Think of offshore bank accounts and you tend to think of millionaires, money laundering, and unscrupulous deals. The reality is that opening an offshore account basically meaning a bank account in a foreign country – can be relatively straightforward, completely legal, and of course profitable.
Offshore banks also known as tax havens — have proliferated in recent years. Today there are over 200 countries and territories that specialize in such activity. In the Cayman Islands, it is sometimes jokingly said that there are more banks than people. Citicorp, the huge banking company, was one of the first of many large US companies to set up its financial operations offshore.
So why would anyone want to or need to open an overseas bank account? One of the misnomers about an offshore bank account is that it is only for the very wealthy. In fact, theoretically, anyone can open an account overseas and in these days of electronic banking, most applications can be handled online or by mail. You can also have your application handled by specialized companies or financial advisors who will help to deal with the paperwork and regulations.
The reason most individuals and companies open an overseas account is, of course, to save or make money. Foreign banks offer a very good interest rate usually much better than most US banks. In general, the longer you keep your money in one account, the more interest you will earn. Apart from the benefits to you, the investor, there are also huge economic benefits for the small foreign country where your bank is located.
Privacy is also a major factor in many countries specialize in banking confidentiality; Switzerland immediately comes to mind. Some offshore banks have secrecy laws so strict that it is considered a crime for any bank employee to discuss your account with anyone except the account holder. Some overseas banks even allow you to open an account in a fictitious name.
To actually open an overseas bank account, you must first do some research on which country and which bank will be most suitable for your needs? Is a large or small bank better? There are advantages either way here a larger bank may offer greater security and more services, but with higher fees. Keep in mind that you will have to communicate regularly with the bank, be able to check your account, deposit and withdraw funds, and perhaps even visit them occasionally.
The factors you would take into account when opening your regular checking or savings account here would also apply what kind of fees will apply, do you have to maintain a minimum balance, and of course what rate of interest you will earn. Is the interest rate on your account tied into the US economy or the local currency of the country you are banking in? You may want to consider other services the bank offers, such as different types of accounts, credit cards, and safety deposit boxes.
Although you may not need any of these things; opening an offshore account can be as straightforward as just having a checking or savings account. Finally, you may want to consider the location of the bank as well most offshore banks are situated in warmer climates, such as the Caribbean or Bahamas and it can be fun to combine business with pleasure!
Most people who open an overseas bank account want to enjoy the significant tax breaks that this will give them. The tax rules regarding offshore accounts can be complicated and you should get specialist tax advice if you are thinking of doing this. In general, if you have money in a bank account in another country it does not fall under US tax laws.
You may have to declare your income but not necessarily pay taxes on it. Once you start applying this same rule to other investments – stocks, real estate, etc the tax rules can be even more confusing. Again, be sure to get professional tax advice before signing anything!