Author Topic: New to USA, need advice on doing the right thing  (Read 7585 times)

Tester

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New to USA, need advice on doing the right thing
« on: May 21, 2015, 06:02:58 PM »

I am new to USA so I am sure I am missing some information on how to improve my tax situation.
I would also like to ask you to let me know if our plan is wrong.
We are a family of 3. We have a 3 year old child.
My wife is not working, she is staying with the child and taking care of his education (she is qualified to teach for children up to grade 5 in our home country).
She is thinking of getting a job, but right now she is getting better with her English.
I am dreaming (it is still dreaming right now) to a retirement at age 50 - this is 13 years from now.
I am relying on using RSUs from my employer plus getting rid of debt to get there quicker.
I am also taking into account the expenses which will appear for our child.

First, our (my plan):

1. Contribute to 401k to get the employer match - here in fact I contribute more.
2. Get rid of the debts - all of them. I will use employer RSU to do this, should pay almost all by the end of this year.
3. I am stuck here, as I don't know enough about the USA financial scene yet to be able to take good decisions.

I am thinking of following what is written in the excel but I would like to be able to understand why - so please let me know what to read :):
"
1. Contribute to 401k up to any company match
2. Pay off any debts over 7%
3. Max HSA, then Roth or Traditional IRA based on income level
4. Max out 401k
5. Pay off any debts over 5%
6. Invest in taxable account with any extra.
"


Also, another question:
I think I want to buy a car (note I did not say "I need a car" yet:) ).
We would like to have a car to be able to go to some nature places during the weekend with our kid.
Until now we used rental cars for a trip to BC and one to some friends 40 miles away, but I don't think this is the best way going forward.
I am looking for a car at around 3500 USD, going up to 5000 USD max.
I think of buying this car from a part of a 12,000 USD obtained from selling vesting RSUs.
The rest I want to use to pay in advance most of the 10,000 USD loan.

Please let me know what you think about the car part.

Also, please let me know if you spot something I missed - especially regarding the expenses and the investment part.


Below you can see the money situation - I put a lot of the items because for some i have questions.


Salary/Wages   $9,667
Pretax Health Ins.   $250
Pretax Vision/Dental Ins.   $60
Healthcare Flex Savings Acct. (FSA)   $0 ??? - I can't opt for this anymore for this year
Daycare FSA   $0 ??? - Should I start using this?
HSA/Pension   $0 ??? - I don't really know what this is - if this is Health Saving Account I can't opt for this anymore for this year.
FICA base salary/wages   $9,357

This does not include RSUs - right now I got 12,000 USD from selling the vested ones.
I have a 50,000 USD projected vest at the end of this year.
Those two should mean I could almost get rid of all the debt.
This will allow me to kill the rest of the debt quicker and then put more money towards retirement.



Traditional IRA   $0 ??? - I don't know what this is yet - where can I read more about this? I started reading about different financial things in USA, still have a lot to read :)
401(k) / 403(b) / TSP / etc.   $800 - I am contributing 8%.
457 plans      $0.00 ???
Employer Match   $200.00  - Employer matches 50% of my contribution, up to 2%.
Income subject to IRS tax   $8,557

Federal tax   $1,495
State/City tax   $0
Soc. Sec.   $580
Medicare   $136
Self-employment Tax   $0
Total income taxes   $2,211


Income before other expenses     $6,346


Monthly Expenses:   
Rent   $1,850
Home/Rent Insurance   $10
Charitable contributions   $20
Child activities    $200
Clothing/Shoes   $50
Dining (Pizza, Restaurant, etc.)   $100
Electricity   $95
Emergency Fund    $500 - I am putting these in the savings account.
Groceries   $750 - we still don't know exactly how to shop for the best price/quality, we are learning
Internet   $60 - Includes basic Cable TV because just internet would have been more costly!!!
Lunches   $50 - I mostly eat home cooked meals, from time to time I forget the food at home or we don't have it ready.
Phone (cell)   $26 - 2 Republic Wireless plans. I am not satisfied with the way it works but we are able to use them.
Water/Sewer   $110
Wine/Beer/Tobacco    $50
Non-mortgage total    $3,871


Loans (built/finishing a house in my home country):
1,200 USD - three loans in the home country.
One 10,000 USD loan - 10% APR
One 25,000 USD mortgage - 10% APR.
One 36,000 USD mortgage - 10% APR.


