Executive Summary
Amid a tight job market and low unemployment rates, a significant amount of the U.S. ‘talent gap’ is filled by foreign-born workers on employment visas like the H-1B. These visas allow foreign workers to live and work in the country temporarily while they are employed – although in practice, this can mean that individuals can spend years or decades (or even their entire career) working in the U.S. on a ‘temporary’ visa.
Like native-born workers, foreign workers need to think about saving for retirement, planning for their children’s college, managing healthcare costs, and all manner of other financial goals. However, the system in the U.S. that incentivizes saving for these goals for American citizens – namely with tax-advantaged accounts such as 401(k) plans, IRAs, 529 college savings plans, and Health Savings Accounts (HSAs) – can impose hurdles on foreign nationals who rely on them for their own savings needs.
For example, the tax benefits of certain accounts can sometimes work in the other direction if a non-U.S.-born worker contributing to them eventually moves back to their home country. Roth IRAs, for instance, are taxed once upon contribution and can grow tax-free thereafter in the U.S., which can allow for a large accumulation of tax-free savings over time; however, because some countries don’t recognize the tax-free nature of Roth accounts, withdrawing from the IRA in another country later could cause it to be taxed a second time, eliminating the primary benefit of Roth savings.
Additionally, foreign workers often also face hurdles in opening and accessing some accounts. For example, some brokerage firms won’t even allow foreign nationals to open new accounts, and others may require the individual to close the account and move their assets out if they ever move away from the U.S. and in some cases, entire account types may be unavailable due to the worker’s foreign status, such as 529 plans, which require beneficiaries to have a U.S. Social Security Number (making them effectively off-limits to individuals with noncitizen dependents) and necessitate a different approach to college savings than is common for U.S. citizens.
Ultimately, navigating saving and investing for foreign-born workers requires a careful balance of understanding the considerations and potential pitfalls of different savings strategies, knowing the person’s goals and plans (including potential relocation overseas), and – perhaps most importantly, given the uncertainty that can come with staying in the U.S. on a work visa – maintaining enough flexibility to preserve their assets should those plans change. Advisors who can stay on top of changes to immigration and tax law and help with navigating these challenges can serve a valuable role for foreign national clients – a potential client base that is only poised to grow in an increasingly global workforce!
Research has shown that foreign-born workers fill a critical need in the U.S. labor market. Not only do foreign employees fill an important talent gap in the U.S., but the presence of immigrant and foreign-born nonimmigrant workers also creates job opportunities for native-born workers, leading to an overall improvement in the economy of the country.
According to a policy brief published in July 2022 by the National Foundation for American Policy (NFAP), 25% of U.S. privately held billion-dollar startups have a founder who first came to the United States as an international student. This works out to 143 of 582 billion-dollar companies started by a former international student and includes popular organizations such as SpaceX, Stripe, Instacart, and REEF Technology. The NFAP research also indicates that, on average, each founder has created 859 jobs in the country. Many of these founders started out on F-1 visas (temporary visas) before moving to a temporary employment-based visa or becoming permanent residents.
The NFAP policy brief further reports that “almost 80% of America’s unicorn companies (privately-held, billion-dollar companies) have an immigrant founder or an immigrant in a key leadership role”. This provides millions of jobs for U.S. workers and generates billions of dollars back into the U.S. economy. Those who don’t start companies fill labor needs (ultimately leading to more consumer purchasing power) and pay taxes (leading to more government spending power).
But for foreign-born workers who don’t intend to stay in the U.S., nonimmigrant work visas present them with many unique obstacles when it comes to planning their finances as residents of the U.S., despite all that they contribute. More specifically, investing and saving their money comes with many challenges due to the temporary nature of their work visas, the restrictions placed on them by their particular visa type, their countries of origin, the limited brokerage firms willing to work with them, and the dilemma of not knowing exactly where they are going to be when they withdraw the money. These are challenges not commonly faced by those born in the U.S.
Those who come to the country on employment-based nonimmigrant visas naturally want to make the most of the economic opportunity provided by the U.S. economy. In addition to the temporary nature of their visas, restrictions attached to each type of visa and associated with unique cultural backgrounds often lead to complex financial planning challenges for this group.
