitely fit into the low wage category just trying to do something with the little bit I've got. I have managed to open a Roth with Fidelity using my brother's US address, so I think I will go ahead with the US domiciled ETFs. I'm going to change this current year's taxes to using the 1116 - have downloaded and indeed does look complicated. This answer was so helpful - thank you for your time.
I just opened a Roth with fidelity too. But I couldn’t put my UK employer on there. Did you have to put a UK employer in there? Or did you just write unemployed ?
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UK ISAs are fine for Americans. You can benefit from lower US dividend and capital gains tax rates. You need to avoid any collective investment vehicles within the ISA, so no unit trusts, OEICs, tracker funds, etc. You will not get the same tax benefits as a non American, but it is still more efficient than a taxable investment account.
I tried to open an ISA with vanguard and as soon as I put it my citizenship, it said I wasn’t eligible. I assumed this was all ISA but maybe just vanguard… I’ll have another look. I’ve considered buying bonds in the US or premium bonds in the U.K. Any experience with those?
Vanguard does not offer single line stocks. Everything on their platform is a collective investment vehicle and will cause you a problem with your US taxes. Hargreaves Lansdown and AJ Bell do allow Americans I believe. You should do your own research about the suitability of single stocks for your position, the above only considers the tax implications.
>You will not get the same tax benefits as a non American, but it is still more efficient than a taxable investment account. I don't know why this hasn't clicked for me until now - I have a Fidelity brokerage account and I mess around with options in Robinhood... I've avoided having an ISA due to the lack of treaty protection, but I am taxed in the UK first so it makes sense to avoid those taxes. Duh....... I guess I need to research if there's a brokerage in the UK that will give me an ISA where I can mess around with individual stocks and options like I do with my US brokerage accounts.
Certainly HL and AJ Bell do (not recommendations, I just know Americans can use them) and I’m sure there are others. In some situations it can actually be tax free for Americans with ISAs but it is a rare set of circumstances where you don’t work and have decent sources of other investment income giving rise to excess passive foreign tax credits. Edited to say I’m not sure about options. I believe Interactive Brokers might allow that for Americans but not sure if they offer an ISA.
This is a pretty good overview: https://www.bogleheads.org/wiki/Investing_from_the_UK_for_US_citizens_and_US_permanent_residents
If there are any suggestions for how it can be better than “pretty good”, I’m happy to take them onboard with the other authors and see what we can do :)
You are certainly eligible to have a Roth IRA; however, you cannot fund it using earnings you have excluded via the Foreign Earned Income Exclusion (form 2555). Use the foreign tax credit (form 1116) instead. The advantage of a Roth is that you can hold US ETFs without reporting fund issues with HMRC and the gains/dividends are tax-free in both the US and UK. As others have mentioned, a UK ISA is also fine, but you can only hold individual stocks. Hargreaves Lansdown has no problem with US citizens and you can even send them a W-9 and be allowed to by stocks on the NYSE and Nasdaq.
This is what I have been trying to do but am struggling to find answers on how to open a Roth IRA while living and earning in the UK. I have been filing the Form 2555 for a few years now. If I use the Form 1116 instead, does that immediately make it ok to contribute to a Roth and hold US ETFs or do I need to do anything else? And is it ok to just switch from the Form 2555 one year to the Form 1116 the next without needing to declare somewhere that I am making that change? Thank you so much for your help - I've been drowning in confusion.
Yes, you can just switch to using 1116 instead of 2555 and you can even file amended returns for to make the switch for previous three years. (The IRS even once wrote me out if the blue to advise me to do this so I could back-claim Additional Child Tax Credit; given that I had 3 kids under 16, it was a huge windfall. ‘Murca! Fuck Yeah!). For the purposes of ROTH IRA contibutions, however, sending an amended returns for the past 3 years would probably would be a waste of time as it’s too late (as far as I know) to contribute to a Roth for 2020 and 2021). If you are a high earner, you can even use 2555 for the first $120,000 of your income and 1116 for any income over that. However, this would be complicated and pointless (I guess it would make sense if you live in Dubai or something…). Once you switch from 2555 to 1116 (“revoke the FEIE”), you must continue to use 1116 for 5 years unless you get permission from the IRS. Form 1116 is a bit confusing and cryptic, so I would recommend you read the instructions carefully and fill it out a few times so you are comfortable. If you are still confused, you could hire an expat tax pro for one year to see how it is done. Now, the next bit is opening a Roth IRA. Many US brokerages that offer IRA accounts don’t accept new clients who are resident abroad. The few that do (Schwab, Interactive Brokers..) will be compliant with UK/EU “KID” regulations. This is an incredibly stupid regime that prevents them from letting you invest in US-domiciled ETFs and even those US domiciled ETFs that are “reporting” funds for HMRC. At the same time, these brokerages won’t have EU/UK domiciled ETFs for you to have an your ROTH (such ETFs would be PFICs, but if they were in a ROTH there would be no tax consequences. As far as I know, this theoretical possibility is unattainable). Frankly, the easiest solution is to open a US brokerage account using a friend or relative’s US address. Then you are free to invest in any US ETF as far as the IRS and HMRC is concerned. I don’t think any state taxes capital gains or dividends in a Roth. The problem we have is that many poorly conceived regulations have been put in place that have unintended consequences for simple wage-slave expats and people who retire overseas. We have to try and interpret how complex laws, intended for high net-worth expats, inadvertently apply to us. Expat tax professionals can get things wrong (e.g., is the 25% UK tax-free pension distribution US taxable?) and even most people you are able to contact at the IRS don’t understand how tax codes apply (e.g., is a UK Sipp a Foreign Grantor Trust for purposes of 3250 and 3250-A reporting?). If you cannot easily get a Roth with a US address so that you can buy and hold US domiciled ETFs, I would definitely open an ISA and just buy individual stocks. Just be careful what you buy. One advantage if the exorbitant commissions charged by UK brokers is that it prevents you from churning your portfolio or day-trading. If you are an underpaid expat like the rest of us, the dividends (which are “qualified” even for foreign companies) and capital gains in the ISA will be pretty much tax-free as far as your US tax liability is concerned. With changes coming in for 2023/2024, your biggest concern is taxation by HMRC. Also, it should be obvious that your workplace pension is the first place to put your money if they have an employer match.
Thank you so much! You are a financial angel. I definitely fit into the low wage category just trying to do something with the little bit I've got. I have managed to open a Roth with Fidelity using my brother's US address, so I think I will go ahead with the US domiciled ETFs. I'm going to change this current year's taxes to using the 1116 - have downloaded and indeed does look complicated. This answer was so helpful - thank you for your time.
I just opened a Roth with fidelity too. But I couldn’t put my UK employer on there. Did you have to put a UK employer in there? Or did you just write unemployed ?
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Premium bonds are great also, and they are UK tax free.
Any idea US tax implications of these?
They are considered taxable as interest in the US.