Summary:   
"Gross" income   $9,667
Income taxes   $2,211
After-tax income   $7,456
   
IRA+401k/403b/TSP/457 (Savers' credit)   $800
Living expenses   $4,181
Non-mortgage loans   $889
   
After-tax investable   $1,586

Hopefully I did not post too much information.










nereo

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Re: New to USA, need advice on doing the right thing
« Reply #1 on: May 21, 2015, 06:47:05 PM »
Hello Tester, and welcome both to the forum and to the USA

First, I highly recommend reading JL Collin's stock series:
http://jlcollinsnh.com/stock-series/
Easy to read, easy to digest, and with some good humor. 

As for your financial plan, I think it is a very solid one. 
You can contribute up to $5500 each ($11,000 for you and your wife if you are filing together) in a tIRA account.  This will reduce your taxable burden by the same amount that tax year.  A vanguard index fund is a popular choice around here due to its low cost.  the JL COllins series goes into more detail.

Regarding cars, check out Craigslist for your area and look for a fuel efficient vehicle.  There are lots that you can find for ~$5k that have 60k-100k worth of miles on them. 
Here's a post to help you get started on what to look for:
http://www.mrmoneymustache.com/2012/03/19/top-10-cars-for-smart-people/

g'luck and post frequently

curler

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Re: New to USA, need advice on doing the right thing
« Reply #2 on: May 21, 2015, 06:51:28 PM »
Hi Tester.  Welcome to the MMM forums and welcome to the USA.
You asked why the generally recommended order of what to do with extra money after contributing to a 401(k) up to the match, and paying off high interest debts.  An IRA is an individual retirement account.  It is very similar to a 401(k), except you open it on your own, rather than through your employer.  You can open an IRA at any investment company, or even at a bank.  Most people on these forums (myself included) recommend Vanguard, as they offer low cost investment funds.  The reason investing in an IRA comes above investing in the 401(k) is that generally there are higher fees involved in a 401(k) than an IRA.  Depending on your income you and your wife may or may not be eligible for an IRA.  See http://www.irs.gov/Retirement-Plans/IRA-Deduction-Limits for details.

You asked about buying a car.  Before doing so, I'd recommend pricing out what the cost of doing so is.  This includes lost earnings from investments (since you are spending $3K-$5K on the car that could otherwise be invested), insurance, parking (if you live in a city), maintenance, registration with the DMV, and potentially other factors.  This needs to be compared to how much you are spending on rentals.

Right now you have loans at a very high rate.  Your first priority should be paying off all the 10% loans.  I would not buy a car until you have paid them all off.

MDM

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Re: New to USA, need advice on doing the right thing
« Reply #3 on: May 21, 2015, 09:21:40 PM »
Healthcare Flex Savings Acct. (FSA)   $0 ??? - I can't opt for this anymore for this year
Daycare FSA   $0 ??? - Should I start using this?
HSA/Pension   $0 ??? - I don't really know what this is - if this is Health Saving Account I can't opt for this anymore for this year.
Choices for 2016 are likely due in ~October or November 2015.  Check with your company HR dept. for specific dates.  If you are eligible, then yes you should use these.

Quote
This does not include RSUs - right now I got 12,000 USD from selling the vested ones.
I have a 50,000 USD projected vest at the end of this year.
You will likely need to pay taxes on these.  Check to see if taxes are withheld when the RSUs are delivered. 

Quote
401(k) / 403(b) / TSP / etc.   $800 - I am contributing 8%.
457 plans      $0.00 ???
You may want to contribute the maximum, $18K, to the 401k.  You may not have a 457 plan available to you.

Quote
Income subject to IRS tax   $8,557
Federal tax   $1,495
For this income I'd expect Federal tax = $842/mo (assuming 2015 rates, MFJ, standard deduction, and 3 exemptions).  Is the $1495/mo what you expect to pay, or is that the amount being withheld?  If you are having $1,495 withheld each month you can reduce that by submitting a new W-4.  Check with your HR department.

I didn't bother to address the issues already covered well by nereo and curler.

And welcome to the USA and the MMM forum!

