US citizens and residents with funds and/or investments in foreign banks or companies have just less than 6 months before this sneaky legislation from the 2010 Hiring Incentives to Restore Employment (HIRE) Act takes effect in January 2013:
“Any funds transferred from the US to any overseas account are subject to a new tax equal to 30 percent of the total amount of the payment – unless the payment is sent to a foreign bank that has agreed to report all American-owned accounts automatically and electronically to the US government.”
The IRS provides a summary of key Foreign Account Tax Compliance Act (FATCA) provisions of 2009 which were expanded in relation to the components of the HIRE Act of 2010 intended to raise revenue to ‘off-set’ the costs involved with the HIRE Act and to enforce compliance of the additional disclosure and reporting requirements.
Stiff penalties are involved for those individuals failing to disclose and report foreign assets and financial accounts – $10,000 for the initial infraction up to $50,000 for continued non-disclosure. In addition, the penalty for any portion of an underpayment of tax on non-disclosed gross income and assets increases from 20% to 40% of the understated amount.
To top it off, the statute of limitations for IRS audits on certain unreported income from foreign financial accounts has been increased from 3 years to 6 years, allowing the government to reach back further to tap into potential revenue from non-disclosed accounts and holdings of US citizens and residents.
But all the IRS strong-arming isn’t just limited to US taxpayers.
Starting in 2013, Foreign Financial Institutions (FFI) which include any non-US banks, securities firms and other investment funds will essentially be forced to choose – either agree to disclose sensitive personal and transaction information about accounts held by certain US persons and/or entities OR accept a penalty of 30% withholding tax on ALL payments received from any US institution or other source.
US institutions will essentially bear the responsibility of ‘collecting’ the 30% withholding tax on behalf of the IRS. Since it will be difficult to determine exactly which transactions are and aren’t subject to withholding – and since the same law provides that US institutions will be held harmless for improper withholding even when tax is not due! – it stands to reason that banks will withhold 30% tax on ALL foreign payments to countries or institutions that do NOT have what is considered the required information-sharing agreement in place with the US.
As predicted by many with a vested interest when the law was first introduced, there has already been a huge uproar in the global financial community. Big banks everywhere began lobbying against the legislation as soon as it was passed in 2010 and several key European institutions (Deutsche Bank, HSBC and Credit Suisse) have already balked at the onerous and costly reporting requirements, systematically refusing business with American clients since 2011. In fact, some countries and institutions may be precluded from compliance with US law due to client privilege and privacy laws of their own.
What was initially purported to be a crackdown on tax evasion by wealthy US taxpayers with non-disclosed off-shore holdings and accounts has such overreaching consequences that some economists are inclined to believe the law is part of a concerted effort by the US at currency control, certainly discouraging Americans from diversifying their portfolios by sending or holding assets abroad, but also essentially creating an ultimatum for the rest of the world – play by our rules or don’t play with us at all.
In this case, the burden of accountability seems misplaced. Instead of encouraging responsible reporting by US citizens or targeting and penalizing specific non-compliant taxpayers, foreign institutions are being coerced by the parent-like IRS into ‘tattling’ on its US taxpayer clients like the older siblings of naughty children, under pain of the 30% withholding penalty.
Such strict limitation and regulation, though, often produces unintended resulting consequences.
Instead of encouraging a healthy flow of information in an effort to close the ‘tax gap’ and ensure proper reporting by US taxpayers, the law could serve to deter other countries from choosing to do business with the US or any of its citizens worldwide.
It could also discourage other nations from using US currency for international trade transactions, potentially resulting in a shift away from the US dollar as the de facto world currency. Many analysts have already expressed concern that the cost and hassle of compliance will far outweigh the benefits of working with US capital and investors.
So what does all this have to do with us regular folks who just want to be able to create a secure, affordable retirement with a decent standard of living?
If it hasn’t already, US taxpayers living, working and/or investing abroad will undoubtedly face significant obstacles to opening foreign bank accounts and conducting foreign financial transactions of any kind. In fact, some banks may close or reject US citizen-held accounts entirely, making it virtually impossible for Americans to function, let alone compete, globally.
For those with accounts at participating foreign financial institutions, the IRS will soon have a very real and extensive system in place to track US taxpayer holdings and transactions, along with the power to go back 6 years to collect and impose harsh penalties. Americans currently living overseas with the bulk of their assets in foreign institutions will definitely need to review the law, institutional policies and the overall potential impact on their individual situations.
Americans may be rejected from participating in joint-venture international projects, making real property purchases or any number of other investments involving fund transfers internationally. Anyone (including pending and non-resident immigrants) considering foreign real estate purchases, extended travel, full or part-time retirement abroad may be forced to reconsider those plans simply on a practical level.
The American Citizens Abroad (ACA) has called for a Repeal of the FATCA legislation citing many of these problematic issues and more.
The true extent and potential repercussions of this legislation may not even be fully realized until after the fact but this law is certain to change the way business is done BY and WITH Americans in the future.
