International Bank and Foreign Investments

Though the two are often confused, an international savings account is not the same thing as an offshore account. In many cases, offshore accounts are used for investment or strategic tax purposes. In contrast, the purpose of an international savings account might be to provide better access to your funds globally, to take advantage of higher interest rates, to diversify risk or to bet on a particular currency.

International savings accounts are typically set up with bank-to-bank transfers or by switching currency options within your existing bank. In many cases, the transactions can be done online. Some of the larger global banks can even consolidate your bank statement to show your international savings account right along with your U.S.-based savings account.

International bank savings rates

When considering international savings rates, it is important to remember that higher is not always better. In many cases, high interest rates are a result or rampant inflation or default risk. For instance, a country in the grips of economic woes may have very high interest rates due to inflation. But a safety-oriented investor would not want to deposit money there for the fear that they could lose principal as the currency continues to devalue.

Banks in the U.S. offer more stability and less currency and default risk than international banks. If current interest rates are still tempting you to go overseas, consider countries with stronger economies such as Canada, Australia, some Western European countries and some of the major Asian countries. Remember though, permanent residency can be a requirement at some foreign banks.

Foreign exchange (forex) rates and currency

International trade and investment is dependent upon a determination of the relative values of different currencies. The exchange rate between two currencies is an expression of the rate at which one currency can be converted into the second currency. The exchange rate can be influenced by political and economic factors, including economic growth, inflation, political stability and market trading or psychology.

Foreign exchange markets, also called forex or FX, provide open-market trading platforms for commercial or investment activities. Individual investors can trade foreign currency through banks or foreign exchange brokers. The most traded currencies in the world are the U.S. dollar, Euro, Japanese yen, Pound sterling (UK) and Swiss franc.

International bank accounts

Global CD rates can be higher than those found in the U.S., especially in countries with growing economies and booming inflation. But the risks with international savings accounts are significantly higher than the risk associated with banks in the U.S. that are covered by FDIC insurance. Default risk and currency risk can make opening an international savings accounts more similar to purchasing stocks or mutual funds than depositing money in a U.S. bank.

That doesn’t mean that every international savings account is as risky as a casino game. International banks in the United Kingdom, Hong Kong and Japan offer online options to U.S. investors that may make sense for individuals or companies domiciled abroad. Many of these banks even have branch offices in New York, Chicago, Los Angeles and other cities in the U.S. Another option is to use a FDIC-insured bank in the U.S. to purchase a foreign-denominated money market account, savings account or CD without having to wire funds outside the U.S. — a quick and easy option.

EverBank CDs

EverBank is an FDIC-insured bank that offers Americans a chance to purchase certificates of deposit (CDs) denominated in one or more foreign currencies. Investors can open an account online at EverBank.com and choose to buy either a single or multi-currency CD that pay a fixed rate of interest. Investors do face a currency risk when converting funds back into U.S. dollars though. FDIC-insurance covers the solvency of EverBank, but does not cover any losses from currency fluctuation.

For more on these accounts, please see the MoneyRates.com report on EverBank WorldCurrency CDs.

Frequently Asked Questions

Q: Where can I find CD rates for international banks? Can U.S. citizens typically and freely open accounts at non-U.S. banks?

A: There does not appear to be a comprehensive source on CD rates for banks around the world, so your best bet would be to start with some country-by-country Internet research, tracking down rates from the web sites of individual banks.

As a U.S. citizen, you generally should be able to open an overseas account, but you will find the exact requirements for doing so will vary from country to country. There are three general cautions you should bear in mind before opening a foreign bank account:

• As long as you continue to live in the U.S., you will be responsible for paying any relevant U.S. taxes on your foreign accounts.
• Putting money in a non-dollar-denominated account will subject you to changes in exchange rates. While these can work in your favor, an adverse currency swing could quickly wipe out all the interest you might earn in a year.
• Your deposits will not benefit from the same protections that U.S. banking customers enjoy. These include both anti-fraud regulations and FDIC deposit insurance. Keep in mind that when some banks went under during the financial crisis, the FDIC was there immediately to backstop deposits that fell within the insurance limit. In most countries, you’d be unlikely to find such an effective safety net.

In short, it may be more effective to shop for the best CD rates here in the U.S. than to chase higher rates that come with a number of unknowns.

Q: Although I’m not a wealthy person needing a Swiss or a Cayman Islands bank account, keeping all my assets in the U.S. worries me. Are there any good reasons for keeping some of my savings in bank accounts in other countries?

A: That’s an interesting question, and the short answer is no, but it’s worth breaking the answer down into component parts to look at why some people keep assets offshore, why you shouldn’t need to do that, and what you can do to manage country risk.

People generally maintain foreign bank accounts if they are a) doing business in foreign countries, b) trying to avoid U.S. taxes, or c) engaged in illegal activities and are looking to shield assets from U.S. authorities.

Assuming none of the above applies in your case, you shouldn’t feel the need to open an offshore bank account. That doesn’t mean that you can’t take some actions to manage risk.

On the simplest level, make sure that your deposits with any one bank total less than $250,000 (this means you individually — your spouse’s deposits can be counted separately.) This will keep you within the coverage limit of FDIC deposit insurance. That is a level of protection you are not likely to get from a foreign bank.

If you are especially concerned about the U.S. economy, consider diversifying into foreign securities. A mutual fund or other diversified portfolio of non-U.S. stocks can reduce your exposure to events in the U.S., while still giving you the convenience of working with a U.S.-regulated financial institution.

Q: I read about CDs in India yielding 9% interest rates. Is it possible for an American to invest in such an account?