Considering that these workers often spend many of their prime working years in the U.S., financial advisors are in a key position to help them figure out how to take part in the market while keeping their unique situations front and center. By understanding the immigration landscape as it applies to employment-based nonimmigrant visa holders, the type of individuals taking up the visas, and the appetite for investing in the market that these individuals have, advisors can help foreign-born clients on nonimmigrant work visas address many of the unique challenges they face with various investment accounts such as Roth IRAs, Roth 401(k) plans, and 529s.
The Immigration Landscape Issues Facing Employment-Based Nonimmigrant Visa Holders
Through my own experience working with clients who are foreign-born employees and understanding the process as part of the community myself, I have noticed common characteristics often shared by many foreign-born employees coming to the U.S. on work visas. For example:
- Many of them come to the U.S. during their prime work years, often when they are between the ages of 25 and 54.
- Before applying for a visa that permits them to work in the U.S., a good number of foreign nationals start as holders of F-1 visas, which are issued to students permitting them to live in the U.S. while attending school. This means that many tread on the younger end of their prime work years.
- Many of them move to the U.S. for a chance to improve their lives.
- They tend to have very young families, or they start families while in the U.S.
- They are often in the mass-affluent category based on their income.
Because they are keen to build generational wealth by investing in retirement or college savings vehicles (just like individuals born in the U.S.), it is not uncommon for them to seek help understanding how to navigate the particular rules that impact their desire to invest in their future.
However, current investment literature and products in the U.S. are primarily for those who are citizens or who have green cards (officially known as Permanent Residence Cards, a green card allows an individual to live and work permanently in the United States). More often than not, the assumption is that investors currently living in the U.S. also intend to retire in the U.S. This is often not an accurate assumption for foreign-born individuals on nonimmigrant work visas.
While there is often quite a bit of confusion about visas in general, there are essentially 2 main categories of U.S. visas:
- Immigrant visas. These allow the holder to move to the U.S. permanently from their home country, including visa classifications IR1 (for immigrant spouses of U.S. citizens), DV (Diversity Visa program to encourage immigration from certain countries to the U.S.), and E1 and E2 (employer-sponsored employment); and
- Nonimmigrant visas. These allow the holder to come to the U.S. temporarily for a specific purpose, most commonly to attend school (e.g., on an F-1 visa) or for employment. Other reasons for nonimmigrant visas include tourism, business, cultural exchange programs, trade, international athletes, entertainers, and government duties (diplomats).
Workers with employment-based nonimmigrant visas are permitted to live and work in the U.S. until the date that their visa expires, which is determined by their Duration of Status (D/S). A D/S label is stamped on the worker’s Departure and Arrival Record (U.S. Customs and Border Protection Form I-94) granted to those coming into the country and means that the holder can be in the U.S. as long as they continue to have qualifying employment (or, for students, as long as they continue their course of study or remain in their exchange program). On the other hand, if the 1-94 form is stamped with an “Admit Until Date” label, it means the holder needs to leave the country before that date.
The date is determined by the length of the visa as well as the reciprocity agreements between the U.S. and the holder’s country of citizenship. So there may be cases where a holder has a work visa valid for 3 years, but because their country’s reciprocity agreement limits the duration of stay to 1 year, they would only get a 1-year Admit Until Date stamp at the port of entry. Therefore, understanding the differences between the Duration of Status (D/S) and the Admit Until Date for different types of visas is important when helping individuals who hold employment-based nonimmigrant visas.
Another point to keep in mind with employment-based nonimmigrant visas is the dual intentionality of some of them. By definition, employment-based nonimmigrant visas are temporary, which means the holder is expected to leave the country at the end of their stay to stay in good standing. Dual intent allows the holder to remain in good nonimmigrant standing but at the same time start the process of becoming a permanent immigrant while still in the country.
If a visa is not dual intent, then the holder technically cannot start the process of becoming a permanent resident while in the U.S. While there are still ways that it can be done, it’s a process that needs a lot of consideration and requires extremely careful, coordinated work with an experienced immigration lawyer.
