Plan for 3 fund portfolio when I leave USA [ Singapore Citizen ]

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Topic Author
athrowman66
Posts: 7
Joined: Fri Jan 11, 2019 12:57 pm

Plan for 3 fund portfolio when I leave USA [ Singapore Citizen ]

Post by athrowman66 » Mon Jan 14, 2019 3:21 pm

I am a Foriegner working in US in H1B ( tax purposes: US resident alien). I have money invested in 401k. I learnt about 3 fund portfolio recently and thinking of doing 33/33/33 us/world/bond funds. I would like to be in US for few more years before I return to my country. Reteirment accounts like 401k, IRA gets lot more complicated when you leave US (also it depends on whether I have green card at the time when I leave US). Due to it I'm considering investing around $100k in a taxable account.


Age: 30
Nationality: Singapore
Combined income: $200k
Money in Savings account: $120k
401k - $35k
Equivalent to 401k in Singapore-$120k
House Rent - $1500
For tax purposes- US resident alien
Singapore Taxes - No capital gain tax and no foreign income tax

In taxable account, what are the best stratagies for a Foriegner who might need to return to their home country:

1) should I invest in ETF or mutual funds ? As I heard ETF are easy to transfer between brokerages. Buying vanguard mutual funds might be difficult to transfer and also vanguard seems like not a friendly broker to people living outside US.
2) can I transfer the ETFs in my US broker account to a non US broker account without triggering a sale event ? Since Singapore don't have capital gain tax , I wanted to utilize it. I can sell year after I leave USA, so I will be considered a non resident and pay no capital gain ? If I have green card then I surrender my GC and sell share to avoid capital gain ? I know there are lot of ifs and buts in tax code so I'm not sure that my understanding is correct.
3) how about bonds ? Since bond pays interests, taxed at regular income.

TedSwippet
Posts: 2016
Joined: Mon Jun 04, 2007 4:19 pm

Re: Plan for 3 fund portfolio when I leave USA [ Singapore Citizen ]

Post by TedSwippet » Mon Jan 14, 2019 5:03 pm

athrowman66 wrote:
Mon Jan 14, 2019 3:21 pm
1) should I invest in ETF or mutual funds ? As I heard ETF are easy to transfer between brokerages. Buying vanguard mutual funds might be difficult to transfer and also vanguard seems like not a friendly broker to people living outside US.
Vanguard may be sort-of okay about letting you keep an account after leaving the US, though whether they do, and what they let you do with it, may well depend on the country you move to and what you hold with them.

I left the US for the UK, and still have my taxable account, 401k, and IRAs all with them and (so far) have encountered few restrictions. They won't allow me to use ETFs, only mutual funds, and sometimes insist on real paperwork by snail-mail where others can do things with a click of a button, but for me it's okay at the moment. That may or may not be reflected for Singapore, though. Hard to say. US brokers sometimes appear to implement entirely random rules when it comes to non-resident accounts.
athrowman66 wrote:
Mon Jan 14, 2019 3:21 pm
2) can I transfer the ETFs in my US broker account to a non US broker account without triggering a sale event ? Since Singapore don't have capital gain tax , I wanted to utilize it. I can sell year after I leave USA, so I will be considered a non resident and pay no capital gain ? If I have green card then I surrender my GC and sell share to avoid capital gain ? I know there are lot of ifs and buts in tax code so I'm not sure that my understanding is correct.
You probably can transfer ETF holdings without triggering a sale -- it seems unlikely you could do the same with mutual funds -- but you will definitely want to rid yourself of any and all US domiciled ETFs and mutual funds and buy non-US domiciled equivalents as soon as you can after leaving the US and surrendering your green card. Singapore has no tax treaties of any kind with the US, and if you hold US domiciled ETFs you will overpay US tax at a flat 30% rate on every dividend, and also run the risk of US estate taxes at up to 40% on any holding above just $60k.

Also, note that 401ks and IRAs are 'US situated' assets and so at risk from US estate taxes no matter what they contain. You mention that you will probably avoid using these during your time in the US, and that might not be a bad plan all round, with the possible exception of capturing any employer match in a 401k. If the match is sufficient enough it can overcome the 10% tax penalty (plus perhaps any state penalty on top) for early withdrawals.

Under current law you can probably leave the US with investments holding a built-in gain, surrender the green card, and then sell the investments while avoiding capital gains tax. You do however have to watch carefully for the US's appalling 'exit tax'. If you meet the asset or tax thresholds for this, you can find yourself being taxed both punitively and immediately on both unrecognised capital gains and un-withdrawn pension funds. This is seriously unfunny. The easiest way to avoid this is to make sure to leave the US before you have held a green card for more than the time limit for the 'exit tax' (eight years, but can be as little as six years and two days because of the stupid way the IRS counts 'years').

