I must admit, this title – Investing as a non-resident alien living in the US – seems a bit contradictory. How can you be a non-resident of a country when you actually live there? Well, it is possible when you consider in a tax perspective.
In fact, there is a group of people who are on non-immigrant visas in the US, allowed to work, but not being taxed as a “US person”. Even though they live in the US full-time, they pay taxes in the US only on a part of their income, as people who live outside of the US.
In the past, I have not written specifically for this group of people, even though I have friends and family falling in this category. They are international PhD students, visiting scholars, employees in foreign missions, and professionals in UN, IMF or the World Bank. It’s a large group of people in my social circle that seeks out my advice, since most US-based advisors don’t work with them. Now it’s time for me to write something just for them!
Investing as a non-resident alien living in the US
Below I’m going to explore some common questions I get about investing as a non-resident alien living in the US.
Note that in this post, I’m only discussing investing in securities in the public markets, and not real estate, private equity, or other non-stock / bond asset classes.
#1: Should I do it?
This is the number #1 question I get. Long-time readers of this blog know that I rarely give black and white answers. However, this is one of the questions that may have a relatively straight forward answer.
My answer is “probably yes, unless you have good reasons not to.”
Some of the good reasons might be:
- I don’t have extra money to invest!
- If I have a US account, it makes my home country tax reporting VERY complicated.
- I am already wealthy and have professionals managing money for me.
Note that I didn’t include “I’ll leave US one day” as a good reason, nor did I include “I don’t want to deal with the hassle of explaining my situation,” – two of the most common push backs I get.
In my opinion, one factor trumps these common concerns – the US offers the most cost-efficient options in the world to build a diversified portfolio as an individual investor.
If you are from a developing country, you’ll know what I mean. In most countries in the world, in order to buy stocks in some of the most well-known companies in the world, such as Microsoft, Google, or Apple, you need to go through a broker that charges high commission, have minimum balance, or even use insurance contracts. There are account maintenance fees, foreign exchange fees, and even performance reporting fees.
Or if you choose the route of using mutual funds or ETFs, you will be paying 2-3% in expense ratio, plus commission to the banks and performance fees.
In the US, on the other hand, you can open a brokerage account online, fund the account, buy stocks all with ZERO cost to you. You can purchase diversified ETFs that cover stock markets all over the world with expense ratio as low as a few basis points (or even zero, if you have access to this fund.)
Being able to easily open an account and invest in the world is a huge opportunity that you may not want to miss out.
#2: How do I do it?
Some people think it might be difficult to do because they’ve experienced difficulty opening bank accounts or getting credit cards when they first arrived in the US. It’s true that some custodians choose not to work with non-US citizens or Green Card holders. Nevertheless, there are several online trading platforms, such as Interactive Brokers and TD Ameritrade (which is becoming part of Charles Schwab soon), that will happily open an account for you as long as you are legally living in the US at the moment of account opening.
One extra step some NRAs in the US might encounter is applying for an Individual Tax Identification Number (ITIN.) For those who have other US taxable earned income, it’s possible you were required to get Social Security Number already, which serves as your tax number. If you don’t have any other US taxable income, then it’s likely you need to apply for an ITIN first.
(Already have an account? Go through the Rethink Investing series to help you decide what to invest in.)
#3: Should I use tax-advantaged accounts in the US?
If you have US taxable earned income, you may wonder whether you should contribute to IRA or employer sponsored accounts such as 401(k) and IRA. I’ve written about this decision in this post. It really depends on your assumptions on current and future global tax obligations.
On the other hand, you may be able to contribute to accounts such as Health Savings Account and 529 college savings even without taxable earned income. You likely receive no tax benefit upfront by contributing to these types of accounts. However, it’s possible there will be long-term tax savings for you depending on multiple factors, such as:
- How are these types of accounts taxed in your future resident country?
- What are your income projections?
- What does the tax treaty say?
It’ll take some work on your end to figure out whether using these special accounts is worth your while. If you don’t feel like dealing with it, just go with a normal taxable brokerage account and invest tax-efficiently.
#4: I’m leaving the US at some point. What should I do with my accounts?
I wrote about some of the considerations here. See point 2(A).
The main thing to keep in mind is to be able to find a custodian that allows you to declare you are a non-resident alien with foreign address. Where you move to is important. If it’s a country on the US Treasury OFAC sanction list, then it’s likely you can’t keep the account open. Every custodian also keeps a list of country that they will do business in due to local regulations.
The worst case scenario is that you are forced to liquidate your investments into cash and send it to another country. There might be some unpleasant tax consequences if this happens. However, your investment growth over the years may still be worth it. If the alternative is that you miss out on investment growth altogether, I might say that paying taxes is a small price to pay. (Not to mention that as NRA living outside of the US, you may get 0% capital gain tax treatment, as opposed to 30% when you lived in the US.)
#5: I’ve left the US but still have US accounts. What should I consider when deciding whether to leave the assets in the US?
There are plenty of factors to consider. I’d say it depends on the alternatives. If you are able to continue holding these assets in an account outside the US without incurring unfavorable tax treatment in the transaction or other negative consequences, then perhaps moving your assets to another jurisdiction works. That is, in the future, other countries also offer similar tax-efficient investment opportunities.
Another reason people might consider moving the assets away from the US is the potential high estate tax liability on US-situs assets for non-resident aliens. Instead of a lifetime exemption of 11.4 million US dollars, non-resident only gets $60,000. Beyond this exemption amount, Taxpayer pays graduated rates from 18% to 40%.
In the end, if you live in the US and have money to invest, starting an account in the US is generally a good move. Depending on your personal situation, you might need to consider various contribution / distribution strategies, tax treaty, and tax efficient asset allocation. More work, yes, but hopefully in the long-term they all pay off!