Foreign Savings Account: What it Means, How it Works

What Is a Foreign Savings Account?

A foreign savings account is more like an investment account than traditional savings accounts for most U.S. individuals. Foreign savings accounts allow you to invest your money in a currency other than the dollar. A foreign savings account can be opened when you're in another country or by contacting an overseas bank online if it opens accounts that way.

How a Foreign Savings Account Works

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 devaluation of the currency being saved (as often happens with inflation) any gains in interest will be lost in currency exchange.

Many foreign savings accounts have higher minimum deposits than traditional savings accounts. This means more of your money is at risk. As well, 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 another 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 with a domestic account.

Taxation of Foreign Savings Accounts

People with foreign savings accounts—those located outside of the U.S.—are required to file the Internal Revenue Service (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, such as the Hong Kong branch of Citibank, for example.

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're looking at this foreign 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—i.e., in the 24% income tax bracket, for example, you would likely pay 15% on long-term capital gains.

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.

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 up to 10% or more on average in the most extreme market circumstances. There is the potential for large gains in a foreign savings account, but there is also the chance of large losses.

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 certificate of deposit (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 insured by the Federal Deposit Insurance Corp. (FDIC) up to $250,000 per depositor.

The Bottom Line

A foreign savings account is a type of investment used by U.S. investors to invest in a currency other than the dollar or by U.S. citizens living or working in other countries. Foreign savings account holders can benefit from interest and currency appreciation, and many non-U.S. savings accounts have higher minimum deposits than traditional savings accounts.

Be aware, however, that people with foreign savings accounts—those located outside of the U.S.—are required to file the IRS form known as the FBAR to report the foreign account if the aggregate value of the accounts held there exceeded $10,000 at any time during the calendar year. There are also U.S. tax implications for these accounts because their income may be taxed at a higher rate than capital gains from investments. Further, currency rates can be volatile, which potentially can reduce or erase any large gains in a foreign savings account.