ShoulderThingThatGoesUp

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Re: New to USA, need advice on doing the right thing
« Reply #4 on: May 22, 2015, 06:58:25 AM »
Welcome!

My company's HSA allows you to change your contribution at any point without a qualifying life event (basically, for no reason).

Consider whether vision/dental is worthwhile. I don't know about vision since neither my wife nor I need anything for our eyes, but it seems just as cheap or cheaper to pay for regular dental care out of pocket for our situation.

Tester

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Re: New to USA, need advice on doing the right thing
« Reply #5 on: May 22, 2015, 01:21:19 PM »
Thank you for your responses.

I am clarifying some things related to your responses.

1. I found out I am not eligible for Traditional IRA. My AGI is greater than 118,000.
2. The federal tax is the amount being withheld right now (In fact I get 1880 USD withheld, just looked in my pay statement). I can't select filing as head of household or filing jointly in my company's tool. This is what I see in the W-4 form: " If married, but legally separated, or spouse is a nonresident alien, select "Single" Marital Status."". I am a nonresident alien and my wife too so I chose what they said there :). I will talk with my HR again about this to find out what it really means. A question here: even if they withhold that amount, at the end of the year I will be able to file jointly and get the money back? I know getting the money back is not the same as not giving them in the first place, just wanted to clarify if my employer system will not allow me to change the withholding amount. I will also investigate what deductions and exemptions I can use and update this thread with what I find out, perhaps it will help someone.
3. I did some math on the car costs, I just did not take into account the interest on the money used for the car. We will postpone the car for now, we will rent when needed. If we rent each weekend for one day we would pay 2500 USD for one year - and we will not rent each weekend.
4. The RSUs have the taxes paid when they are released. The amounts mentioned are after taxes.
5. I will max the 401k contribution, but I plan first to get rid of at least one loan. My employer uses Vanguard for the 401k - I will look if my asset allocation makes sense, right now I opted for a lot of the Vanguard funds and I will leave them as is for some time.

Again, thank you for your time and I will update this periodically to perhaps help some other users too.

Next, after I will pay the loans I will ask what to do with my home country house, but right now I don't want to start that discussion, I left right before being able to move in the house...
Plus we want to be sure we will be able to adjust to the USA before deciding what to do with the house.

Edit:

Something else on our radar for the next year: reducing the rent amount.
Right now we chose a 2 bedroom place 30 minutes by bus or bike away from my work (5 miles).
It also has Trader Joe's, Safeway, Fred Meyer and some other stores in a 10 minutes walk radius.
It is close to farmers market and to fishermen market.
It has parks and other interesting things very close.
Plus it is a new place.
Still, we pay 1850 USD/month in rent.

I saw some condo's for sale which would require somewhat less monthly (although they are not displaying the HOA and tax expenses):
http://www.zillow.com/homes/for_sale/Eastlake-Seattle-WA/48919310_zpid/271857_rid/mostrecentchange_sort/47.645485,-122.303774,47.628886,-122.347291_rect/14_zm/X1.dash.SSzw1c12pp19mz_aau4b_sse/1_fr/
Next year if we continue to like the life here we will start thinking on buying something, until then we will better understand the tax implications and what to look for in an apartment/house.
« Last Edit: May 22, 2015, 01:31:46 PM by Tester »

MDM

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Re: New to USA, need advice on doing the right thing
« Reply #6 on: May 22, 2015, 01:33:41 PM »
2. The federal tax is the amount being withheld right now (In fact I get 1880 USD withheld, just looked in my pay statement). I can't select filing as head of household or filing jointly in my company's tool. This is what I see in the W-4 form: " If married, but legally separated, or spouse is a nonresident alien, select "Single" Marital Status."". I am a nonresident alien and my wife too so I chose what they said there :). I will talk with my HR again about this to find out what it really means. A question here: even if they withhold that amount, at the end of the year I will be able to file jointly and get the money back? I know getting the money back is not the same as not giving them in the first place, just wanted to clarify if my employer system will not allow me to change the withholding amount. I will also investigate what deductions and exemptions I can use and update this thread with what I find out, perhaps it will help someone.

See http://forum.mrmoneymustache.com/ask-a-mustachian/w4-and-qualifying-widow-vs-head-of-household/ for a similar discussion.  You can do more or less whatever you want with the W-4: it is the amount withheld, not the the labels on the calculation, that matters.