When purchasing a big-ticket item like a car or a house, don’t most people usually do a little research, shop around, compare prices and look for specific features that suit their needs? Of course they do. So why do many people not bother doing the same when it comes to their investments, especially their retirement, arguably one of the most important big-ticket items a person will ever own?
It always surprises me when people talk about their portfolio but have no clue as to what they are invested in. They’ll often joke about it and make a comment about leaving it up to the professionals or that’s why they pay their stock broker/adviser the big bucks.
Let me ask you this: Would you let the dealer pick out the car you’re going to purchase? Or how about letting your real estate agent pick out your home? Highly unlikely. So why would you let anyone else have the last say on your retirement or investments?
Think about some of the reasons why you probably wouldn’t leave the decision-making up to a dealer or agent:
Perspective. The fact that there are six – count’em, six! – cup holders may be a fabulous feature but not as high on your list of ‘Auto Must-Haves’ as it might be for the car-pool commuter. An agent might find the school next door to be most convenient but your spouse working the night shift might disagree when trying to sleep during the day. Different people are always going to have different opinions based on their unique personal perspective, especially when it comes down to the details.
Priorities. The dealer may also not realize that you’d rather give up side air-bags for an extended warranty, even though you indicated that ‘safety’ was a priority. An agent might consider a view to be more valuable than a yard. Many of us don’t even realize our own priorities until we start looking at options and are faced with making some decisions.
Cost. It’s way easier to spend someone else’s money. It’s also easier to take risks and overlook ‘minor’ issues when it’s not your buck. The agent or dealer won’t have to live with the stiff clutch or the less-than-functional kitchen layout. And if compensation is based on a percentage of price, they might not be as aggressive in negotiating the sale. Always track the money chain. Fee structure can often make a big difference in how much you end up actually paying for something.
Value. No one will care as much about getting the best bang for your buck as you will. These are your hard-earned dollars so it makes sense that you’ll want them to work as hard as you do (or harder!) That’s why we usually take the time to shop around, to get the most value for the best price. We each have a different cut-off point when we feel we have a good idea of the ‘going rate’ and are comfortable with the intrinsic value of the purchase. The dealer or agent might only look at 2 or 3 options before making a decision.
Reliability. Choices can be tough, either having too few or having too many. It’s hard to know all the in’s and out’s of every product in every field and it can be even harder to slog through all the information out there and filter it down to manageable, suitable options. That’s one of the reasons why we look to loan brokers, agents, lawyers and other professionals. Hiring a specialist in the field and leveraging their knowledge and experience is usually well worth it. But…
How reliable would you consider the data or opinion if the dealer/agent providing the information was also the owner of the car or property you are about to buy?
Don’t get me wrong. I think it’s VERY important to seek professional assistance and advice, especially for infrequent, large and/or complex transactions. But just like an auto dealer or real estate agent, their role is to give information, guidance, advice and support through the transaction. You might decide to outsource some of the legwork but ultimately you need to make the final decisions.
All of these concepts apply when making any major decision, including investment and retirement planning. If you leave all the decision-making up to someone else, you are basically at the mercy of their choices. You don’t have to be an expert but you owe it to yourself to do a little research and have a basic understanding of the core concepts, even when you use a professional, so that you can effectively evaluate the information you are given and make informed decisions.
NOTE: Many employer-sponsored retirement and 401k plans are limited to a few select investment funds but they usually include dollar-for-dollar matching contributions. It’s hard to go wrong with free money! Just be sure to monitor statements and fund performance, and discuss options or concerns with the fund manager. Don’t forget ~ 401k accounts can normally be rolled over into an IRA when employment has ended. Know where your funds are and what they’re doing!
I just read an article by Timothy McMahon, editor at Financial Trend Forecaster entitled All it Takes to Make a Million Dollars is Time, Consistency and Rate of Return.
McMahon shares some numbers and data to support this formula and it got me thinking about a pretty exciting reality: Anyone can be a millionaire.
It’s true. The tools are available, especially here in opportunity-rich North America, for anyone with a little bit of self-discipline and a willingness to learn. A-a-a-a-and there’s the rub. Despite having the key to the Million Dollar Formula, those two little characteristics make all the difference when it comes to WANTING a million dollars versus actually MAKING a million dollars.
Think about it. We all know that a journey of a thousand miles begins with a single step. And then another and another, until we finally reach the destination. We know the destination is there waiting for us even though we can’t see it. We know that paths are available to get us there, sometimes many different routes. So why do so many of us never actually make it there?
It’s been said that ultimately we are the sum of our choices in life. Nowhere is that more apparent than in our financial picture. Good habits are the cornerstone of success but to develop them you have to be willing to prioritize and maybe even curb some indulgences along the way.
The ability to delay gratification is a huge struggle for most of us. But it’s also your most powerful tool when it comes to money, saving and investing. If CONSISTENCY is one of the keys to the Million Dollar Formula, then having a plan and a system can really help you balance and manage the process, as well as to stay focused on the end goal. This is especially important when the goal is long-term, like retirement and the benefits can’t be seen or felt immediately. Make it as easy as possible for yourself to be successful!
