Lifetime ISA or other funds for investing / saving purposes

Hello,

I am not quite sure if this is the correct place for my question, but I live permanently in London and will receive my IDR in two years time (I am currently on the spousal visa).  I am trying to figure out the best way for future savings - I have a pension with my employer but I would like to open either a lifetime ISA or other investment fund. My first question is are all of these taxed in the USA (if over a certain amount)?  My other question is which companies allow Americans to open an account? For example, I know that Nutmeg does not allow Americans to open an account due to the tax implications.

I am just curious what other Americans have done.  I assume that I would be able to open this type of account once I become a UK citizen, but does dual citizenship have any other effect to be aware of?

Thank you so much.

Your pension with your employer is not taxed by the IRS until you start withdrawals. Similarly a private pension plan otherwise known as a SIPP is also treated by the IRS like an IRA and not taxed until withdrawals happen. ISAs unfortunately are not recognized by the IRS as tax deferred or tax exempt and will be taxed. A stocks and shares ISA investing in funds will be severely taxed by the IRS as a Passive Foreign Investment Company (PFIC).

Even gaining UK citizenship won’t change the view of the IRS and some companies won’t even allow US citizens to be customers. We are both dual citizens and have the bulk of our investments, mostly in Roths, in the USA. In the UK we restrict ourselves to fixed income investments such as savings accounts and bonds. Moneysavingexpert.com  is a good resource to investigate savings and bond rates.

https://www.moneysavingexpert.com/

Extremely helpful, thank you so much. So you can contribute to a Roth even if you don't live in the States? Is it easy to take out the funds at retirement if you do retire in the UK? Or is it something we should consider (perhaps retiring in the States rather)? Just curious... trying to understand all of our options.

Thanks again.

Extremely helpful, thank you so much. So you can contribute to a Roth even if you don't live in the States? Is it easy to take out the funds at retirement if you do retire in the UK? Or is it something we should consider (perhaps retiring in the States rather)? Just curious... trying to understand all of our options.

Thanks again.

We stopped contributing to our IRAs and 401ks when we retired 12 years ago. We were still living in the USA back then. The year we retired, and had much lower taxable income we started doing IRA to Roth conversions and after 12 years we only have Roth IRAs which we manage quite easily from England, with our UK address and UK mobile phones registered with our brokerage, Vanguard. We each have a Wise Borderless account  linked to our Roth accounts to withdraw money when needed and move it to England. Withdrawals from a Roth are tax free in both countries. (We moved back to England in 2017)

If you have no IRS taxable income I don’t think you can make Roth contributions but am not sure about that.

Echoing durhamlad:

ISAs, including LISAs, are fully taxable by the US. Just a brokerage account as far as the IRS is concerned. And since they're outside of a pension wrapper, PFIC rules apply - this essentially limits these to individual stocks, unless you can get somebody to let you buy US ETFs inside an ISA (possibly Interactive Brokers, if you can convince them you're a professional investor). You'd then need to report interest, dividends, capital gains to the IRS and pay US tax - you won't have any UK tax to take as a credit, so you may owe real actual money to the IRS. To me, it's a very close call if it's worth it to avoid the higher UK taxes (only once you get above the pretty generous dividend and capital gain allowances), with the added reporting complexity and reduced diversification of an ISA. That said, I do invest in mine/my wife's, in a diversified basket of 40 UK stocks. But if you decided it was too much hassle and skipped it, that would also be a reasonable approach. I use Hargreaves Lansdown, there aren't many UK brokers that will touch a US citizen (also Interactive Brokers and maybe AJ Bell, I think that's about it).

IRA is a great option if you're using the Foreign Tax Credit, rather than Foreign Earned Income Exclusion - you need some US taxable earned income, but it's fine if you don't actually have to pay tax on the income due to the FTC, you just have the income excluded. I do this in preference to my ISA, maxing this out in early January is on my calendar. You might have challenges finding a broker that a) will open an account for a US citizen outside the US and b) allows you a reasonable selection of investment options, due to the MiFiD rules. One option is buying European ETFs, which are PFICs but are fine inside the IRA wrapper - I do this at Interactive Brokers.

Really appreciate all of the help and advice - we are in our mid 30s (my husband is British / South African) so just trying to be as wise as we can for the future, learning a lot to say the least

Thanks again.

I use Tanager Wealth Management.  They are all dual USA/UK citizens and qualified and will prevent you falling into any tax traps on either side of the pond.  You will pay a slightly higher fee for these advisors than a UK-only advisor but you will also find they won't work with you the minute you say your American.  They won't even work with my husband independently!

That being said, it is 100% possible to invest as an American living outside the USA.  You just need to be fully informed before you do anything.