There are a number of reasons why an American might be interested in having a foreign savings account. Those living abroad may find that opening an account in their country of residence makes it easier to access their funds and saves them money on bank and transaction fees.
For people who live in the United States, a foreign savings account is more like an investment account than a traditional savings account. Foreign savings accounts allow you to invest your money in a currency other than the dollar – you're gambling that the foreign currency will have a favorable exchange rate when you want to withdraw your savings and convert them back to dollars. You can open these accounts when you're in a foreign country or by contacting a foreign bank online, if it opens accounts that way.
Foreign savings accounts may have higher interest rates than in the U.S., which may make them appealing for savers willing to take the risk that the exchange rate will work in their favor. However, if the high interest rate is coupled with the devaluation of the currency (as often happens with inflation) any gains in interest will be lost in currency exchange.
(For more on this, read The Hazards of Currency Movements.)
Currency Exchange Fees
Many foreign savings accounts have higher minimum deposits than traditional savings accounts. This means more of your money is at risk.
There are almost always currency exchange fees associated with changing between currencies. Opening a foreign account means you may have to pay them twice – once for converting from the dollar into a foreign currency, and once to convert your money back to dollars. These fees are generally priced as a percentage of the total amount being converted, which means they can take a big cut out of the interest you earned. Be sure to factor in these fees when comparing what the foreign account would yield compared to a domestic account.
Special Tax Reporting Requirements
People with foreign savings accounts – those located outside of the United States – are required to file the IRS form known as the FBAR. This is true whether you opened the account at a local bank in that country or at a local branch of a U.S. bank, say the Hong Kong branch of Citibank.
Not filing the FBAR has steep penalties. You can be fined as much as $100,000, or half the amount in the foreign account, whichever is greater. If you have foreign accounts and are unsure about your tax status or which forms to file, it is worth hiring an accountant to protect your assets.
If you're looking at this account as an investment, not a savings account, just remember that you will be required to pay ordinary income tax on any income you earn through interest or currency exchange – the same way that you pay income tax on earnings from an American savings account. If you had made that money by investing in the stock market, you would only owe capital gains tax on your earnings.
Both of these tax rates vary depending on your tax bracket, but generally capital gains tax rates are significantly lower than ordinary income taxes: In the new 24% income tax bracket, for example, you would likely pay 15% on long-term capital gains.
Risks and Benefits
Saving in another currency works best for those with a high tolerance for risk and the willingness to track exchange rates and move fast if necessary.
Currency markets are extremely volatile, with values changing between 1% and 3% on average each day. There is the potential for large gains in a foreign savings account, but there is also the potential for large losses.
Alternatives to Foreign Savings Accounts
While there may be some appealing reasons to entrust your savings to a foreign account, the U.S. stock market also offers investments that earn more than a domestic savings account, but without currency exchange fees. Additionally, you would only pay taxes at the capital gains rate, rather than at the ordinary income tax rate.
If you are looking for a safer place to save your money and earn interest, consider investing in a CD at a U.S. bank. CDs have a guaranteed return on investment at a higher interest rate than a traditional savings account and are FDIC-insured up to $250,000 per depositor.
The Bottom Line
If you live abroad, having a foreign savings account probably has obvious practical value. For U.S. residents, the appeal of a foreign savings account is the potential of taking advantage of a favorable exchange rate and having an account that pays higher interest rates than at a U.S. bank.
However, the high risk associated with foreign currency – and the taxes and fees associated with foreign financial transactions – make foreign savings accounts a risky (and potentially expensive) places to store your money.