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What is offshore banking?

Offshore banking isn’t as mysterious as it may seem. Here’s how it works.

Yahoo Personal Finance· Getty Images
6 min read

When you think about offshore bank accounts, spy thrillers and tax strategies for the wealthy may come to mind.

However, offshore banking can also be a financial solution for anyone who works internationally, has close family in another country, or frequently travels abroad. In fact, roughly 1.5 million Americans have around $4 trillion in assets held in foreign financial accounts, according to the IRS.

If you've ever wondered whether it makes sense to open a bank account in another country, here's what you need to know about how offshore banking works and whether it's right for you.

An offshore bank account is a financial account located outside of the country where you currently live. It may also be referred to as an overseas or non-resident account.

Offshore banking can make it possible for you to receive and make payments in the country where your money is held, typically in that country's currency or possibly in multiple currencies.

While offshore bank accounts have a certain reputation as tax havens for the uber-wealthy, there are several different types of people who may consider using offshore banking to better manage their money. That includes:

  • Expatriates working in another country

  • U.S. residents who regularly travel to another country for work

  • Digital nomads who plan to stay in a specific country or region

  • People planning to move to another country

  • People who regularly receive payments in a foreign currency

  • U.S. citizens or residents who provide financial support to loved ones in another country

  • People who own significant investments abroad

If any of these scenarios apply to your situation or you expect that one will soon, you may consider offshore banking as a way to make your financial life a little easier.

Offshore bank accounts have a reputation as tax havens, but while some wealthy Americans use them to conceal assets and evade taxes, it's important to make sure you use the account legally. Here are some of the key points to understand.

The Bank Secrecy Act requires U.S. citizens, residents, and companies to report any foreign bank or financial account with a value of $10,000 or more to the U.S. Department of the Treasury.

Additionally, the Foreign Account Tax Compliance Act (FATCA) requires U.S. taxpayers with $50,000 or more in assets held in foreign accounts to report details about those accounts to the IRS. That threshold jumps to $100,000 for married couples who file a joint return.

Keep in mind that FATCA reporting is required even if you don't earn any income in the offshore bank account.

Read more: How to choose the right tax filing status

The IRS also requires U.S. taxpayers to report any income they earn in foreign countries. Fortunately, the federal agency allows you to exclude some or all of your foreign-earned income for tax purposes — up to $126,500 per person in 2024.

However, the foreign-earned income exclusion doesn't apply to interest, dividends, capital gains, or rental income.

Depending on the type of income you earn in a foreign country and how much, you may need to pay taxes to both the U.S. government and the government of the country where you received the income. That said, some countries offer more favorable tax rates than others.

If opening a bank account in a foreign country makes sense for your situation, it's important for you to go into it knowing both the advantages and disadvantages of offshore banking. Here's what to keep in mind before you get started.

  • Simpler money management: If you currently live or work in a foreign country, having a locally held bank account can make it easier for you to manage your money in a foreign currency without needing to convert all payments to U.S. dollars.

  • Potential tax efficiency: While you'll still need to report any income you earn in a foreign country to the IRS, some countries offer more favorable tax rates than others, which could help your tax situation, particularly if you're dealing with different currencies.

  • Investment opportunities: Having a bank account in a foreign country could give you access to investment opportunities and advice that you may not have in the U.S.

  • International banking laws can vary: If your bank fails in the U.S., your funds are likely protected by federal insurance. While some foreign governments may offer similar protection for bank account holders, laws and coverage amounts can vary, requiring extra research.

  • Regulatory requirements can be onerous: Offshore bank accounts have been subject to more scrutiny in recent years due to their association with tax evasion and money laundering. If understanding and meeting the reporting requirements sound like too much of a headache, it might not be worth the benefits.

  • You may not qualify: Some international banks require you to meet a minimum deposit requirement or earn above a certain threshold to qualify for an offshore account.

The process for opening an offshore bank account can vary depending on the country and the bank you have in mind. While some banks may allow you to open an international bank remotely, others may require you to do it in person.

With that in mind, here are some steps you can take to open an overseas bank account:

  1. Shop around for a bank: Take your time to research and compare financial institutions in the country you're planning to open an account. Focus on the features you want in an offshore bank account, as well as fees, minimum deposit requirements, the application process, and the bank's financial stability.

  2. Gather the required documents: The bank will typically let you know which documents you need to get set up. Generally, you'll need to provide documentation to verify your identity, address, and the source of your funds.

  3. Submit the application: Whether you can apply online, via mail, or in person, fill out and submit your application and comply with any additional requirements the bank has for prospective customers.

  4. Fund your account: Once you've been approved, set up a wire transfer or other funding method to add money to your new account. You'll then receive instructions on how to access your account and manage your funds.

Having a bank account in another country is completely legal. However, there are reporting requirements you may need to meet to ensure you comply with federal laws and regulations surrounding offshore bank accounts. If you don't comply, you may be subject to fines and other penalties.

Some international banks may require you to meet a minimum opening deposit or salary requirement to get approved for an account. Deposit requirements can range from $500 to $500,000 or more, but a typical expectation is between $5,000 and $15,000.

Yes, U.S. citizens are allowed to open offshore bank accounts as long as they meet the reporting requirements created by the federal government.