15 years ago, when I came to the US to study, most of the international students I knew wanted to stay in the US and get their green card. As my life brought me to other countries, I came to meet more people for whom the US is only one stop in their global journey. Nevertheless, depending on when they came, or how long they stay, these US visa holders may be accumulating a significant portion of their lifetime wealth in the years they call the US home.

If you are accumulating wealth in the US as a visa holder, you may be thinking from time to time whether that’s the best strategy. After all, you do not plan to stay in the US forever. Is it better to send your saving to invest in your home country (or the financial home base of your choosing)?

Why accumulating wealth in the US as a visa holder

The truth is, there are three major reasons why accumulating wealth in the US while you still live in the US can be a good idea.

1. The cost to start investing in the US as an individual investor is basically zero. You are able to open brokerage account online for free, trade for free, buy diversified mutual funds with little to zero expense ratio. Compare this to most other places in the world, where you may need to pay commission to get access to investments, hire adviser to open account, or pay expense ratio up to 3% to invest in S&P 500. Over time these costs add up.
2. While you are earning in the US, there are typically opportunities to reduce your taxes if you invest through tax-advantaged retirement accounts. I’ve written about the decisions around contributing to 401(k) and the like in a previous blog post.
3. As a US taxpayer, you need to make extra filing and disclosure for your accounts overseas, even though you are only in the US on visa. Some people oppose to that on philosophical ground, while others simply don’t want the hassle. If you consistently send your saving overseas to invest while you live in the US, eventually you may run into the more complicated tax compliance alphabet soups, such as FBAR, FATCA, or PFIC reporting.

Estate tax as a major risk

However, accumulating wealth in the US comes with one major risk for visa holders who wish to leave permanently in the future. This risk is potentially high estate tax in the US. (There may be a treaty between US and your future home that mitigates this.)

While US citizens and residents (or those who are US-domiciled) have a life time exemption on gift and estate up to 11.2 million US dollars, non-resident aliens only have $60,000 exemption. The US government levies estate taxes on any US-situs assets, which includes US real estate properties, US-situs investment accounts, or stocks of US corporations. The top tax bracket is at 40%.

Of course, you’d hope that over your life time, you will be able to gradually spend down or move your assets to where you eventually call home. Nonetheless, there is always a risk of passing before you think you will. Therefore, it is important that you do proper estate planning for your US-situs assets as you consider leaving the US for good.

Administration creates extra costs

One other deterrent for some visa holders to accumulate wealth in the US is the cost of administration, both monetary and time-spent, after your move. There are several major considerations:

1. Banking – will the current custodian continue to work with you as a foreign investor?
2. Currency exchange – is it favorable to keep your wealth in a currency that may fluctuate against the currency that you will spend?
3. International transfers – are you able to receive the proceeds of your investment in whatever country that you end up?
4. Tracking and filing US tax return – what happens if custodian withholds over your tax liability?

Accumulating wealth in the US as a visa holder

Let’s say that after considering the pros and cons above, you determine accumulating wealth in the US is still preferable than alternatives, how should you structure your investments?

Before we get into the strategy, let’s look at the components that help you build the strategy:

Investment Accounts

Tax Advantaged Accounts

For US tax payers, using tax advantaged accounts such as 401(k), IRA, Roth IRA or 529 plan to save is generally a good idea. Nevertheless, for those who will no longer be US tax payers in the future, the decision is less straight forward.

In general, if investing in the tax advantaged account only gives you US tax benefits in the future, (such as Roth IRA or some 529 plans), you should think twice and doublecheck how tax treaty between the US and your financial home base applies to future distributions. As a foreign investor in the future, it is likely you are able to structure long-term investments in a normal brokerage account with very low tax liability. We will discuss more about this in the Sources of Wealth section.

Brokerage Account

This is perhaps the most flexible account type to own as a foreign investor. Many custodians are happy to open US brokerage accounts for foreign investors, depending on where they reside. As long as you don’t intend to move to countries in the future that are on the “do-not-do-business-with” list, it’s likely you can update your tax status and new correspondence info once you move and continue to own the account.

Unfortunately, which custodian will do business with residents in what country constantly changes. If you are opening new accounts, you may want to inquire in advance whether the custodian you want to open account with will continue to work with you shall you decide to leave the US permanently, and what its policy is for dealing with your tax status change.

One thing you might want to do is pick a custodian that is flexible with you transferring your investment holdings to another custodian without liquidating the holdings. Since you never know how tax laws, tax treaties and company policies may change in the future, having the flexibility give you more breathing room to deal with unexpected changes.

