Foreigners investing in US index funds


#1

Hi

Apologies if this has been answered before. But what is the most efficient way for foreigners to invest in US index funds? Not just transaction fees but also tax implications.

Cheers


#2

To invest in US index funds you will first of all need to have an account with a broker account which supports trading in US index funds. Depending on where you live you may find a national broker which supports it, this the easiest and most hassle free option.

If you want to open a brokerage account in the US you will need find a broker which allows non-resident aliens, the brokers I know supports non-resident aliens are:

TD Ameritrade
Very large US broker, standard brokerage fees, no minimum deposit

Interactive Brokers
Brokerage firm targeting a more advanced and professional segment, high minimum deposit but lower fees with volume

DriveWealth
New smaller player, no minimum deposit, low fees, allows trading fractions of equities which means you can lower fees when trading smaller amounts

Independent of which broker you choose you will be subject to the following tax rules:

  • As a non-resident alien you don´t pay capital gains tax in the US
  • You will pay capital gains tax or similar in the country where you are resident
  • As a non-resident alien you pay 30% tax on dividends from US companies or a fund invested in US companies
    If your country has a tax treaty with the Us this may be lower, in my case Sweden has a treaty which lowers this to 15%.

Make sure to check what applies estate tax for your country as well, if your country does not have a treaty with the US you may be subject to 40% estate tax of the total value if something happens to you.

You may need to manually report capital gains tax in your own country when doing your annual tax filing. Capital gains doesn´t always automatically gets reported between tax authorities across countries.

What´s most efficient is mostly a choice of which broker to use, a local national broker is probably easiest and if you choose a US broker you will benefit from choosing a broker targeting your volume.

Based on how tax applies to you you may want to evaluate what type of funds to invest in, high yield vs little to no dividend paying funds, but that´s more related to what investment strategy your choose.

To signup for any broker as a foreigner you will need to fill out a form call W-8BEN with your personal details and a copy of your passport.


#3

Are you wanting to invest in US-domiciled index funds or an index fund of US corporations?

You should research investment options where you reside. Vanguard is in many parts of the world these days. You might be better off in a foreign domiciled fund than a US domiciled Fund. You can still invest in an index fund of US corporations in Canadian dollars, Australian dollars or Euro’s, etc


#4

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