Pertinent Facts About Employment-Based Nonimmigrant Visas
While each visa type is unique and comes with specific eligibility requirements, all employment-based nonimmigrant visas are assigned to recipients with the assumption that the holder will leave the U.S. at some point. Every one of them requires dependent visas for any of the recipient’s family members who wish to accompany the principal. While there are over 80 different classes of nonimmigrant visas, the most common employment-based nonimmigrant visas an advisor is likely to encounter today include those with classifications H-1B, L-1, O-1, TN, and E-3.
H-1B Visa
The H-1B visa is the most popular employment-based nonimmigrant visa, with 4 conditions for eligibility:
- A bachelor’s degree or higher;
- A professional job offer from an employer requiring specialized knowledge (common job types include engineering, medicine, software development, etc.);
- A demonstrated lack of qualified talent provided by the employer; and
- Documentation that the employer is willing to pay the prevailing wage or the actual wage – whichever is higher.
Although there are 85,000 thousand H-1B visas available every year, with 20,000 reserved for those with a master’s degree or higher, the process is still highly competitive. 6,800 of the 85,000 are set aside through the H1B1 visa program for workers from Chile (limited to 1,400) and Singapore (limited to 5,400) under a special free-trade agreement with the U.S. If not used in the current year, they are put in the regular cap for the following year.
Notably, universities, non-profit organizations, and some government research organizations are considered cap-exempt employers and can petition for an H-1B visa at any time during the year. There is no limit to the number of H-1B visas issued on behalf of these employers.
Each year, thousands of companies apply for a very limited number of visas. To manage the process, the U.S. Citizenship and Immigration Services (USCIS) has instituted a lottery to decide who gets a chance to apply for the visa.
The interest in getting this visa is extremely high. For example, for the fiscal year 2023, the U.S Citizenship and Immigration Services (USCIS) received 483,927 H-1B registrations and selected 127,600 registrations to be included in the annual lottery, which they projected would be sufficient to reach the FY 2023 numerical allocations (as not all registrations end out qualified to receive the visa).
The H-1B visa holder can continue to work in the U.S. even if their visa stamp expires, but the immigration status (I-94) would still be valid. And because it typically gets stamped with an Admit Until Date label, this means that if the visa holder were to lose their job, they would have to leave the country in 60 days or less, find another H-1B-eligible job, or switch to another nonimmigrant visa type.
L-1A and L-1B Visa
L-1 visas allow a U.S. company to transfer either an executive or manager (through an L-1A visa) or a professional worker with specialized knowledge from one of their overseas offices to the U.S. (through an L-1B visa). Foreign companies looking to open an office or branch in the U.S. frequently use these visa types. The employer needs to meet the following 4 conditions to be able to petition for the executive or employee in question:
- Secure sufficient physical space to house the new office;
- Employ the worker as an executive or manager for 1 year in the preceding 3 years;
- Show evidence that, within 1 year of the approval, the new office will be able to support a managerial position (this can be done in the form of a business plan, showing the size of the investment, financial projections, etc.); and
- Provide evidence that the foreign company will continue to operate and will continue maintaining a relationship with the new office.
There are no cap limits on how many L-1 visas are issued each year. On average, there are about 75,000 L-1 visas issued annually (except for 2020 and 2021, when the numbers dipped down to 24,000–35,000 due to COVID-19). Additionally, the L-1 visa holder’s spouse is allowed to work, unlike other visa categories, which don’t allow this.
If the L-1 visa holder loses their job, then they have to leave the country in 60 days or less, find another job on an L-1 or H-IB visa, or switch to another nonimmigrant visa.
O-1 Visa
The O-1 visa is a special nonimmigrant visa issued to individuals who have demonstrated extraordinary ability in certain fields such as the arts, education, science, business, or athletics. It’s one of the hardest visas to obtain due to the high-level standards applied.
The applicant must demonstrate national or international awards in their chosen field of expertise. They can show extraordinary achievements through evidence of major awards or peer-reviewed publications. They also need to show evidence that they are coming to work in the U.S. in their chosen field. In 2022, there were over 30,000 O-1 visas issued. Similar to the other types of visas, they require the holder to have a U.S. employer sponsor them.
