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Since interest rates are higher in the Euro zone than in the U.S., I'm exploring the possibility of opening a European bank account. For example, IND Direct is offering 3.5% on a 12-month CD, whereas the same product in the U.S. pays a laughable 0.75%.

What do I need to consider when opening an account in the Euro zone? Obviously, I'm incurring a foreign currency risk as my deposit will be in EUR, not USD, but this is fine with me as I consider a hedge against a declining dollar an added bonus.

Is there an equivalent of FDIC insurance?

EDIT

I'm curious as to the rules and procedures that apply to opening an account as a resident or as a non-resident (I'm assuming the latter is more difficult).

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People with this plan often do not appreciate how much the foreign currency risk is. The Euro has swung 20-30% several times in the past 5 years. It's only a good hedge if it swings in the right direction. –  smackfu Jul 29 '11 at 19:16

3 Answers 3

up vote 6 down vote accepted

Tackling your last point, all banks in the EU should be covered to around €100,000. The exact figure varies slightly between countries, and generally only private deposits are covered.

In the UK it's the FSCS that covers private deposits, to a value of £85,000, see this for more information on what's covered. In France (for a euro denominated example), there's coverage up to €100,000 provided by Fonds de Garantie des Dépôts, see this (in French) for full details.

There's a fairly good Wikipedia Article that covers all this too.

I'll let someone else chime in on the mechanics of opening something covered by the schemes though!

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Be mindful of your reporting requirements. Besides checking the box on Schedule B of your 1040 that you have a foreign bank account, you also need to file a TD F 90-22.1 FBAR report for any year that the total of all foreign bank accounts reaches a value of $10,000 at any time during the year. This is filed separately from your 1040 by June 30 of the following year.

Penalties for violating this reporting requirement are draconian, in some cases exceeding the amount of money in the foreign bank account. This penalty has been levied on people who have been reporting and paying tax on the interest on their foreign bank accounts, and merely neglected this separate report filing.

IRS FAQ

http://www.irs.gov/businesses/small/article/0,,id=210244,00.html

Article on the "shoot the jaywalker" punitive enforcement policy.

http://www.rothcpa.com/archives/006866.php

Mariette

IRS Circular 230 Notice: Please note that any tax advice contained in this communication is not intended to be used, and cannot be used, by anyone to avoid penalties that may be imposed under federal tax law.

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Good point regarding all the legal entanglements of opening foreign bank accounts. That might be another thing in favor of using a domestic vehicle (such as the ETF I suggested, ) to acheive the same or similar ends without having to risk the wrath of the IRS –  Chuck van der Linden Jul 1 '11 at 7:22

If you don't want to hassle with opening an account (and don't mind going without insurance) there are currency ETF's that basically invest in euro money market accounts.

Here's an example of one

Not sure if the return would be as much as you'd get if you opened your own account and went for longer term instruments like a 12 month CD (I think the Euro MM rate is around 1.1% compared to 0.1% for the US). But since it trades like a stock you can do it without having to establish an account with an overseas bank.

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