Difference Between a Foreign & a Forex Account

Many individual investors who are intrigued by the mystique of foreign investments are confused about the difference between foreign accounts and forex accounts. Foreign accounts are bank or brokerage accounts outside the United States. Forex accounts are used to trade foreign currencies on the foreign exchange market. Foreign accounts are difficult to open and entail the filing of a considerable amount of paperwork with the U.S. government each year. Forex accounts are easy to open and maintain.

Reasons for Maintaining a Foreign Account

Money laundering, off-shore tax evasion, and secret Swiss bank accounts are often associated with foreign accounts, but there are legitimate reasons for having a foreign account. Those who travel frequently to a country find it convenient to have a local bank account that allows them to use an ATM card to get cash in the local currency. Others have foreign accounts to get higher interest rates than those available in the United States or to be able to trade stocks directly in that country.

Individuals Can Now Trade on the Foreign Exchange

Forex accounts allow individuals to buy and sell foreign currencies, usually online, 24 hours a day from Sunday evening until late Friday afternoon. These accounts allow leverage up to $20 for every dollar deposited with the forex dealer. Even though the spread between the purchase price (bid) and the selling price (ask) is very small because of the leverage, a small price change results in large gains or losses. Currencies trade in pairs, such as the U.S. dollar (USD) and the euro (EUR). Forex accounts are easy to open online. Minimum balances range from just $1 to 25,000.

Foreign Accounts Are No Longer Secret

Many foreign financial institutions no longer allow Americans to open accounts. Americans can no longer open foreign accounts online, but they may do so in person. Those with foreign accounts must file Schedule B and -- if they own more than $50,000 in securities -- Form 8938 with their income tax returns. In addition, individuals with more than $10,000 total in foreign accounts must annually file Form TD F 90-22.1 directly with the U.S. Treasury. Local regulation of the accounts varies from country to country, and deposits often are not insured.

Cutting Down on Forex Trading Abuses

The Commodity Futures Trading Commission and the National Futures Association regulate forex trading in the United States. The government does not require extra paper work for individual forex traders -- just the typical filing of gains and losses with tax returns. Most forex dealers offer free practice trading accounts that allow novice investors to gain a full understanding of forex trading before they use their own real money.