The O-1 visa gets an Admit Until Date that is based on the visa approval notice expiration date and the reciprocity status of the holder’s country. If the visa holder loses their job, then they have to leave the country in 60 days or less, find a job on the same visa or an H-1B visa, or switch to another nonimmigrant visa.
TN Visa
The TN Visa is granted to citizens of Canada and Mexico as part of the United States’ membership in the North American Free Trade Agreement (NAFTA). The job must be one of the NAFTA-approved occupations, which include accountants, engineers, lawyers, teachers, pharmacists, and scientists, among a long list of many others. The employee must meet the job qualifications to get the visa and cannot be a resident of Canada or Mexico.
The TN visa is good for 3 years, but if the holder is coming from Mexico, the duration date on the I-94 is sometimes only 1 year due to the reciprocity agreements between the U.S. and Mexico.
If the visa holder loses their job, then they have to leave the country in 60 days or less, find another job on a TN or H-1B visa (which requires them to go through a lottery), or switch to another nonimmigrant visa.
E-3 Visa
E-3 Visas are given to Australian nationals coming to the U.S. to perform services in a specialty field. Similar to the H-1B visa, the E-3 visa requires the visa holder to have specialized knowledge needed for their job and a bachelor’s degree or higher. USCIS describes ‘specialized knowledge’ as not commonly held, complex, or not easily obtained (experience counts for a lot). An example of this includes an engineer who has been in the field for many years and who has specific knowledge about a certain engineering process.
The I-94 Admit Until Date stamp is typically 2 years. If the visa holder loses their job, they have to leave the country in 60 days or less, find another job on an H-1B or E-3 visa, or switch to another nonimmigrant visa type.
Investment Challenges Facing Employment-Based Nonimmigrant Visa Holders
When it comes to retirement saving, the common practice for most Americans is to save and invest in retirement accounts such as 401(k) and 403(b) plan accounts, Health Savings Accounts (HSAs), and Traditional and Roth IRAs. And for most U.S.-born residents, retirement account contributions are often made with the (justified) assumption that there will be no issues with withdrawing money when it comes time to fund their retirement.
However, many clients in the country on a temporary visa aren’t sure how long they are going to stay in the U.S. and, perhaps even more commonly, aren’t sure where they’ll be living when they’re ready to retire. These individuals face serious questions when it comes to investing their assets as a U.S. resident. Every decision they make – even those that take place only 1 year into the future – must be considered not only with their current residency in mind but also by taking into account their future residency plans, which are often uncertain or undetermined.
Determining The Utility Of ‘Future-Use’ Savings Accounts For Foreign-Born Investors Who Leave The U.S.
Many retirement accounts available in the U.S. (e.g., 401(k) plan accounts, Traditional and Roth IRAs, etc.) are, by design, ‘future-use’ accounts as their potential is most fully realized only when they are left alone for long periods time for use in the future, typically beginning when the investor reaches retirement age. For those on nonimmigrant work visas, the ‘future-use’ characteristic is a huge investment challenge that raises a lot of questions. Consider the following questions that often come up for foreign nationals living and working in the U.S.:
- “Is it even 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?”
- “I’m not really clear about how long I’m going to be in the U.S. Would I be better off investing in other things in my home country instead of in a 401(k) plan account through my employer?”
When foreign nationals on nonimmigrant visas contribute to a tax-advantaged retirement account based on the U.S. Tax Code (e.g., a 401(k) plan account) and they have to leave the country before retirement, they have to make a decision about the account: either take the money with them or leave it here.
Each of the decisions has tax implications; if they choose to withdraw the money and take it home with them, not only will they be required to pay income taxes on their distribution, but they will also have to pay an early withdrawal penalty of 10% if they are under age 59 ½.
One option to mitigate this is for them to leave the country and withdraw the money from the plan the following tax year. They would still have to pay any applicable early withdrawal penalties along with income taxes imposed by their home country (if the country has taxes on overseas assets), but the net income tax may end up being lower since their overall U.S. income will generally consist only of distributions from their retirement plan.