You can find more about US tax traps for US non-residents and for people who plan to be US non-residents in future in this wiki page:
Non-US investor's guide to navigating US tax traps - Bogleheads

And more about non-US residency in general here:
Outline of Non-US domiciles - Bogleheads
athrowman66 wrote:
Mon Jan 14, 2019 3:21 pm
3) how about bonds ? Since bond pays interests, taxed at regular income.
The US does not tax interest income paid to non-resident aliens. However, if these bonds are at risk from US estate taxes then once you leave you would still want to ditch them and replace with something fully insulated from the US.

Topic Author
athrowman66
Posts: 7
Joined: Fri Jan 11, 2019 12:57 pm

Re: Plan for 3 fund portfolio when I leave USA [ Singapore Citizen ]

Post by athrowman66 » Tue Jan 15, 2019 5:17 pm

Thanks a ton for your advice and the links. It's very helpful.
TedSwippet wrote:
Mon Jan 14, 2019 5:03 pm

You probably can transfer ETF holdings without triggering a sale -- it seems unlikely you could do the same with mutual funds -- but you will definitely want to rid yourself of any and all US domiciled ETFs and mutual funds and buy non-US domiciled equivalents as soon as you can after leaving the US and surrendering your green card. Singapore has no tax treaties of any kind with the US, and if you hold US domiciled ETFs you will overpay US tax at a flat 30% rate on every dividend, and also run the risk of US estate taxes at up to 40% on any holding above just $60k.
To clarify, flat 30% tax on every dividend means tax is only on the dividend and it's not on the capital gain of the ETF itself right. Example VTI yield is at 2.13% and average return is say 6% . You are taxed at 30% for the yeild alone right (2.13%). Is my understanding correct ? Reason I am asking in order to pass substantial presence test I might need to wait close to a year in some cases to sell and buy non US domiciled ETF.
TedSwippet wrote:
Mon Jan 14, 2019 5:03 pm

Also, note that 401ks and IRAs are 'US situated' assets and so at risk from US estate taxes no matter what they contain. You mention that you will probably avoid using these during your time in the US, and that might not be a bad plan all round, with the possible exception of capturing any employer match in a 401k If the match is sufficient enough it can overcome the 10% tax penalty (plus perhaps any state penalty on top) for early withdrawals.
What do you mean match is sufficient enough it can overcome 10% penalty ? Also I'm guessing I need to pay fed tax (normal tax brackets) + penalty if I withdraw before 59 and after I leave US and became non resident. .

TedSwippet
Posts: 2016
Joined: Mon Jun 04, 2007 4:19 pm

Re: Plan for 3 fund portfolio when I leave USA [ Singapore Citizen ]

Post by TedSwippet » Tue Jan 15, 2019 6:03 pm

athrowman66 wrote:
Tue Jan 15, 2019 5:17 pm
To clarify, flat 30% tax on every dividend means tax is only on the dividend and it's not on the capital gain of the ETF itself right. Example VTI yield is at 2.13% and average return is say 6% . You are taxed at 30% for the yeild alone right (2.13%). Is my understanding correct ?
Right. The US standard rates for non-treaty non-resident aliens are 30% on dividends, nothing on interest and capital gains.
TedSwippet wrote:
Mon Jan 14, 2019 5:03 pm
What do you mean match is sufficient enough it can overcome 10% penalty ? Also I'm guessing I need to pay fed tax (normal tax brackets) + penalty if I withdraw before 59 and after I leave US and became non resident.
What I meant was that if you cash in an entire 401k before you leave, your tax bill would come to 10% plus normal tax on the entire balance. That could push you up a tax bracket or two, and along with the 10% penalty give a pretty unpalatable tax rate, except that if you get a generous employer match on your 401k contributions you may well still come out ahead of the game here. Careful maths needed, then. If your employer offers a Roth 401k that might also be worth investigating. If you can meet the holding time requirements, a Roth can in some cases be easier to collapse to cash and take with you when you go. (Also much less exposed to the US's appalling 'exit tax'.)

If you withdraw from a US pension after you leave and become non-resident, the tax picture is decidedly murky. IRS documents suggest that with no treaty, your contributions are taxed at normal US graduated rates and any and all gains in the pension at a 30% standard non-resident alien rate (though how exactly you separate out contributions from gains in a 401k may be hard to impossible to uncover if it is composed of multiple rolled-over 401ks, IRAs, and so on).

