Offshore Brokerage Accounts: Sketchy?

Are Offshore Brokerage Accounts Really Sketchy?

A reader question:

My friends wonder if I’m doing something really sketchy when I mention that I’m opening an offshore brokerage account. Is this stigma justified? Is it perpetuated by Tax Authorities to discourage people from opening them? My main two questions that I need answered are: am I doing anything illegal (if the $ is from a legal source)? If it’s such a good idea, why doesn’t everyone do it (a classic dad-rebuttal)?

My answer:

First of all, there are plenty of sketchy things you can be doing in the world of international investing, so the stigma is perhaps not totally unjustified. Besides individuals doing some questionable things, there are just as many companies out there trying to rip people off, often through pensions or whole life insurance plans. Of course tax authorities will not encourage people to try to reduce their tax burdens, so it is in their best interests to try to reduce any kind of thing that people would do to avoid paying taxes. That said, opening up an account with a company like Interactive Brokers or TD Direct Investing is not illegal and if it were, they wouldn’t take your account, so don’t worry about that.

Secondly, it is often, depending on where you are from a good idea to open up an offshore brokerage account if you’re an expat to avoid or reduce taxes in your home country while you are living abroad, especially since you are likely unable to take advantage of any retirement savings tax breaks that you would get if you were living at home. Take any and all advice you get from someone who has never lived outside their own country with a large grain of salt. For some much better advice, check out: The Global Expatriate’s Guide to Investing: From Millionaire Teacher to Millionaire Expat.

The reason that most people don’t do it is because there just aren’t that many people living outside their home countries. If you’re living in your home country, it is better to open up brokerage account there, since you’ll often be able to invest a certain amount of money per year tax-free because most governments want to encourage retirement savings.

If you’re an average person working in your home country and earning an average kind of wage and investing a normal amount into the markets each year, it’s much simpler and easier to do it this way. Where it might become beneficial to think about offshore accounts when living at home is if you are investing way more than the allowable tax-free amount per year. But of course, this is an advanced level move and an international tax accountant should of course be consulted with first.

Another reason why everyone isn’t doing it is because most English teachers don’t have enough money to be able to invest in the markets. In general, the ones that I meet are trying to pay off their credit card debts or students loans and once they have paid off their debt, aren’t thinking beyond the next tropical vacation or how to pay for grad school. Investing isn’t a priority for most of them, which is why offshore investing isn’t a common topic of conversation in the expat bars.

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