Tester

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Re: New to USA, need advice on doing the right thing
« Reply #7 on: June 04, 2015, 09:04:23 PM »
I have another question - about maxing the 401k contributions:
Until now I contributed 2000 USD to 401k - I started in March.
I have 6 more months to max - this means I will have to contribute 2667/month.
Is there a way of contributing a lot in one month and then less?
I was planning to add money to 401k from RSUs at the end of the year, but I just realized that those will be automatically taxed at vesting time.
If I contribute with money after tax will I get the tax amount back?
If this is written somewhere please let me know where to look.

MDM

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Re: New to USA, need advice on doing the right thing
« Reply #8 on: June 04, 2015, 09:36:09 PM »
Is there a way of contributing a lot in one month and then less?
Talk with your company payroll department.  You have to do 401k contributions through them.  Also google "401k true-up" and ask payroll about your company's policy.

StockBeard

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Re: New to USA, need advice on doing the right thing
« Reply #9 on: June 05, 2015, 12:35:49 PM »
Hi Tester, I'm a foreign citizen who moved to the US earlier this year and in a very similar situation to yours.

My advice:
Think about how long you plan to stay in the US. If only for a few years, make sure you invest in things that will not bite you back: a 401k is great, but you can't touch it for a long time in theory. If you move away from the US, you'll either have to keep it, or get rid of it. Both choices have tax implications in the US and in the next country you will move to. (if you get rid of your 401k when you live the US, there is a 10% penalty on capital gains, in addition to taxes. If you keep it, you'll have to declare it to your next country, and they most likely will not agree that it is a "tax free" investment)

Another thing about saving/brokerage accounts: get accounts with a company that would be ok with keeping you as a client even if you leave the US. International agreements change a lot of course, but for example my brokerage account is with Schwab because historically they're ok with me as a customer in Japan. Other brokers such as Morgan Stanley have told me I would need to close my account with them if I ever leave the US. That was a deal breaker for me.

nereo

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Re: New to USA, need advice on doing the right thing
« Reply #10 on: June 05, 2015, 05:02:48 PM »
My advice:
Think about how long you plan to stay in the US. If only for a few years, make sure you invest in things that will not bite you back: a 401k is great, but you can't touch it for a long time in theory. If you move away from the US, you'll either have to keep it, or get rid of it. Both choices have tax implications in the US and in the next country you will move to. (if you get rid of your 401k when you live the US, there is a 10% penalty on capital gains, in addition to taxes. If you keep it, you'll have to declare it to your next country, and they most likely will not agree that it is a "tax free" investment)

Another thing about saving/brokerage accounts: get accounts with a company that would be ok with keeping you as a client even if you leave the US. International agreements change a lot of course, but for example my brokerage account is with Schwab because historically they're ok with me as a customer in Japan. Other brokers such as Morgan Stanley have told me I would need to close my account with them if I ever leave the US. That was a deal breaker for me.
I have to clear up a few things here.  First, you can always keep your money in your 401(k), where it will grow tax free until you need it.   There are ways of accessing that money penalty-free before age 59.5 (or you can keep that money there until you are 59.5 as 'old man/old-woman money').  See SEPP and 72t for details.

If you are legally residing within the US when your job ends you can roll over that money from your 401(k) to either a tIRA or a ROTH, where it will continue to sit regardless of whether you continue to live in the US or not.  I agree with wololo that you should check with whatever broker that you use that they can continue to service you while you are living abroad.  I've never heard of one forcing you to sell/cash-out when you move overseas, but perhaps there are some.  My previous company used to hire a lot of immigrant workers and most participated in the plan.
Every country has their own set of tax laws; check with your own about whether a US 401(k) account is taxable.

Finally, the penalty for cashing out a 401(k) early is not as described above.  It's a 10% penalty, and then the amount in your account is taxed normally. 