Another option is for them to leave the money in the U.S. until retirement, but they’ll still need to pay taxes on that money and probably have to contend with their home country taxing them on the same. Additionally, choosing this option would require that the employer allows them to leave the money in the account (or roll over the funds into an IRA account) and that the custodian allows a foreign address.
For workers who choose to take withdrawn funds with them to their home country, recognizing that every country is different with very different investment options can make it very challenging to choose how to move their funds from a U.S. retirement account into a non-U.S. account.
Nerd Note:
I personally have friends who are choosing to invest in business and real estate in developing countries like Kenya, South Africa, and India instead of investing in a U.S. retirement account plan. Many foreign-born families who tend to choose these options are often driven by some of the challenges described above, as well as home-country bias.
College Planning For Foreign-Born Investors
Another investment challenge facing those on work visas is how to save for college for their kids. College education saving goals are often a high priority for some foreign-born families – sometimes even more important than saving for retirement. And with the education levels of U.S. immigrants on the rise, many families want to plan for their children’s college education. Many immigrants on employment-based nonimmigrant visas started with an F-1 student visa and are more likely to want the same for their kids.
While 529 accounts are generally the default accounts used for college savings in the U.S., visa holders have to consider whether it’s worth opening and funding a 529 account, as 529 benefits can be very limited when it comes to funding expenses for colleges outside the U.S. While there are several international schools that allow the use of a 529 college savings account, they may only be practical if they are based in the visa holder’s home country.
Lost Benefits From Certain Tax-Advantaged Accounts When Relocating Overseas
When foreign nationals move to the U.S. on work visas, there are a few possible options when it comes to their long-term residency plans. They don’t always have control over the final outcome or the timing of what happens, which can make it especially challenging to invest while living in the U.S. The typical options are:
- Become permanent U.S. residents/citizens and move back to their home (or other) country for retirement.
- Move back to their home (or other) country without changing their immigration status.
- Become permanent U.S. residents/citizens and retire in the U.S.
Workers choosing the first and second options should be cognizant that 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, one is 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 the worker to take full advantage of the tax benefits offered by their accounts.
Similar issues apply to 529 plans and HSAs, which were simply not designed to be used outside the U.S. While foreign nationals can leave the accounts in place when they leave the country, their home country may consider the accounts as regular taxable brokerage accounts. Which means that withdrawing the money after returning to their home country will likely result in the loss of tax-advantaged benefits that made these accounts very attractive in the first place. In addition, moving funds from the tax-advantaged account to a taxable account would not only create an income tax liability on the withdrawal but may also result in a penalty (e.g., 10% on 529 plan earnings; 20% on HSA withdrawals if under age 65).
Hurdles To Open And Maintain Accounts With U.S. Brokerage Firms
Due to increased compliance requirements mainly arising from the Patriot Act of 2001 (designed to prevent foreigners from funding terrorist acts via U.S. capital markets), many brokerage firms in the U.S. don’t want to be associated with accounts for foreign nationals on nonimmigrant visas. Furthermore, brokerage firms must be mindful of the countries sanctioned by the U.S. Office of Foreign Assets Control (OFAC) and ‘Know Your Client’ (KYC) protocols that ensure the firm can verify their customer’s identity and understand their risk. Accordingly, opening a brokerage account requires a lot more from foreign nationals than from U.S. citizens (e.g., documentation to confirm the identity of the prospective account owner).
Even for foreign institutions, there are strict Foreign Account Tax Compliance Act (FATCA) policies that require them to report on assets held by U.S. taxpayers, anti-money laundering regulations that require additional information collected from account applicants, and more stringent monitoring of transactions and held assets.
With workplace retirement accounts, however, employees with work visas can easily open accounts at the employer’s chosen custodian, regardless of their citizenship status. Which means that even though a foreign national can open a 401(k) plan account at Brokerage XYZ through their company, they will still likely have trouble opening a Roth IRA account on their own at the same brokerage firm!
Some brokerage firms may be more accommodating for foreign nationals who wish to open accounts, but as soon as the foreign national leaves the U.S. and registers a foreign address, the brokerage will often force the holder to close the account or prevent them from trading any equities in their account.