A: There are several reasons why you should be wary of this kind of investment.

Through the end of the third quarter of 2013, India had a year-over-year inflation rate of 9.84 percent. So, if the best CD rates in India are around 9 percent, they are in much the same boat as the best CD rates in the U.S. — struggling to keep up with inflation.

Now, if you are investing in India but living in the U.S., why should you care about the Indian inflation rate? Because high inflation is often a sign of a weak currency, and your deposit would be denominated in the local currency. Sure enough, over that same one-year period when India experienced a 9.84 percent inflation rate, its currency declined by about 15 percent against the U.S. dollar. So, had you made this investment a year ago, you would have earned 9 percent in interest and lost roughly 15 percent to the exchange rate.

Beyond understanding the economics underlying any investment opportunity, there are three basic questions you should ask before depositing money in a foreign institution:

1. Is it a scam? Actually, whether it’s at home or in a foreign country, you should always be alert to the possibility of a scam when dealing with unfamiliar people or institutions. Don’t do anything unless you can independently verify the legitimacy of the institution offering the product, and the authority of your specific contacts at that organization.
2. How safe is the bank? Remember, your money would be a long way from FDIC insurance. You’d have to do some research into the quality of the bank making the offer, and find out what protections are offered to depositors in India.
3. What about taxes? Often, foreign accounts have local taxes withheld, but you would also still be liable for U.S. taxes on your earnings. The U.S. has tax treaties with several countries that allow investors to avoid double taxation, but even if this is in place, reclaiming taxes that were withheld from your account can involve complicated paperwork and long delays.

One of the real hazards of a low-interest-rate environment like the one the United States is experiencing is that people start looking beyond the tried-and-true options in a search for higher yields. When the best CD rates in the U.S. struggle to reach 2 percent, it is natural that a 9 percent CD rate would sound attractive. Unfortunately, reaching for higher yields can radically change your risk exposure, pushing it well beyond what you would normally expect from investing in a CD.

Q: Where can I find CD rates for international banks? Can U.S. citizens typically and freely open accounts at non-U.S. banks?

A: There does not appear to be a comprehensive source on CD rates for banks around the world, so your best bet would be to start with some country-by-country Internet research, tracking down rates from the web sites of individual banks.

As a U.S. citizen, you generally should be able to open an overseas account, but you will find the exact requirements for doing so will vary from country to country. There are three general cautions you should bear in mind before opening a foreign bank account:

• As long as you continue to live in the U.S., you will be responsible for paying any relevant U.S. taxes on your foreign accounts.
• Putting money in a non-dollar-denominated account will subject you to changes in exchange rates. While these can work in your favor, an adverse currency swing could quickly wipe out all the interest you might earn in a year.
• Your deposits will not benefit from the same protections that U.S. banking customers enjoy. These include both anti-fraud regulations and FDIC deposit insurance. Keep in mind that when some banks went under during the financial crisis, the FDIC was there immediately to backstop deposits that fell within the insurance limit. In most countries, you’d be unlikely to find such an effective safety net.

In short, it may be more effective to shop for the best CD rates here in the U.S. than to chase higher rates that come with a number of unknowns.

Q: I am an American citizen and I have money in a CD in India that will mature in 10 years. Do I have to pay taxes in the U.S. in a given year, even if the value of my account goes down because of currency changes?

A: This is a very specialized tax question, so you would probably wise to consult with a qualified tax accountant for an answer that is completely suited to your particular situation. However, it is possible to outline the major issues involved.

First of all, it appears that in terms of reporting, there are three standards that may apply:

1. Foreign holdings of more than $10,000 must be reported annually to the IRS via the Financial Crimes Enforcement Network’s Form 114, Report of Foreign Bank and Financial Accounts.
2. If the value of your foreign holdings exceeds $50,000 at the end of the tax year, or was above $75,000 at any point during the tax year, you will probably have to report those holdings by attaching IRS Form 8938 to your tax return.
3. Regardless of whether you have to report the holdings pursuant to either of the above requirements, if you are paying U.S. taxes you will probably be obligated to report any income from those holdings on your return.

Income earned in a foreign currency must be translated to U.S. dollars for tax reporting purposes. So, if the Indian currency goes down, your reportable CD interest could be reduced by the currency change. However, the change in principal value of the CD would probably not be reportable as a loss until you cash in the CD and convert it back to U.S. dollars.

Currency translation is often the fatal flaw of investing in foreign CDs. The best CD rates, along with the highest rates on savings accounts or money market accounts, can often be found in countries with weak currencies. This is because those countries often pump up their interest rates in an attempt to attract investment to shore up the currency, and also because a weak currency is generally inflationary, which causes interest rates to rise naturally.

To a U.S. investor, this means the interest you earn may be devalued by currency translation, and meanwhile, the principal value of the account would also be devalued by that same currency translation. Keep in mind too that foreign bank accounts are not covered by FDIC insurance protection, so their rates are really not directly comparable with U.S. rates.

Adding insult to injury, it appears that you would have to pay tax on the interest earned from a foreign CD (adjusted for currency translation), but this would not be offset by losses to the principal until you cash in your CD.

Disclaimer: An EverBank deposit account is insured by the FDIC for up to $250,000 per depositor. FDIC insurance covers against loss due to the failure of the institution, but not market-related fluctuations including changes in currency prices. The amount of deposit insurance available for funds denominated in foreign currency will be determined and paid in the United States dollar equivalent of the foreign currency on the institution’s date of default. As with all investments, investors can lose money, including principal due to currency fluctuations, over the term that you own it. Please only invest with money that you can afford to risk, and as part of a broadly diversified investment strategy.