StockBeard

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Re: New to USA, need advice on doing the right thing
« Reply #11 on: June 05, 2015, 05:15:59 PM »
  First, you can always keep your money in your 401(k), where it will grow tax free until you need it. 
Not true if you leave the US and are not a US citizen. Each country has different laws, some countries do not recognize your 401k as a tax free investment and will ask you to pay taxes on it. France, for example, has a tax on wealth and would require you to pay taxes if all your wealth, including your 401k, goes above a certain threshold. This would not be income tax, but I am surprised that you can say for certain that you know the tax laws of all countries in the world, and can 100% guarantee that an investment, governed by some rules in the US, would necessarily follow the same rules outside of the US. This has to be a misunderstanding.

you can roll over that money from your 401(k) to either a tIRA or a ROTH, where it will continue to sit regardless of whether you continue to live in the US or not.
Not true either, you cannot own a ROTH or IRA if you are not a us citizen and live abroad, AFAIK. see:

http://rothiraaccountrules.com/roth-ira-rules-while-living-abroad/

Assuming a person rolls over their 401k to a ROTH while living in the US, they would have to cash it out when moving back to their own country.

Edit: This seems to actually depend on the broker, but is definitely not a clear answer:
http://www.retire2india.com/2007/05/iras-for-non-citizens.html

Some companies *will* force you to cash out if you're not a US citizen and decide to move out. It depends on the broker, and the country you are moving to

So, telling an immigrant worker: "just open an IRA, you'll be fine" is not a good enough answer. There are possibilities, but they have tax implications. It is very likely that you end up getting double dipped when you cash out your 401k or IRA from a foreign country: the US will make you pay the maximum withholding rate, and your home country will tax you as well. Good luck with the paperwork to justify you already paid 30% to uncle sam
« Last Edit: June 05, 2015, 05:31:19 PM by wololo »

nereo

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Re: New to USA, need advice on doing the right thing
« Reply #12 on: June 05, 2015, 07:35:33 PM »
  First, you can always keep your money in your 401(k), where it will grow tax free until you need it. 
Not true if you leave the US and are not a US citizen. Each country has different laws, some countries do not recognize your 401k as a tax free investment and will ask you to pay taxes on it. France, for example, has a tax on wealth and would require you to pay taxes if all your wealth, including your 401k, goes above a certain threshold. This would not be income tax, but I am surprised that you can say for certain that you know the tax laws of all countries in the world, and can 100% guarantee that an investment, governed by some rules in the US, would necessarily follow the same rules outside of the US. This has to be a misunderstanding.

you can roll over that money from your 401(k) to either a tIRA or a ROTH, where it will continue to sit regardless of whether you continue to live in the US or not.
Not true either, you cannot own a ROTH or IRA if you are not a us citizen and live abroad, AFAIK. see:

http://rothiraaccountrules.com/roth-ira-rules-while-living-abroad/

Assuming a person rolls over their 401k to a ROTH while living in the US, they would have to cash it out when moving back to their own country.

Edit: This seems to actually depend on the broker, but is definitely not a clear answer:
http://www.retire2india.com/2007/05/iras-for-non-citizens.html

Some companies *will* force you to cash out if you're not a US citizen and decide to move out. It depends on the broker, and the country you are moving to

So, telling an immigrant worker: "just open an IRA, you'll be fine" is not a good enough answer. There are possibilities, but they have tax implications. It is very likely that you end up getting double dipped when you cash out your 401k or IRA from a foreign country: the US will make you pay the maximum withholding rate, and your home country will tax you as well. Good luck with the paperwork to justify you already paid 30% to uncle sam
as I said before: "Every country has their own set of tax laws; check with your own about whether a US 401(k) account is taxable."
I never claimed to know every country's tax laws. I'm just trying to clear up some misconceptions about US laws here.
My point was simply that you will not be forced by any US law to sell or convert your 401(k), and that it is a complete and often-repeated fallacy that you cannot access that money before age 59.5.  Your statement on penalties was also incorrect.

IRAs are based on taxable income the year for that year.  As long as you are working on a qualified visa you can have an IRA.   

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Re: New to USA, need advice on doing the right thing
« Reply #13 on: June 05, 2015, 08:31:31 PM »
Which is why I started my sentence with "If you move away from the us"

Tester

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Re: New to USA, need advice on doing the right thing
« Reply #14 on: June 05, 2015, 11:58:33 PM »
Thank you for your help.

My country has an agreement to avoid double taxation with the USA.
When I sold RSUs while working there I was not taxed in the US.
I might be wrong, but the logical thing would be to not be taxed in my country if I will pay the taxes from the 401k in US.
I will check with my country laws.