In any case, no let-out on the 10% early withdrawal penalty, no matter whether you collapse the 401k before or after you leave.

Topic Author
athrowman66
Posts: 7
Joined: Fri Jan 11, 2019 12:57 pm

Re: Plan for 3 fund portfolio when I leave USA [ Singapore Citizen ]

Post by athrowman66 » Tue Jan 15, 2019 10:32 pm

TedSwippet wrote:
Tue Jan 15, 2019 6:03 pm

If you withdraw from a US pension after you leave and become non-resident, the tax picture is decidedly murky. IRS documents suggest that with no treaty, your contributions are taxed at normal US graduated rates and any and all gains in the pension at a 30% standard non-resident alien rate (though how exactly you separate out contributions from gains in a 401k may be hard to impossible to uncover if it is composed of multiple rolled-over 401ks, IRAs, and so on).
Is this 30% withholding rate or actual tax rate for non-resident alien ? Because say, I withdraw less than $39000/yr I should be under 12% tax rate based on tax brackets. Can I file tax refund using 1040NR to claim the extra withholding (30%-12%) ?

TedSwippet
Posts: 2016
Joined: Mon Jun 04, 2007 4:19 pm

Re: Plan for 3 fund portfolio when I leave USA [ Singapore Citizen ]

Post by TedSwippet » Wed Jan 16, 2019 3:38 am

athrowman66 wrote:
Tue Jan 15, 2019 10:32 pm
Is this 30% withholding rate or actual tax rate for non-resident alien ? Because say, I withdraw less than $39000/yr I should be under 12% tax rate based on tax brackets. Can I file tax refund using 1040NR to claim the extra withholding (30%-12%) ?
30% is the actual rate. The broker will withhold it on all dividends from US stocks and US domiciled ETFs, and all 401k and IRA withdrawals, once you file a form W-8BEN with them.

For dividends, filing a 1040NR won't get you anything back because this is not 'effectively connected income'. For 401ks and IRAs, it looks like you have to separate the withdrawal into two parts, contribution and gains, and apply ECI rules to the first and FDAP to the second. (I don't really have any idea how you could accomplish that in practice, since the records to do it may no longer exist -- I certainly could not do this with my 401k and IRA, but because I have coverage from the US/UK treaty this does not come up for me.)

From https://www.irs.gov/businesses/taxation ... t-aliens-1
Nonresident aliens are generally subject to U.S. income tax only on their U.S. source income. They are subject to two different tax rates, one for effectively connected income, and one for fixed or determinable, annual, or periodic (FDAP) income.

Effectively connected income (ECI) is earned in the U.S. from the operation of a business in the U.S. or is personal service income earned in the U.S. (such as wages or self-employment income). It is taxed for a nonresident at the same graduated rates as for a U.S. person.

FDAP income is passive income such as interest, dividends, rents or royalties. This income is taxed at a flat 30% rate, unless a tax treaty specifies a lower rate.

Topic Author
athrowman66
Posts: 7
Joined: Fri Jan 11, 2019 12:57 pm

Re: Plan for 3 fund portfolio when I leave USA [ Singapore Citizen ]

Post by athrowman66 » Wed Jan 16, 2019 12:21 pm

TedSwippet wrote:
Wed Jan 16, 2019 3:38 am


For dividends, filing a 1040NR won't get you anything back because this is not 'effectively connected income'. For 401ks and IRAs, it looks like you have to separate the withdrawal into two parts, contribution and gains, and apply ECI rules to the first and FDAP to the second. (I don't really have any idea how you could accomplish that in practice, since the records to do it may no longer exist -- I certainly could not do this with my 401k and IRA, but because I have coverage from the US/UK treaty this does not come up for me.)

From https://www.irs.gov/businesses/taxation ... t-aliens-1
Nonresident aliens are generally subject to U.S. income tax only on their U.S. source income. They are subject to two different tax rates, one for effectively connected income, and one for fixed or determinable, annual, or periodic (FDAP) income.

Effectively connected income (ECI) is earned in the U.S. from the operation of a business in the U.S. or is personal service income earned in the U.S. (such as wages or self-employment income). It is taxed for a nonresident at the same graduated rates as for a U.S. person.

