Finally, you are living in the promised land. The country where dreams come true – United States of America!
After the first few years of relentless conversion from Dollars to Indian Rupees, you give up. Soon, kilometers become miles. Liters become gallons. And before you know it, kilogram becomes pounds.
But there’s one critical part of the financial equation that’s missing.
Investing your money.
Most Indians hold back because investing in the US can be complicated.
- What if my H1B visa does not get renewed?
- What if I lose my job?
- Should I invest in an IRA or a 401(K)?
The concerns are valid. But that shouldn’t stop you from investing.
In this post, I will go over some of the practical tips to invest in the US.
How should Indians in the US invest?
#1: Don’t delay. Start saving with an emergency fund
The first thing you need to do is to build up an emergency fund. Set aside at least 3 to 6 months of expenses. Use your bank’s saving or checking account to keep your money safe. You can also choose a CD (Certificate of Deposit).
The cost of not starting early can be pretty high.
The following chart shows how much $25,000 invested every year @ 7% returns, can grow to. A 5 year delayed start can mean as much as a $519K difference in returns.
#2: Max out your 401K
It’s essentially free money you are losing out if you do not max out your 401(K). It’s similar to Employee Provident Fund (EPF) offered by employers in India.
Not all companies offer 401(K) plans. And not everyone offers matching contributions. But if they do, max it out.
#3: Open an IRA
IRAs come in many flavors – Traditional, Roth, SEP, and Simple. For H1B holders, in most cases, Traditional or Roth would apply.
Contributions you make to your Traditional IRA are tax deductible. Sort of like the 80C tax saving investments you make back in India. However, with a traditional IRA, you are only deferring your tax liability. When you withdraw from a traditional IRA, your gains are taxed.
You contribute to a Roth IRA with your after-tax dollars. When you withdraw, you are not taxed on the withdrawals.
Should I open a 401(k) and an IRA?
Max out 401(K) first if your employer matches your contribution and then invest the rest in a Traditional or a Roth IRA.
#4: Open a taxable investment account – single or joint
With an annual maximum limit of $18,500 for 401(k) and $5,500 for an IRA in 2018, how do you invest the rest of your money?
Sure, you can invest in a bank certificate of deposit (CD), the equivalent of a bank fixed deposit in India. But with interest rates below inflation, they are not as attractive. The longer you invest your money into a CD, the more it loses its value.
You need to invest in the equity market. Unlike India, the equity participation in the US is pretty high. So there are a lot of low-cost options for you to invest.
The three main asset classes you can invest in are – stocks, bonds, and real estate.
You can invest directly in stocks or opt to invest through ETFs or mutual funds.
You can approach a broker like Interactive Brokers or TD Ameritrade to open a brokerage account. If you need financial advice and a fully managed account, you can open an account with an online wealth manager.
If you are looking for simple savings, you can choose a robo-advisor like Wealthfront or Betterment.
#5: Open a 529 college savings plan for your kids
The cost of college education in the US can be very expensive.
You can choose a 529 college saving plan or dip into your Roth IRA to fund your child’s college education. 529 plans are tax-advantaged while you’ll need to pay a penalty for early withdrawals from your Roth IRA.
#6: Be disciplined
It’s possible to get rich with only your salary and prudent investing.
Sylvia Bloom-Margolies amassed a $9 Million fortune working as a secretary. She bought stocks regularly and held on to them for a very long time.
You can make a fortune with a regular salary. Make sure you live within your means and invest in equities regularly.
Some things to keep in mind while you are in the US
#1: Are you sending money back home?
If you are sending money back home, be mindful of gift taxes and repatriation issues.
A simple workaround is to send money to your own NRO/NRE account in India and then send it to whoever you want.
#2: Don’t invest in India for a higher interest rate
Bank FD rate in India is now around 6%. In the US, a CD is around 2%. Makes sense to send the money to India and earn more interest, right?
Hold on. There’s a catch.
When you send dollars home, you convert it into rupees. The interest you earn is on the rupee. When you want the money back, you have to convert it back to dollars.
Based on historical data, over a period of time, for the same rupee, you get fewer dollars.
on 4 Jan 2014, the price of a dollar was Rs 45.351. On 27 May 2018, the same dollar will require Rs 67.435 to buy back. This means that $10,000 you sent home is now worth only $6,725 (assuming no growth). That’s currency value fluctuation acting against you.
My hypothetical analysis of the above scenario results in a profit of $3,495 on an initial investment of $10,000 over 14 years. However, this could vary wildly based on RBI rate changes, currency rate change, and other factors both in India and US.
For the geeks among you, refer to the concept of “Interest Rate Parity” to learn more about why interest rate differences do not matter.
Considering the marginally low potential to earn a profit, and the associated tax filing complexities, you are better off investing in the US.
What if I do not intend to convert the money back to USD?
It would still be better to invest in the US and convert to INR as required. Since USD is a reserve currency, liquidity for USD is higher compared to INR.
And who knows what could happen in the future? You might decide to retire in the US and not go back to India. Or you might decide to settle down in Europe.
#3: You will need to pay taxes and file the correct forms
Due to FATCA regulations, most Indian entities will report your investments in India to SEC. So don’t think you can skip paying taxes on your income.
Unless you invest in real estate in India, any investments/holdings in your bank account, brokerage, or mutual funds will be tracked and reported.
So make sure you file the appropriate tax forms.
Over To You:
Are you an Indian living in the US? How do you invest? Share with me in the comment section below.