I agree that right now it is very early in my USA life but I try to act like we will settle here for a long time - to make it easier to get adjusted.
I plan to start the green card process in 3-5 months. Luckily my visa allows me to apply for this as it is a dual purpose visa.
Our plan right now is to stay in the USA at least until our son finishes school - will see how much school he will get :).

I will talk with Schwab, I had an account with them until two years ago to handle the RSUs.
Then my company switched to Morgan Stanley - which have a "very interesting" website (keep in mind I am a software tester :) ).
EDIT: In an investment website I am looking for accurate data and correct functionality, not fancy style and graphs with wrong data or functionality.
I will do this after I max out the 401k.

Regarding modifying my 401k contribution, I can select monthly how much to contribute :).
Right now I set the contribution to 25% for the next month and we will see how things work out.
If it is too much, I might not max out this year. Or I will contribute 90% in December, as then I will get to use the RSU money to live.
I can even select how much to contribute to a Roth IRA, but right now I left it at zero.
« Last Edit: June 06, 2015, 12:01:32 AM by Tester »

StockBeard

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Re: New to USA, need advice on doing the right thing
« Reply #15 on: June 06, 2015, 12:26:15 AM »
One typical suggestion is that you should put heavily taxed funds into your 401k, and not-so-taxed funds into your "taxed account".
Typically, bonds have dividends, and dividends are taxed. So for example put bonds (VBTIX) in your 401k, and stock with less dividends (ETF) in your taxed account.

Edit: another thing, selling your RSUs as soon as they vest is not necessarily a good idea (except for the share you sell for taxes). If you keep them for 1 year or more, the benefits turn into "long term capital gain" and are taxed less. It depends on everyone's situation of course, but in case you didn't know that, you might want to have a look into this.
« Last Edit: June 06, 2015, 12:33:37 AM by wololo »

Cathy

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Re: New to USA, need advice on doing the right thing
« Reply #16 on: June 06, 2015, 09:20:34 AM »
IRAs are based on taxable income the year for that year.  As long as you are working on a qualified visa you can have an IRA.

This quoted statement is far more restrictive than the statutory requirements.

Individual retirement accounts ("IRAs") are authorised by 26 USC 408(a)(1), which provides that an IRA is a trust satisfying a number of conditions, including that the written instrument governing the trust provides that contributions to the trust will not be accepted in excess of the maximum defined by 26 USC 219(b)(1)(A). Meanwhile, 26 USC 219(b)(1)(A) says that maximum is the lesser of (i) the maximum deduction, and (ii) the "compensation includible in the individual's gross income for such taxable year". According to 26 USC 219(f)(1), the term "compensation" includes "earned income" as defined in 26 USC 401(c)(2). Pursuant to 26 USC 401(c)(2), "earned income" means "net earnings from self-employment" (as defined in 26 USC 1402) but only "with respect to a trade or business in which personal services of the taxpayer are a material income-producing factor", and subject to some technical requirements. (Note that this statutory definition of "earned income" is more restrictive than we often use the term on this forum.)

Here are a few highlights of the law, compared to the restrictive statement above:

First, a "visa" is neither necessary nor sufficient to work legally in the USA.

In US immigration law, a visa is a document that, if required, authorises an alien to travel to a port of entry and seek admission to the USA. A visa does not entitle an alien to be admitted to the USA: 8 USC 1201(h). On that basis alone, we can see that a visa, "qualified" or otherwise, is not sufficient to work legally in the USA. It is also not necessary as will be described below.

Pursuant to 8 USC 1324a(a)(1)(A), it is unlawful for an employer to hire an alien knowing that said alien is an "unauthorized alien". Pursuant to 8 USC 1324a(h)(3), an "unauthorized alien" is an alien who is neither (i) an alien lawfully admitted for permanent residence, nor (ii) authorised to be employed by 8 USC or by the Attorney General.

Based on this, you can see immediately that having a visa is not necessary for lawful employment, because of the "or by the Attorney General" branch of the test, which cloaks the Attorney General with authority to authorise employment on any basis she deems fit, subject to the general principles of administrative law. This is part of the legal basis for Obama's various programs granting work authorisation to certain aliens who entered the country illegally.

