If on a Work Visa, Should I Invest in 401k and Other Special Accounts?

One of the questions I get all the time is how to invest on work visas in the U.S. using special accounts like Roth IRAs, HSAs, 401ks, 529, etc. The work visas in question are H-1B, H1B1, L-1, O-1, TN, and E3. This is keeping in mind that work visas are by nature temporary non-immigrant visas and technically the holder is expected to depart the U.S. after the work assignment.

This question is from both advisors, as well as foreign nationals on work visas. I have not found one single comprehensive guide on this, so I have gone ahead and worked with the Kitces editorial team of the famous Nerds Eye View Blog to publish a very comprehensive guide for financial advisors. It will answer the question “How do I invest on a work visa in the U.S.” Kitces.com site is the top leading authority for financial planning technical issues. The 7000 + word, 14-page article is heavy on technical details and geared toward advisors.

In today’s post, I’m distilling it for those on work visas and providing you with a very high summary of how to start thinking about the issue. I’ll be breaking it out into manageable pieces over the next couple weeks, but today we get started. Use this as a guide to get you started down the investment path in the U.S. using special accounts.

A Summary of the Work Visas Under Discussion

Every year, USCIS (United States Citizenship and Immigration Services), issues over 100,000 non-immigrant visas. The non-immigrant visas under discussion are H-1B, L-1, O-1, TN, H1B1, and E-3. Each visa has its requirements and restrictions discussed extensively in the article.

The visas fall into two broad categories:

• Dual Intent: H-1B and L-1 visas are dual intent visas, which means, the holder can start the process to become a permanent resident (green card holder), while still in the U.S. The 0-1 visa is dual intent under certain conditions.
• Non-Dual Intent: TN, E-3, and H1B1 are not. A holder of these visas can still get the green card petition started, but it takes a good immigration lawyer to get through the nuances of the process and avoid screwing up.

The Need for Investing in Special Accounts on a Work Visa

If coming to the U.S. on a work visa you are most likely:

• In your prime work years, between the ages of 25 and 54.
• Most likely started on an F-1 student visa.
• Moved to the US for economic opportunity.
• Have a young family, or likely to start one in the U.S.
• In the mass-affluent category based on your income.

So, it makes sense that you want to start investing in the US while on a work visa.

Unique Challenges You Are Likely to Face Investing on Work Visas in Special Accounts

This stems from the temporary nature of the work visas – technically the visas allow you to be in the U.S. for a time and then you are expected to leave.

The main investing challenges on a work visa are:

Investing in “Future-Use” Accounts an Not Using Them as Designed

Retirement accounts available in the US (e.g., 401(k) plan accounts, Traditional and Roth IRAs, etc.) are, by design, ‘future-use’ accounts.

Their potential is most fully realized when they are left alone for long periods for use in the future.

If on a nonimmigrant work visa, the ‘future-use’ characteristic is a huge investment challenge that raises a lot of questions.

• “Is it worth investing in a long-term vehicle when I’m not sure if I’ll be able to let the account do what it’s supposed to do?”
• “Are the penalties I may have to pay to make an early withdrawal from my retirement account worth the current tax benefits available to me from having the account in the first place?”
• “Would I be better off investing in other things in my home country instead of in a 401(k)-plan account through my employer?“

U.S. Brokerage Firms Investing Challenges for Those on Work Visas

A lot of brokerage firms, don’t want to open accounts for foreign nationals on work visas due to increased compliance requirements arising from the Patriot Act of 2001.

The act is designed to prevent foreigners from funding terrorist acts via U.S. capital markets. For example, Vanguard, simply states that “you need to be a U.S. citizen with a U.S. mailing address to open an account.” However, this is not an issue if opening a retirement account through the employer’s chosen custodian, regardless of your citizenship status.

Lost Benefits From Certain Tax-Advantaged Accounts When Relocating Overseas

If on a work visa, there are a few possible options when it comes to long-term residency plans. Evaluate this if considering investment options on a work visa.

You don’t always have control over the outcome or the timing of what happens, which can make it especially challenging to invest while living in the U.S. If you are going to move out of the U.S., there are two options available to you.

• Become a permanent US resident/citizen and move back to your or other) country for retirement.
• Move back to your home (or other) country without changing your immigration status.

The Issue: Most countries don’t recognize the tax-free nature of certain retirement accounts (e.g., Roth IRAs, Roth 401(k) plan accounts, and HSAs).

If withdrawing the money in those countries, you are likely to pay income tax on the gains, which negates the tax-free benefits of the Roth-type accounts, as recognized by the U.S. There are a few countries that recognize the tax-free nature of Roth accounts in their tax treaties with the U.S. Those countries will allow you to take full advantage of the tax benefits offered by the accounts. Consider where you plan to be.

Getting Around the Investing Challenges on a Work Visa

This is a process where you need to ask yourself a lot of questions. In addition, you need to become more knowledgeable in certain areas. Remain flexible, and be willing to evaluate your situation every time your visa situation changes.

Understand Your Visa Type and Its Tax Implications

Get a good handle on:

• Any visa restrictions and visa duration.
• Dual – intentionality status – in case you want to apply for a green card.
• What happens if you lose a job on the work visa.

Consider How Long You Are Going to Be in the Country

If you are in the country for a short duration, it may not be worth entangling yourself into the US tax system via investing in retirement special accounts like 401ks, 403b, etc. This is especially important based on where you are coming from.

If on the other hand, the company has a decent match, then it may be worth it to save into the accounts, simply to get the match. If you think you are going to be here for a couple of years, and your company’s plan has good funds, and you want to lower your taxable income is crucial, then consider the pre-tax plan. If not going down this path consider a regular brokerage account.

529 Plans Investing Challenges on a Work Visa

The question to answer is, are you saving for US colleges or colleges outside the U.S.? I get a lot of questions on this question, so here are two posts, I have written to address some of the issues.

• How to save for your foreign-born kids while on a work visa.
• Can I open a 529 account on an H-1B visa?

If after going through all this, the 529 account is not an option for you, consider the brokerage account.

Use Foreign Nationals Friendly Brokerages

The firms I have found to be easiest to work with are TD Ameritrade (moving to Charles Schwab), Charles Schwab, and Interactive Brokers.

Some brokerage firms may be more accommodating to foreign nationals who wish to open accounts, but as soon as you leave the US and register a foreign address, the brokerage will often force you to close the account or prevent you from trading any equities in the account.

Find out how they’ll treat your accounts before you open them. You may have to call customer service a couple of times to get to somebody knowledgeable about the issue.

Leaving the U.S. When You Have Special Accounts

If you have to leave the country before retirement you have a decision to make – take the money with you or leave it here.

Each of the decisions has tax implications.

Withdraw the Money

Pay income taxes on the distribution plus an early withdrawal penalty of 10% if under age 59 ½.

To mitigate this leave the country and withdraw the money from the plan the following tax year. You’ll still pay any applicable early withdrawal penalties along with income taxes imposed by your home country (if the country has taxes on overseas assets), but the net income tax may end up being lower since the overall income will generally consist only of distributions from the retirement plan.

Leave the Money in the U.S. Until Retirement

You may have to contend with your home country taxing you on the same. Leaving the money assumes the employer will allow the money to be left in the account (or roll over the funds into an IRA account) and that the custodian allows a foreign address.

Hopefully, this gives you a starting point for thinking about how to invest in the US on work visas via US special retirement accounts.

This article was originally published here and is republished on Wealthtender with permission.