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Imagine there are funds spread out over multiple UK current (checking) accounts, savings accounts and index funds. None of them are taxable in the UK.

Upon moving to the US, one becomes a US resident after a year at most, which means that foreign funds become taxable in the US.

What is the best way to proceed to minimize loss? At the moment I see 3 options:

  1. Transfer funds to the US and re-invest it there. Loss on currency exchange.

  2. Invest everything into index funds, which are not taxable until cashing them. In this case, one can move back to the UK, wait a year to clear resident status and cash them then.

  3. Lock it in a SIPP and wait until retirement age to not pay tax under the US-UK pension agreement.

Suggestions?

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    Not to be picky, but the term ‘resident’ has legal meaning in the US, and you don’t become a resident necessarily just by living there. Not relevant for your point though, as you are becoming taxable in the US. – Aganju Nov 2 '17 at 12:06
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    The US frowns holding foreign ETFs or mutual funds by taxing the gains heavily. The US may also not recognize the tax free status these investments enjoy in the UK. – Eric Nov 3 '17 at 13:16
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There is a fourth option - pay those taxes. Depending on the amounts, it might be the easiest way - if you make 34.49 in interest, and pay 6 $ in taxes on it, and be done, that might not be worth any other effort.

If the expected taxable amount is significant, moving (most of it) to index funds or other simply switching existing investments to ‘reinvest’ instead of ‘pay out in cash’ would be the best approach. Again, some smaller amounts in savings or checkings accounts are probably not worth any effort.

Transferring the money to the US doesn’t save you taxes, as any interest would still be taxable. You have a risk to lose on the conversion back and forth (and a potential to gain - the exchange rate could go either way!), so if you are sure you go back, it’s not a good idea to move the money.

  • 'Reinvestment' of distributions counts for US tax purposes as receiving the income and immediately investing it; even though not received in cash that income is taxable (to a citizen or tax resident, as commented on the Q) unless it is interest from (US) 'municipal' bonds. OTOH 'growth' stocks generally pay low (or no) dividends, so a fund of them has less to distribute (and should appreciate in price instead), but also look for low turnover so they don't have cap gains to distribute. – dave_thompson_085 Nov 3 '17 at 7:37
  • @Aganju Paying taxes on checking accounts is fine but index funds are seen as PFIC by the US and the tax on those is 40 something percent. Investing in the US would lower this tax to the standard income levels. – shadesofdarkred Nov 13 '17 at 16:37
  • @dave_thompson_085 Afaik, if the fund is set up as accumulation fund, the "reinvestment" never occurs. Since the fund is not cash but just a collection of arbitrary units, the fund platform merely changes the price of the units (which is not experienced until the moment the fund is cashed out). – shadesofdarkred Nov 13 '17 at 16:39
  • @Aganju What i mean is that capital gains tax on index funds in the US is lower than PFIC tax on the index funds in the UK -- which could potentially overcome the loss caused by currency conversion. This is the reasoning behind my first option. Or am I missing something? – shadesofdarkred Nov 13 '17 at 16:56
  • Forget it. My comment was to another question, I didn’t pay attention, sorry. Will delete it. – Aganju Nov 13 '17 at 21:23

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