Even the "authorised by 8 USC" part of the test does not necessarily require a visa. A visa does not control the legal status of the alien inside the USA. That is controlled instead by the terms of admission as granted by the inspector at the border (8 USC 1184) or as subsequently changed by the Secretary of Homeland Security once inside the USA (8 USC 1258). A visa is not always required to seek admission to the USA for the purpose of working there. For example, under 8 CFR 212.1(a)(1), a visa is not generally required for citizens of Canada, even if they intend to work in the US. There are also a variety of other situations where a visa is not required to enter the US to work.

Having addressed the implicit suggestion that a "visa" is necessary or sufficient to work in the USA, I now turn to the implied suggestion that the work must be legal in order for the income therefrom to be eligible for contribution to an IRA. There is no explicit requirement for the work to the legal under immigration laws or otherwise in order for the worker to be eligible to contribute to an IRA. According to the Supreme Court, "the federal income tax is a tax on net income, not a sanction against wrongdoing": Commissioner v. Tellier, 383 US 687 (1966). The remedy for unlawful work is found in immigration law in the form of sanctions imposed on the employer or employee, but not in the form of prohibiting an otherwise-lawful IRA deduction.

However, the Tellier court does say that a deduction may be disallowed if allowing it would "frustrate sharply defined national or state policies proscribing particular types of conduct" (quoting other cases). The Court gives the example of a fine paid to the government, which cannot be deducted as a business expense because that would reduce the amount of the fine and defeat the point of having specified a particular dollar value for the fine. It could be argued that allowing an IRA deduction for illegal work would encourage people to plan to retire in the US illegally, thus defeating national policy. However, I haven't located any extant case law on that topic, and the IRS doesn't appear to take that position. In sum, illegally performed work may be eligible for an IRA deduction.

Finally I will address the implied suggestion that an alien must enter the US and work in the US in order to have income eligible for contribution to an IRA. That is not the case either. Under 26 USC 871(b), nonresident aliens are taxed on income effectively connected with a US trade or business, if the nonresident alien "engaged in trade or business within the United States during the taxable year". Engaging in a trade or business in the US does not require working in the US or even entering the US. For example, you might own a business which is physically based in the US, but you personally work from abroad. The definition of "earned income" requires that the "personal services of the taxpayer are a material income-producing factor", but there is no requirement that those personal services be performed in the US.

So to review:
  • a "qualified visa" is neither necessary nor sufficient to work legally in the US;
  • illegally performed work may still be eligible for an IRA contribution if the other requirements are met; and
  • there is no need for a foreign national to enter the US to contribute to an IRA because work outside the US can still be eligible if the other requirements are met.
« Last Edit: July 21, 2015, 08:53:43 PM by Cathy »

StockBeard

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Re: New to USA, need advice on doing the right thing
« Reply #17 on: June 06, 2015, 10:38:22 AM »
Cathy, this is all great, but it does not really matter what the law says: at the end of the day, banks, brokerage companies, etc... are *more* restrictive than the law, in order to protect their business. Bottom line is, good luck finding any institution in the US that will accept to open/maintain an IRA account for you if you're a foreign national AND do not live in the US. You can discuss all you want with their representatives about your and their interpretation of the law, the point is moot: they are allowed to refuse doing business with you.
Schwab and Morgan Stanley, among others, have been very clear with me that independently of what I could be legally allowed to do in regards to IRA, the amount of paperwork/risk for them is not worth the money.

All I'm saying is:
Maxing out a 401k as a foreign national is not necessarily a good idea depending on your situation and your plans for the future. It's not as crystal clear as if you were a US Citizen.

Cathy

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Re: New to USA, need advice on doing the right thing
« Reply #18 on: June 06, 2015, 10:51:15 AM »
Cathy, this is all great, but it does not really matter what the law says: at the end of the day, banks, brokerage companies, etc... are *more* restrictive than the law, in order to protect their business. Bottom line is, good luck finding any institution in the US that will accept to open/maintain an IRA account for you if you're a foreign national AND do not live in the US. You can discuss all you want with their representatives about your and their interpretation of the law, the point is moot: they are allowed to refuse doing business with you.
Schwab and Morgan Stanley, among others, have been very clear with me that independently of what I could be legally allowed to do in regards to IRA, the amount of paperwork/risk for them is not worth the money.

