us institutions to expats take your retirement

Added 20th June 2013

First American expatriates were told that their bank accounts weren’t welcome. Now, it seems, Americans’ tax-deferred retirement accounts are also increasingly unwanted by US financial institutions, unless these accounts are of significant size.

us institutions to expats take your retirement

Now, it is emerging, Americans’ tax-deferred retirement accounts – many of which were set up decades ago, and never touched since – are also increasingly unwanted by US financial institutions, unless these accounts are of significant size.

The reason, according to a US-based adviser who specialises in helping American expatriates, is because the companies that manage these Individual Retirement Accounts (IRAs), Keogh Accounts and 401(k) plans have become increasingly concerned about “know your customer (KYC) rules” that were first introduced in the US in 2003.

“The legal department of banks are looking at these rules and realising that it is impossible to ‘know’ your client if he or she lives outside the US,” says David Kuenzi, whose Madison, Wisconsin-based company, Thun Financial, has helped “scores” of expat Americans over the last few years move their US retirement accounts to new, US institutional custodians after they were told they had to.

However, he adds, “for big enough accounts – say, $500,000 or more – the US banks can, and will, go the distance to meet the KYC rules, and get to ‘know’ their customer. But not for less”.

Institutions that are reported to have been contacting clients who no longer live in the US and telling them they must move their retirement accounts elsewhere include Merrill Lynch, Morgan Stanley, PNC Bank, Vanguard and Fidelity.

American Citizens Abroad, a Geneva-based advocacy organisation, said it could not independently verify reports that expats had been asked to close or move retirement accounts, but said it could confirm hearing from some “who have been rejected for accounts or had limitations put on accounts held by Fidelity, Scottrade, Sharebuilder, ETrade and TD Ameritrade”.

The organisation has struggled to get much traction on the issue, it added, because American legislators “throw it back at the private banks/brokerage firms, and they in turn quote corporate policy”.

A spokesperson for the Washington-based Financial Industry Regulatory Authority (FINRA), which exists to oversee investor protection and market integrity in the US brokerage industry, said the organisation had not yet received “a whole lot in the way of complaints on this issue”, and could give no reason why this might be, unless the problem was not significant. Others said few expatriates may be aware that FINRA might be able to help them.

Less portable than cash

Being asked to move or close an IRA, Keogh or 401(k) can be trickier than moving or closing a checking account because, like the UK self-invested personal pensions they are often compared with, they involve various tax-related incentives, and stiff penalties for early encashment, those familiar with them say.

As reported, many banks and other institutions outside the US have been letting go of their American clients ever since the implications of the Foreign Account Tax Compliance Act, or FATCA, began to be known in 2010. Around seven million Americans live abroad, although a growing number of them have been renouncing their citizenships recently in response to the growing complications.

Some institutions say they are not showing overseas clients with US retirement accounts to the door. “We have not asked any of our non-US clients to close accounts,” a spokesperson for Charles Schwab told International Adviser. 

“We continue to open accounts for non-US residents who want to open IRAs with us, and comply with related IRS reporting requirements.”

However, she noted that the company is not in the business of providing tax advice, which is something that expats and foreigners with US retirement accounts would be expected to receive elsewhere.

James Sellon, a founder and managing partner in Maseco Private Wealth, which looks after expatriate Americans out of offices in London, Geneva and Zurich, shares Kuenzi's view that expats are getting their IRAs and Keogh accounts handed back to them as a result of the increasing regulations – though he thinks that in addition to the KYC rules, institutions are also being spooked by requirements that they need be regulated to provide advice in the jurisdictions in which their retirement account clients live, which few are.

"Over the years I have seen a number of senior US compliance officers making decisions to close accounts for non-US residents because of the ‘advice’ issue," Sellon said. 

"I think that this story will build and build, but is at the moment only in its infancy."

Joshua Matthews, Sellon's partner and a co-founder of Maseco, said non-US-based advisers began to get nervous about looking after American expats and others with links to the US in 2008, when the US government pursued UBS whistleblower Bradley Birkenfeld, and eventually sent him to prison – even though the information he had provided had been key to the government's case against UBS (for helping Americans to evade US tax).

Birkenfeld's prosecution, Matthews explained, shone a spotlight on how governments increasingly are viewing locally-unregulated outsiders giving advice – or apearing to – to their citizens. "What's happened is that the US companies have decided the reputational risk [of having expat American clients without providing them with regulated advice in the jurisdictions in which they now live] isn't worth it," Matthews said.

US QROPS ‘unlikely’

One seemingly obvious solution to the problem, some say, might be the creation of a US equivalent to the British Qualifying Recognised Overseas Pension Scheme (QROPS), which enables people who move abroad for good to move their pension either to their new country of residence or a third country, such as Malta.

However, Kuenzi said, such an entity would be “essentially meaningless” in the US, at least as long as the US maintains its current citizenship-based taxation system, as one of the main attractions of QROPS is that they can confer advantages that are not realised when the pension schemes are left in the UK. (QROPS were originally conceived as part of an overhaul of UK pension legislation known as A Day, which took effect in 2006.)

What’s more, according to Kuenzi, there are some compelling investment reasons for keeping a retirement account in the US, where costs tend to be lower and returns higher than in many other markets. 

“Also, Americans are far less likely than Brits to retire abroad,” he noted. “Brits go to Spain. Americans go to Florida.”

There is, though, a sizeable if unknown number of non-Americans who set up US IRAs, Keogh Accounts and 401(k)s while living and working in the US, who eventually return or plan to return to their home countries, and who therefore are also being told to move or close these accounts.

Kuenzi and others say the solution is for US legislators to amend the existing KYC legislation, so that banks will feel that the advantages in  keeping even small retirement accounts outweigh the potential downside of getting caught with criminals for clients. 

Said Kuenzi: “The US is never going to make it easy to move assets offshore, nor specifically accommodate expats.

“But there is a hope that the most egregious discrimination can be addressed on an issue-by-issue basis.”

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