For example, Vanguard, one of the more widely known brokerage firms, states on its website that “you need to be a U.S. citizen with a U.S. mailing address to open an account”. Foreign nationals on employment-based visas won’t pass this test.
TD Ameritrade (which will soon be part of Schwab) generally has no issues opening accounts for foreign nationals, but they typically require applicants to submit a lot of information, such as copies of driver’s licenses, foreign passports, visa stamps, or visa approval forms (if the visa was granted/approved while in the U.S.).
Schwab and Interactive Brokers are probably the most friendly to visa holders, even after they leave the U.S. Schwab has a digital workflow that makes it very easy to open accounts, and it can be used by anyone in the country. Interactive Brokers prides itself on being “the gateway to the world’s markets”. It’s designed to be a global brokerage firm, so an account can be opened from anywhere in the world. Both are also more likely to allow non-residents to maintain their brokerage accounts with a foreign address.
One common challenge I have personally encountered when helping my clients open new accounts is that different members of the same customer service team within a brokerage firm often give out conflicting information on account requirements. Unfortunately, I’ve found that the only true way to confirm what a firm requires to open an account often is to actually open the account!
When it comes to maintaining an account opened in the U.S. after moving back overseas, foreign nationals must be mindful of the requirements to keep their account open. For example, all brokerage firms require non-U.S. citizens moving out of the country to complete IRS Form W-8BEN, “Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting”, which is submitted to the brokerage firm itself. Generally, Form W-8BEN will remain in effect for up to 3 years, so brokerage firms may require account holders to resubmit an updated W-8BEN every few years as long as accounts remain open. In addition to periodically submitting an updated Form W-8BEN, individuals may be subject to different rules and requirements in place for their home country.
Helping Foreign Nationals On Employment-Based Nonimmigrant Visa Invest In U.S.-Based Accounts
Despite the numerous challenges facing many foreign-born workers in the U.S. when opening and maintaining investment accounts, financial advisors can help clients who hold employment-based nonimmigrant visas invest in the U.S. wisely, becoming their heroes in their pursuit of the American dream. There are several ways to accomplish this.
Understanding Visa Types And Their Tax Implications
Advisors working with foreign nationals on work visas can be more helpful by becoming intimately familiar with the type of visa their client has. There are many resources that provide a good overview of different visa types and their requirements and include the U.S. Citizenship and Immigration Services (USCIS), the IRS, the CIGA Network, and the Global Financial Planning (GFP) Institute.
In addition to understanding the client’s visa requirements and allowances, knowing where the client comes from – not just their country of origin, but also their cultural background, goals, life experiences, etc. – and having a clear sense of their investment expectations can also help the advisor give better guidance to their clients. This includes understanding how long the client plans to be in the U.S., if there are specific plans to leave the country, and where they plan to live in the future. Also of crucial importance is to develop a clear picture of their worldwide assets.
One way to become familiar with how the unique circumstances affecting those with employment-based visas are navigated is to work with an immigration attorney. Similar to establishing a relationship with CPAs for guidance on a client’s tax-related matters, advisors can benefit from developing a relationship with immigration lawyers who specialize in working with employers and employees with employment-based visas.
Solo advisors who have limited capacity to service a large number of clients have to be very intentional in seeking out the resources that will address their clients’ particular needs. On the other hand, larger firms that may have several clients facing similar issues may benefit from establishing a formal/informal relationship with immigration attorneys and their firms.
The U.S. Citizenship and Immigration Services (USCIS) website is the best resource for immigration and visa-related questions, and offers a thorough overview of different types of temporary visas for nonimmigrant workers, provides information for U.S. employers hiring noncitizens and noncitizen employees seeking work in the U.S., and the eligibility requirements for and process of obtaining a green card.
The IRS website is the best resource for understanding the tax implications of the different visa types and can act as a great reference. For example, if an advisor has questions related to whether a client should be treated as a tax resident or not, the resident alien IRS page will provide the information.
Partnering with advisors in organizations like The CIGA Network is a great way for advisors to increase their competency in this space. The CIGA Network is an organization created by cross-border advisors from all over the world who collaborate on cross-border planning issues. It’s one of the best resources for getting answers to international/cross-border financial planning issues.