FDAP income is passive income such as interest, dividends, rents or royalties. This income is taxed at a flat 30% rate, unless a tax treaty specifies a lower rate.
Wouldnt keeping records of past W2 and 401k not sufficient to separate ECI(my contribution+ employer contribution) and FDAP(gain, interest, dividend) for taxing(30%) and get refund ? Curently I'm at 24% fed +6% state tax withholding bracket. Probably will reach 30% fed bracket in a year or two. So not sure putting Roth 401k will save me anything .

TedSwippet
Posts: 2016
Joined: Mon Jun 04, 2007 4:19 pm

Re: Plan for 3 fund portfolio when I leave USA [ Singapore Citizen ]

Post by TedSwippet » Wed Jan 16, 2019 1:00 pm

athrowman66 wrote:
Wed Jan 16, 2019 12:21 pm
Wouldnt keeping records of past W2 and 401k not sufficient to separate ECI(my contribution+ employer contribution) and FDAP(gain, interest, dividend) for taxing(30%) and get refund ?
Probably. Personally I lack those, but if you have them, keep them. I built up my 401k through two employers, three 401k providers and an intermediate IRA rollover, between 1997 and 2008. The records for all of those contributions are long-gone, since at the time I had no reason to suspect I might need to keep them, and the 401k providers didn't keep them either (or if they did, their records did not survive the rollover and transfers). By now, my retirement savings will be more gain than contribution, too. Shrug. As long as the US/UK treaty holds, I am fortunate that I don't have to deal with that.
athrowman66 wrote:
Wed Jan 16, 2019 12:21 pm
Curently I'm at 24% fed +6% state tax withholding bracket. Probably will reach 30% fed bracket in a year or two. So not sure putting Roth 401k will save me anything.
If your employer offers a Roth 401k with an employer match, it can come out that way. Granted, not many do. But if yours does then you can compare your projected tax rates to see whether or not you come out ahead. While you end up paying tax on both the contributions (before contributing) and the earnings (on withdrawal), you will only pay the 10% early withdrawal penalty on the earnings, not the contributions. For early withdrawal on traditional 401ks and IRAs the 10% penalty applies to the entire withdrawal balance, so both contributions and earnings.

The Roth withdrawal rules are far from clear, but this table summarises them well.

In general though, you're right that if you plan a definite departure from the US then avoiding retirement savings plans (except perhaps to the extent of capturing an employer match) is probably a good idea. The penalties surrounding cashing them in, the problems with US tax later on if you do not, the threat of confiscatory US estate taxes on even very modest sums, and the nasty treatment that 401ks and IRAs get from the US 'exit tax' all point towards steering clear of them.

Topic Author
athrowman66
Posts: 7
Joined: Fri Jan 11, 2019 12:57 pm

Re: Plan for 3 fund portfolio when I leave USA [ Singapore Citizen ]

Post by athrowman66 » Wed Jan 16, 2019 6:39 pm

TedSwippet wrote:
Wed Jan 16, 2019 1:00 pm
If your employer offers a Roth 401k with an employer match, you should. Granted, not many do. But if yours does then you can use that to come out ahead. While you end up paying tax on both the contributions (before contributing) and the earnings (on withdrawal), you will only pay the 10% early withdrawal penalty on the earnings, not the contributions. For early withdrawal on traditional 401ks and IRAs the 10% penalty applies to the entire withdrawal balance, so both contributions and earnings.
That's a great point. My employer do offer Roth 401k. For Roth 401k, at least I can take out all my contributions from 401k when I leave US without any taxes. Understand that gain is going to be taxed at 30% (non-resident) under FDAP. Sorry I been asking lot of questions but you are really helpful. Thanks. What about the employer contributions to Roth 401k? Wouldnt it be covered under ECI (lesser tax bracket possibly) since it's all contributed before leaving US ?

TedSwippet
Posts: 2016
Joined: Mon Jun 04, 2007 4:19 pm

Re: Plan for 3 fund portfolio when I leave USA [ Singapore Citizen ]

Post by TedSwippet » Thu Jan 17, 2019 3:58 am

athrowman66 wrote:
Wed Jan 16, 2019 6:39 pm
What about the employer contributions to Roth 401k? Wouldnt it be covered under ECI (lesser tax bracket possibly) since it's all contributed before leaving US ?
Presumably yes, since it will actually be in a traditional 401k. Employer match cannot go into a Roth 401k, but has to be held alongside in a traditional 401k. So you don't get to avoid the 10% early withdrawal on that part. You still avoid it on your own contributions, though.

And again, beware of all of the fiddly rules, time limits and so on, around both Roth and traditional retirement account withdrawals. US taxes for non-resident aliens are a minefield.

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