A Visa Holder's Guide To Saving For Retirement In The United States
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Quick back story: My husband and I came to the United States from India about 25 years ago on a J visa. I actually became interested in US Tax Law after I had to read up all the various rules and regulations for taxation of J Visa holders in the US.
Naturally, visa holders coming to the United States to work make up a sizeable portion of our client list. The type of visas range from A to Z in the alphabet and each of them have special rules as to counting days in the United States; and taxation of their United States and/ or their world-wide income.
Caveat: These rules should be navigated under professional guidance to save financial and legal trouble in the future.
Two of the most frequently asked questions by visa holders are usually about Social Security taxes and saving for retirement.
We will focus on retirement savings in this blog post.
Retirement savings come under two categories:
- Pre-tax: A pre-tax retirement contribution yields a tax saving in the year in which it is made. The contribution grows tax-free until it is distributed, at that time it is taxed as ordinary income at your then tax rates. This is usually a "Traditional" contribution.
- Post-tax: A post-tax retirement contribution is when taxes are paid upfront. The contribution grows tax free and is also usually not subject to taxation when a distribution is taken. This is usually a "Roth" contribution.
Some of these factors are elaborated below:
- Employer match for your contributions and vesting schedule:
Does your employer match some of your contributions? And how long do you have to work with them to take the employer match before you leave the company? If your employer matches your contribution, you should definitely contribute up to the match if you think you are going to stay with the company for as long or longer than the vesting period. This is free money!
- Length of residency in the US or future plans:
If your plans are to eventually get a Green Card and settle in the United States, this is a no-brainer- you should invest in retirement funds. However, if you do not or cannot plan to live in the US for the long term, you need to read further.
- Short term and long term goals for your funds:
Depending on the length of your stay in the US and your long term goals, investing in brokerage funds for ease of repatriation and convenience of liquidity may be a better goal for you.
- Country where you plan to return to and whether this country has a tax treaty with the United States and Taking a distribution from your retirement savings as an NRA:
The United States will tax you on distributions from your pre-tax retirement accounts unless the tax treaty it has with the country of your residence specifically states otherwise. If the tax treaty says that the United States has the right to taxation of your retirement funds, the tax rates are the same as if you were a US resident. If there is no tax treaty or if the resident country can also tax your earnings, you need to take into account if you will get a credit for one country's taxes paid on the other country's tax return. In this case, the US will tax your distribution at 30% flat rate before distribution of funds.
- Managing funds in your retirement accounts when not present in the United States or as an NRA:
Many retirement plan brokerage fund custodians do not want to deal with the additional reporting and compliance requirements if the plan participants are foreign citizens or non-resident aliens (NRA). Or they may not want to deal with your account if your balance is too small or the plan or your company might close your accounts. If this happens, you will be forced to either take a distribution or you may have to find a custodian who will service your accounts. The brokerage funds may also require medallion signatures.
- Post tax retirement savings and distributions:
I am of the opinion that if your long term plans do not include settling in the US, a Roth contribution may not be of much use to you unless the country you are planning to settle in also recognizes the Roth "wrapper" for your investments. Remember, you do not pay capital gains taxes as an NRA on the sale of your US investments hence, unless the tax free growth is accounted for in the country where you will reside after you move out, there is no advantage to making a Roth contribution.
- Future Tax Laws:
No doubt we can all agree that future tax laws are highly unpredictable. If you want to cut all ties to the United States once you leave the country, it is best to take all your retirement funds out as soon as you leave. Or plan your savings in such a way that there is minimal tax impact.
We help clients in their pre-immigration and pre-emigration planning. This includes coming up with various scenarios for you to decide what your exit strategy should be and what you should do with your funds in the United States after moving out of the country. Please contact our office if you have questions regarding any of the above or more.
Consult with an Enrolled Agent for your unique tax needs and make sure your questions are answered. Always remember to read my disclaimer here. If you have any more questions regarding this or other tax matters, contact me via my website www.mntaxbiz.com.