The Global Financial Planning (GFP) Institute offers a wealth of educational resources and tools for financial advisors looking to work with foreign-born individuals. The GFP Institute also offers a master class in inbound/outbound financial planning in addition to a member-based community with access to additional resources like webinars and white papers that focus on working with international clients.
Helping Employment-Based Visa Holders Invest And Make Investment Decisions
As noted earlier, there are many resources available to financial advisors that can help them create a strategy for clients on employment-based visas to invest in special accounts. While each client will have unique goals and circumstances, asking the right questions can help identify the core challenges that advisors can help their clients overcome.
529 Accounts
The questions below can help a client decide whether investing in a 529 plan makes sense for them. While there may be other factors that affect the decision, these questions cover a majority of the issues that are likely to come up in the decision-making process.
Based on the client’s visa timeline and when it expires, are they saving for U.S. colleges or colleges outside the country?
When U.S. families start saving for college, there is generally an unspoken understanding that their kids will be attending college in the U.S. However, for foreign nationals in the U.S., their stay in the U.S. may be limited by a certain amount of time, depending on their visa timeline. This could range from a couple of years to however long their visa status allows them to stay. There is no guarantee of how long they are going to be here, so the location of their kids’ chosen school may be outside the U.S.
For example, consider a visa holder who’s been in the U.S. and saving for his children’s college education for 5 years. His visa expires in the 6th year, and he is unable to renew it (or perhaps he loses his job and has to go back home). Obviously, his kids will go back home with him, and if his savings are kept in a 529 account, it would be almost impossible to access the full benefits of the account unless the school in his home country allowed the use of 529 plan funds. Which means that using a taxable account for education savings from the start would probably be a more sensible option (since moving funds from a 529 account into a taxable account would result in tax on the withdrawal and a penalty on the earnings).
Are the client’s kids U.S. citizens with Social Security numbers, or are they visa dependents without Social Security numbers?
The beneficiary of a 529 account must be a U.S. citizen or resident alien with either a Social Security number or an Individual Taxpayer Identification Number (ITIN). Foreign-born kids moving to the U.S. as dependents on various work visas don’t always have Social Security numbers or an ITIN.
One option for parents is to open 529 accounts and to name themselves as the beneficiaries (since they are U.S. workers with Social Security numbers or ITINs), with the hope that by the time the kids need to go to college, they will be permanent residents or citizens with either Social Security numbers or ITINs (if the family is in the process of getting their green cards), and eligible to be named as the 529 plan beneficiaries. In the meantime, though, the parents can benefit from using the 529 account funds to pay for qualified expenses for their own educational benefit – perhaps to improve their own career prospects – until the kids can replace them as the designated beneficiaries on the account.
If coming from a country where the family’s priority date to obtain a green card is several years away, there is a very high possibility that the kids won’t get the required info in time to take advantage of their 529 accounts, in which case it may make more sense for the family to stick with a taxable account to establish an education savings fund.
Based on the high cost of U.S. college education, are there other saving alternatives or considerations?
Foreign-born students on matching dependent visas (e.g., an H-4 dependent visa for those with parents on an H-1B visa, or an L-2 dependent visa for those with parents on an L-1 visa) are not eligible for Federal student aid and are not permitted to find work. To be eligible for some types of work, students on matching dependent visas must first switch to an F-1 visa, which allows them to work on campus (and if they are able to prove economic hardship to USCIS, they may be permitted to work off-campus jobs, as well).
Additionally, the student’s school may also provide special authorization to students with F-1 visas for certain practical training opportunities meant to give students the opportunity to apply their educational studies to work experience, either through Curricular Practical Training (CPT) or Optional Practical Training (OPT) work authorizations.
Even with permission to work, though, paying for college tuition can still be challenging as F-1 visa students are required to pay out-of-state or international tuition, which is typically twice the cost of in-state tuition.
Nerd Note:
Some state schools require students whose parents are visa holders to pay the (much higher) out-of-state tuition fee, which is why it was a big deal when New Jersey Governor Phil Murphy signed a law allowing H-1B visa workers’ kids to qualify for in-state tuition in early 2020.
