People on visa-Where to invest your money

If you are an Indian citizen, working in the US with a immigrant visa like H1b or L1 etc, What are your options on investing your hard earned money?

Debt

If you have debt in India, it’s generally better to pay them down first. However, if you have debt in the US, as long as the rates are competitive it’s ok to keep it around, because your credit history will improve. As you know that’s a good thing.

Sending money to India

Sure, you would have to send money to India, to support your family etc. But, from an investment point of view, you would have to think through your options.

One common mistake people make is looking at the fixed deposit interest rates. They notice Indian FD interest rates are higher than the US, so try to gain from the interest rate arbitrage. However, one thing they forget is the USD vs INR historical comparison. Historically, the rupee has lost 7-8% a year on an average over long periods of time. So, what that means is, it is roughly the same to keep your money in dollars under a mattress as investing in an Indian FD. Remember, the key term is long term. Over the long term, your FD INR grows by certain percentage but looses value to inflation against USD by roughly the same amount. On top of it your FD returns are taxed, where as your dollars under the mattress, which appreciated is not taxed. You think carefully about the depositing in Indian FD schemes.

How about FCNR deposits in USD? Glad you asked, I tried to invest $4000 in FCNR deposit. The bank booked FD only for $3800 after their charges and fees. And the projected return after 4 years on this FD is $4000. That’s right, you give the bank $4000 and they return you the same after 4 years! So, do your math before going this route.

Another factor to think about before sending money to India is what is your long term immigration goal? In the earlier years of visa, people buy properties in India etc. But as years progresses and your plan changes and you acquire a green card, your tax situation changes. Once you are on a green card, your global income is taxed in the US. One of the bitter stories from my friend is about their house back in India. They bought a house in India. And after several years they got a green card and decided to settle in the US and buy a house here. They sold their house in India and tried to use that proceeds towards buying a US house. But they were shocked to find out that they have to pay a hefty income tax to the US govt before they could repatriate the money from India.

So, unless you are plan to settle down in India is set in stone, it’s wise to think twice about investing in FD or property in India. And yeah, you also have the whole gamut of protecting the property from frauds etc.

HSA vs FSA

If you are deciding to keep the money in the US, the first option to consider is a HSA plan. Chances are that you and your family here in the US are young and healthy. A HSA plan is designed for people just like you. Instead of paying a high premium for a lower deductible, you pay lesser premium for a high deductible. The idea is that, since you are healthy, your hospital visits may be far and fewer hence pay from your pocket only when you visit a hospital. And the money you save by lower premiums can then be contributed towards a Health savings account (HSA). And that money is yours and you can use it for any future medical expenditures before tax. For example, you can accumulate money for child birth down the line etc. So, don’t spend on those high premiums, consider using the HSA plans. Remember to do the match across potential medical expenses over 5 or 10 year period instead of year on year comparisons. These plans will be offered by your employer as high deductible health plans combined with HSA.

IRA

Next option to consider is a IRA. If your employer doesn’t offer a 401k the decision is easy. You and your spouse can contribute a pretax money upto a limit (Govt sets the limit every year). to your IRA account. You can then invest the money in mutual funds or even stocks. The money is taxed when you withdraw after age 60. But, if your plans change and you decide to go back to India, consider leaving your investments here. You can manage them online and they continue to be your nest egg. But if you want to take that money back to India, then you pay the taxes and also a 10% penalty.

If you and your spouse work, then it may be advantageous to have separate IRA accounts. Because in the US you file taxes jointly, in India you file separately. So, by having individual IRA accounts you can take advantage of higher individual tax slab, when you pre close IRAs on your return.

401K

Consider a 401k if you are sure of settling down in the US and also if your employer makes a matching contribution. Most of the considerations for IRA applies here too.

Roth IRA vs Normal trading account

Roth IRA differs from a normal IRA in one aspect. Instead of contributing money before tax, you contribute money after tax. And any growth in the invested money is tax free. However, you still have a 10% penalty for premature withdrawal. But the principal contributed in roth can be withdrawn any time penalty free. But earnings on that principal will attract 10% penalty if you withdray before 60 years of age. And again most considerations for the IRA apply here too. If you think you can make good stock market investments or if you may inherit high income business later in your life consider Roth IRA. If not compare it with a regular trading account. Because in exchange of paying taxes on the investment returns you don’t have to pay 10% penalty for premature withdrawal. Also, if you are a passive index fund investor, you can get away with minimal taxes on your returns.

“Each person’s situation is different. This post is not a legal or a financial planning advice”

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