Can I buy a Bank CD with FDIC protection as an American Expat living overseas?

Can I buy a Bank CD with FDIC protection as an American Expat living overseas? You live abroad and are an American expat? You might be wondering if you have access to the same investment options available to US-residents. In this article I will provide you with some information about great solutions available to non-US residents with US-connection. You might have an IRA or cash in a bank account earning next to nothing. There might be a place for a safe and principal-protected investment for a portion of your current portfolio.

FDIC for non-US residents?

FDIC insurance is widely known and trusted in the US. The protection is for products like savings accounts or certificates of deposits issued by banks in the US. The Federal Deposit Insurance Corporation (FDIC) was created by the Banking Act of 1933. It was enacted to restore trust in the American banking system. If a bank fails there is protection of up to $250,000 per social security number per financial institution. That means that if you have a joint account with your spouse at Chase Bank and another joint account at Bank of America, your total FDIC insurance protection would be $1,000,000.

Benefits of a Certificate of Deposit in the US

FDIC insurance up to $250,000 per customer per bank
Great choice of Banks in the USA
Ultimately backed by the US Government
Maturities form 1 month to 10 years
No bank fees
Fixed rate of return

European similar protection

If you have a bank account in the UK, your protection from the FSCS would be only 85,000 GBP per financial institution. In France, the FGDR guarantees protection of only 100,000 Euros. It is almost the same as the UK GBP protection after currency exchange. That would be the equivalent of around $105,000 USD. The FDIC insurance in the US is by far the most generous and better protection.

How can I have access to FDIC products while living overseas?

While living abroad you might be wondering how is it possible to find US FDIC protection and safety. One investment vehicle that provides FDIC protection is a Certificate of Deposit issued by a bank in the US. As Financial Advisors, we can have access to Bank CDs that are offered by banks to generate liquidity. These CDs can have different maturities from 1 month to 10 years. The bank guarantees a rate of return until maturity and you get FDIC insurance up to $250,000 per customer. It is possible for a wealthy individual to buy 10 different CDs from 10 different banks with a total FDIC coverage of $2,5000,000. The possibilities and principal protection are endless. We can use as many banks as we need to provide the coverage needed.

US Treasuries

Another option is to purchase US Treasury Notes. It provides the same principal protection with slightly lower interest rates since the protection comes directly from the US Government instead of a created entity (FDIC). I would argue that it is as safe. However for a larger amount, we need to divide the investment into a few different banks in order to keep 100% protection. You could buy 1 million into Treasury Notes and all of it would be backed by the US Government.

Rise in the Interest rates

With the rise in the interest rates in the US and most countries in Europe, it is now a good time to lock in a good rate that will most likely be lower in future years to come. We expect the interest rates to peak in the summer of 2023 and then go down in 2024. We have a flat yield curve which provides a rate of return that is the same for 1 month or 10 years. At the moment of writing this article in June of 2023, the current average rate of return on a Bank CD in the US was about 5.25%.

The Ladder Approach

One great strategy is to use a ladder of CDs. If you would like to have investment maturing in a consistent way, it is advisable to purchase CDs with different maturities. For example, if you have $500,000 in cash at the moment and would like to have access to $100,000 each year you could purchase 5 CDs. One maturing each of the next five years so you have more liquidity.

Liquidity of a Brokered CD

It is important to know that by purchasing CDs on the stock market from a bank. You can also sell them before their maturity at the market price. That means that if interest rates go down in the marketplace, the value of your CD would be higher and you could sell it before its maturity at a profit. It gives more flexibility since there is no penalty to cash it out earlier but the price you will sell depends on the interest rate available at the time.

Taxes on Bank CDs

By purchasing an investment in the US on an investment platform set up for American Expats, you benefit from having your investment taxed in the US only. This might depend on your country of residency but most likely the US income from a US investment will only be taxed in the US. You most likely will have to declare the income in your new country but there should not be double taxation. Your investment would also generate a Form 1099 each year. It will be easier for your to file your taxes with the IRS.