What is the most tax-effective way for Americans to invest in Germany?

This is an excellent question and as often the answer is “it depends”.

First of all, we are tax professionals and cannot give any investment advice. However, we can highlight a few tax aspects, which we think are critical and add perspective on real-life aspects which we have come across during our work with various Americans in Germany.

People are different and each have their own preferences. Some might like a widely distributed ETF portfolio and some are well versed in single stocks. Some need the rush from day-trading and others prefer to just buy and hold. A client with a trader background might be comfortable with options trading when others can’t understand the difference between call and put.

All of the above are versions of “investing” and have their justification for each person engaging in them. For as long you are happy with your approach and successful in what you are doing we look at what you are doing as the “effective” strategy for you. You might not be able to save as much in taxes as you might find desirable, but our dogma is “tax follows strategy”, not the other way around.

From our point of view, there really are only three tax-savy vehicles out there which work in Germany. One is a German product called “Rürup”, and it is geared towards freelancer and contractors. The other is a German product called “Riester” and aims at regular employees. Both come with certain requirements and restrictions. Again, we are not insurance people, so we ask you to kindly reach out to experts – such as MW Expat Solution Services GmbH – to find out about their intricacies. However, contributions towards both can fairly easily be considered for tax purposes. The last tax-savy product is a US retirement plan because under both US and German law it grows tax-deferred without strings attached. In order to save towards a US retirement plan while an expat in Germany, most often you should take the foreign tax credit, rather than the foreign earned income exclusion. The flip side being that this might not make for the biggest tax savings stateside.

To learn more about the taxation of US retirement plan distributions in Germany, please check out this article.

To make a decision towards one or the other investment strategy obviously is a combination of financial expectations, personal preferences, administrational aspects, tax consequences and the general life plans. Obviously there is not one that fits all, but if you feel like discussing some of the above from a tax point of view, please reach out to us.

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