This is a different topic that I have already addressed in another post on this forum: http://forum.mrmoneymustache.com/investor-alley/can-non-resident-aliens-open-iras/msg563844/#msg563844

StockBeard

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Re: New to USA, need advice on doing the right thing
« Reply #19 on: June 06, 2015, 10:59:53 AM »
Thanks for the link.
It just confirms what I've been saying since the beginning of this thread: recommending a foreign national to "max out their 401k and then transfer it to an IRA" as if it were that simple, is a dangerous recommendation to make. At the very least, in such a situation, it is essential to check with the bank/IRA provider that they would still be willing to maintain the account if you ever moved to your home country and lost your resident status, etc...

I'm just saying, this has bit me in the back in the past, precisely because everyone's situation is different, and generic answers like this one on a forum are presented as "ultimate truth" when they actually aren't. But maybe I'm overestimating the trust that visitors put on the answers found on this forum :)

Cathy

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Re: New to USA, need advice on doing the right thing
« Reply #20 on: June 06, 2015, 11:09:06 AM »
...recommending a foreign national to "max out their 401k and then transfer it to an IRA" as if it were that simple, is a dangerous recommendation to make...

I agree with you that there is no "one size fits all" optimal way to make use of the US retirement accounts, for foreign nationals or otherwise. Some people on this forum are so excited to learn about the strategy commonly referred to as the "Roth pipeline" that they overstate its actual merits and ignore its limitations. The correct approach depends on all of the facts and the details of the person's situation.

AnnieO

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Re: New to USA, need advice on doing the right thing
« Reply #21 on: June 07, 2015, 10:56:11 AM »
I'm no expert, but it looks to me like two big future expenses aren't in your calculations:

1) What is your plan for your child's college education?  It sounds like you probably live in Washington state.  Public university tuition there has risen 14% per year in recent years.  You need a plan for college savings and a realistic idea of how much debt you and your child are willing to take on later.  At your income level, your child isn't likely to qualify for a lot of grants and I wouldn't count on academic or athletic scholarships either.

2) What expenses will you incur securing your green card?  Perhaps your employer will cover some of the costs, but most people still need to pay some hefty fees and need a good immigration lawyer to review their case.

I doubt that you will qualify for a loan from a U.S. bank until you have your green card, and even after that you may find you get a better rate by waiting until you have at least a two-year U.S. employment history.

All that said... welcome! We're glad you're here! 

Tester

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Re: New to USA, need advice on doing the right thing
« Reply #22 on: June 07, 2015, 04:46:16 PM »
Thank you :).

Regarding the child education, I will start saving for that using pre-tax money when I start the green card process.
If I won't get the green card, I will save for that with post-tax money, will see in which country :).
I looked a little at the costs for tuition for University of Washington - they seem reasonable right now.
I also took a quick look at two of the best US universities, I plan to be able to provide at least half of those costs.
Right now I am working on paying off all my debt - that will free around 1300 USD/month to save more.

I will ask some of my colleagues about the green card costs. I will also read my company policy on that.
Although I don't remember those colleagues talking about money they had to pay for the Green card, they talked about paperwork.

Regarding loans, I have my account opened at a credit union which works with my employer for helping foreign nationals.
They told me they will give me a car loan or a personal loan.
Right now I just got a credit card from them with 1000 USD limit to build my credit history.
It also has a cash back benefit which is nice, but I still use my debit card from time to time.

Anyway, I plan on avoiding loans as much as possible.
If I will get the green card I might take a loan at some point for buying a home - if I don't get the green card I have to leave USA in maximum 5 years - I have a visa valid for 3 years which can be extended by two more years.

AnnieO

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Re: New to USA, need advice on doing the right thing
« Reply #23 on: June 08, 2015, 12:16:22 PM »
Sounds like a good plan!  And yes, I meant a home loan.  Building a credit history is a good idea.  You also might want to check out the Seattle-based organization www.homesightwa.org.  They do excellent first time homebuyer classes.  I doubt you need it to understand all the costs/benefits given the level of thought you've put into your finances, but your wife might and I know they offer translation services into a lot of different languages.  Their program is geared to lower-income buyers, but your wife would still benefit from building her own knowledge about U.S. homeownership before you make a decision about buying.