Life Insurance

Some people use life insurance as a vehicle to defer tax liability since you do not need to pay taxes on cash value accumulation. Nevertheless, this may not be a necessary feature based on the same reason we discussed above regarding Roth type accounts. Always check tax treaty before you think about minimizing US taxes while you are in the US.

On the other hand, there is term life insurance that only covers the risk of premature death without an investing component. Death benefit in the US is tax-free. As mentioned earlier, premature death can result in estate tax consequences, so a US life insurance may be a solution to mitigate potential estate tax consequences.

Sources of Wealth

More important than the account that holds your investment is the type of investments you hold. Here I’ll only discuss the three most common types of sources of wealth:

Capital Gain

Capital gain is the difference in value between when you bought the investment and when you sell it. In the US, it is the most favorable source of wealth tax-wise. For US taxpayers, the tax bracket only goes up to 20% for the highest income earners. For foreign investor, capital gain is NOT taxed in the US AT ALL. Additionally, you have more control of when you realize the capital gain – if you don’t sell the investment, you won’t have capital gain. (There is an exception in ETF or mutual fund investing, where some capital gains may be passed on to you, even if you don’t sell your shares.)

As you can imagine, investing for capital gain, even in a normal US brokerage account, is a very cost-efficient strategy. It is best for people who have a long investment horizon and can wait for the value of your investments to grow.

Dividend and Interest

Another source of wealth comes from the income that investments generate. Even if there is no difference between you buy and sale price, it is still possible to grow your wealth through accumulating the income you receive. Coming from stock, the income is called dividend; coming from loans, the income is called interest.

In general, in the US, a taxpayer needs to pay taxes on these types of investment income based on their ordinary tax rate, (with the exception of qualified dividend, which is generated through US company stocks.) This is on top of their normal earned income.

However, as a foreign investor, dividend from US domestic corporations (or other passive FDAP income) are taxed and withheld at 30% rate, unless there is a more favorable treaty rate. (If treaty rate applies to you, you also need to report it on W-8BEN in advance to the custodian so they will withhold correctly. Otherwise you will need to file tax return to get back the over-withholding.) This means that investing in high growth and low dividend stocks in the long-term will be more tax-efficient. Nevertheless, you shouldn’t base your investment decision solely on tax treatment.

One additional wrinkle is that if the stocks you own are not of US domestic corporation, it’s not considered taxable because it’s not “US source income”.

Real Estate

Lastly, many people like to buy real estate properties to get both appreciation and possible rental income. However, how IRS treats this type of investment is vastly different from the securities we just talked about.

If you own real estate as a foreign investor and receive rent income, it is likely you can claim this as effectively connected income and treat this like a rental business operation. This allows you to take deductions against rental income, such as repair, insurance costs, taxes, and depreciation. Therefore, on the income side, it is more favorable than dividend or interest from securities.

On the other hand, when it’s time to sell the property, foreign investors are subject to 15% withholding of the SALE PRICE. For instance, even if you buy and sell a property both at $500,000, (no profit whatsoever), your buyer would still be required to send 15%, or $75,000, to the IRS. You will need to file a tax return, showing that you didn’t make any profit, to get a refund.

In addition, since real estate properties are physically located in a STATE, most likely you will have state tax liability as well from the sale, as opposed to no liability at all from capital gains of securities sale.

It is possible to own real estate interest through REIT or partnership interests. Nevertheless, the withholding rules still applies to the share of profit distributed to you from the disposition of properties, with some exceptions. You can read more about it here.

Planning opportunities for accumulating wealth in the US as a visa holder

With all the info above, what might be a good strategy for a current visa holder that will leave the US? Let me suggest one below. Note that it’s not the only one, and depending on the countries you will move to, you may even discover better ones.

1. For long-term wealth building, invest for growth in taxable brokerage account. Use a few low-cost ETFs that captures the US market, and potentially other international markets that you won’t have connections to. If you will move to other major markets, it can make sense to invest in those markets through local account after your move for tax purposes. (For people moving to the European Economic Area, PRIIPS regulation may prevent you from continuing purchasing US domestic ETFs.)
2. If you have vested company stocks from your US employment with high capital gains, consider liquidating them after you achieve nonresident alien status to avoid US taxes.
3. If you have 401(k) or IRA, consider allocate your fixed income investment in those accounts and keep equity in tax-efficient brokerage account.
4. If you do not invest in tax-deferred accounts in the US, once you become nonresident alien, consider moving your income portfolio to your financial home base, especially if interest rates and tax rules are more favorable there.
5. Consider liquidate your real estate holding before leaving the US if it makes sense. Or choose to invest in real estate overseas while living in the US if you like to have real estate as part of your portfolio. (Direct international real estate property holding is not subject to FBAR or FATCA reporting when you are a still a US resident.)

What strategies have you employed and how have they worked for you? Share below!