Temptation and accessibility are the silent saboteurs when it comes to your money and savings. Take steps to make it harder to access your funds, like setting up a separate savings account that is NOT linked to your ATM card or locking up your credit cards (carry only one for true emergencies). Choose to go to the park or beach instead of the mall. Unsubscribe from magazines and emails with advertising and offers. Keep pictures to remind yourself of the end-goal and track your progress so you have a visual representation of your success.
Treat your savings like an iron-clad fixed expense and take it off the top of each paycheck no matter when or how often it comes in. YES, YOU CAN! Remember, it’s about making choices. Latte or $1M? Eat out or $1M? New car or $1M? Every single indulgence is a choice you make that adds up and pushes your goal back a little further. It’s not about doing without; it’s about priorities. If you want to get to the Million Dollar Destination you have to make it a priority. How quickly you get there depends on how high a priority you want (or need) to make it.
McMahon shares the math about the effects of Time and Consistency, along with an interesting thought: “Even if you don’t have a (lump sum) nest egg you can retire a millionaire. Simply by saving $10 per day and investing it at 15% per year you will still reach Millionaire status in 25 years. Is 25 years too long to save become a Millionaire? The average mortgage is 30 years! So why are people willing to go in debt for 30 years but not save for 25 years?”
Willingness to Learn
People will often tell themselves that others have more opportunities, more cash, more luck or more whatever so that they can absolve themselves of any and all responsibility for their own success (or failure!) The truth is that we are each in charge of how we handle the people, things and events in our lives.
We are in the Digital Information Age. There is information readily available on just about every possible topic you can think of, including money, finance and investing. There are many paths to get to the Million Dollar Destination but not all of them will be right for you. Taking time to read about different options and benefits will help you make informed decisions and more likely to avoid costly mistakes and setbacks.
Knowledge is power. Even a child can understand the value of knowledge. I asked my 13 year old son which he’d rather have: A million dollars or the ability to make a million dollars. He explained that, of course, knowing how to make a million would let him do it over and over again. (But as we all know, knowing and doing are two completely different things – cue self-discipline!)
Are you familiar with the phrase, The rich get richer and the poor get poorer? Knowledge and discipline really do make all the difference in the world. McMahon shares this insight:
The Wealthy buy Assets; the Poor buy Liabilities; The Middle Class buy Liabilities believing they are Assets.
Knowing the difference between an asset and a liability is fundamental to building wealth. Assets earn money and can appreciate in value; liabilities cost you and depreciate. A rental home has the capacity to provide income and tax benefits AFTER covering its operating expenses, as well as the potential to appreciate in value. Conversely, that boat you’re eyeing might provide hours of enjoyment and entertainment but it depreciates the minute you purchase and costs you every month for storage, gas, licensing, registration, maintenance and repairs.
As your funds grow, so will the temptation to spend and/or move them around. It’s important to understand the pros and cons and the ins and outs of what you are invested in so that you can make informed decisions, regardless of whether it’s the stock market, real estate or any other asset class. Rates of return vary greatly from product to product and every investment carries its own risk and parameters. Again, there are many possible paths to get to the Million Dollar Destination so you need a basic understanding how they work to decide which is right for you.
Million Dollar Formula
So here it is again, the not-so-secret formula for anyone to make a million dollars:
Time + Consistency + Rate of Return = $1Million
Whether it’s the magic of compound interest or the brilliance of principal reduction, the sooner you start, the longer your funds have to work for you.
You have the Million Dollar Formula ~ The big question now is what are you going to do with it?
BTW, did you know that one of the best graduation or birthday gifts that you can give your kids is a ROTH IRA? They may not fully appreciate it now but when it helps to pay for their college education or a down payment on a house, rest assured your kids will profusely thank and consider you a financial genius!
“The secret of getting ahead is getting started. The secret of getting started is breaking your complex overwhelming tasks into small manageable tasks, and then starting on the first one.“ ~ Mark Twain
This quote seemed to be the perfect way to start things off. Getting started is probably the most important step in just about any task, investing included. Yet it almost always seems to be the hardest.
This Blog, for instance, has been on the To Do List for months (okay, a year!) but despite the explosive growth in social media and awareness of the power of the internet, the ‘Blog Project’ always got pushed to the back burner. It actually wasn’t the difficulty of the task that was the problem; it was the scope of the project and time it would take to understand and do it ‘right’.
The world of investing and finance and wealth can be pretty overwhelming, too. There’s a lot of information to sift through. There’s the anxiety and dread of making the ‘wrong’ choice. This is, after all, your hard-earned savings and retirement we’re talking about.
But like most of the challenges we face, once you get started you’ll probably find that it’s not really as bad as you built it up to be in your mind, especially when you have a plan and a solid support team behind you.
In fact, you may even wonder why you didn’t start sooner…!