Investing In Retirement and Health Savings Accounts
If an individual’s employer offers an HSA or traditional retirement plan featuring tax-deferred savings accounts, it is often beneficial for them to take advantage of it – especially when employer matching contributions are offered – regardless of their visa type and the custodian involved. The tax savings and the growth may be worth the effort regardless of their length of stay in the U.S.
However, if an employer’s plan includes a Roth component, understanding the client’s long-term plans and where they will likely be living when they withdraw the money becomes much more important, as the temporary nature of the visa adds a new level of complexity.
As mentioned earlier, Schwab and Interactive Brokers are 2 custodians that are most likely to allow a non-resident to maintain their accounts with a foreign address, so it usually makes sense to go with them on special accounts outside of the workplace retirement plan.
At a very high level, the following questions can be used to help advisors decide how to help their clients choose which accounts to use. Of course, every situation is unique, but by asking the right questions and having extended discussions with the client, figuring out how to best advise the client will be much easier.
How long are the clients planning on staying in the U.S., and how much do they want to entangle themselves in the U.S. system?
If the client plans on staying in the country for only a very short time, then it may not be worthwhile for them to invest in specialized tax-advantaged accounts. If they plan to stay longer (e.g., 5 + years), it may be worth having further discussions to assess whether it makes sense to invest in traditional retirement accounts.
Are the clients on non-dual-intent visas (E-3, TN)?
For clients who are on a non-dual-intent visa, the process of filing for permanent residency in the U.S. can be challenging. The nature of a visa without dual intent means the visa holder will most likely move back to their home country after their work assignment. If they wish to become a permanent U.S. resident by obtaining a green card, the process is generally much more complicated than for those with a dual-intent visa, and the outcome can be very uncertain.
Because there is so much uncertainty associated with obtaining a green card for those with non-dual-intent visas, investing in any tax-advantaged accounts should be done with caution. For example, even though it might make sense for those with a 401(k) plan featuring an employer matching contribution to invest up to the matching contribution, as discussed earlier, it may still make the most sense to invest anything beyond that in taxable accounts.
How comfortable does the client feel about their job?
When a client on a work visa loses a job, they typically have about 60 days or less to find a new job, switch visas, or leave the country. So unless they are very comfortable about their job security or have started the green card process, investing in special accounts may not be worth it.
Is there a tax treaty between the client’s country of origin and the U.S.? If so, does it call out the tax status of a “Roth type” account?
If there is no tax treaty or if there is a tax treaty but it does not explicitly call out the benefit, then the client should avoid accounts with tax-free growth (e.g., Roth IRAs, Roth 401(k) plans, HSAs, etc.) as the absence of a tax treaty will generally mean they will be taxed on distributions meant to be tax-free had they been taken in the U.S. This suggestion assumes the client will be in their home country when they start withdrawing the money from the special accounts.
As with other areas of advising foreign nationals, nothing is ever black or white, but by gathering enough information to determine the various shades of gray facing the client, advisors can still help them make the most of their current situation.
Ultimately, when it comes to working with foreign nationals, the unique challenges they face often call for more flexibility from their advisors in comparison to advising U.S.-born clients on investments. For example, while clients whose children don’t have Social Security numbers might not be able to open 529 accounts for them, advisors can still help them establish a savings strategy with a regular brokerage account instead, recognizing that it might be the best college education investment vehicle for foreign nationals on employment-based nonimmigrant visas.
Additionally, these clients require frequent assessment of their visa status coupled with ongoing evaluation of (and potentially frequent changes to) their investment vehicles to ensure that the right savings and investment strategies are being implemented for them. They also benefit from advisors who are able to act very proactively and who stay up to date on the changes in both the immigration and the tax landscape as they pertain to foreign nationals.
Based on the growing economy, global mobility, and the fact that the U.S. continues to attract the best of the best from the rest of the world, it’s a safe bet to assume that foreign nationals will continue to move to the U.S. on nonimmigrant employment visas. And despite the steep learning curve, financial advisors can enjoy the rewarding experience of helping this group of clients navigate the unique challenges of investing and reaching their financial goals in the U.S. successfully.
