HWZ Forums

Login Register FAQ Mark Forums Read

*Official* BBCWatcher club

Like Tree137Likes
Reply
 
LinkBack Thread Tools
Old 30-07-2019, 08:41 AM   #1351
Member
 
Join Date: Oct 2018
Posts: 180
Hi BBC,

Do you have a view on investing in Muni's? (Likely with ETFs so there is some diversification?)

I'm not sure if they are like treasuries and there is no withholding tax for foreigners, but if they are, then the higher return seems attractive.

TIA.
See page 12 —

https://www.belegger.nl/Forum/Upload/2014/7530608.pdf
celtosaxon is offline   Reply With Quote
Old 30-07-2019, 07:11 PM   #1352
Supremacy Member
 
Join Date: Jun 2010
Posts: 9,686
Will be moving with my spouse to New York early next year.
Both of us will be under the H1B1 visa, does it make sense to elect for this if we are planning to stay in the US for a maximum of 2-3 years? (Hope to have kids in Singapore). My employer will match 50% the contribution up to 5%.
Our projected annual incomes are $200k for myself and $130k for my spouse.
I assume "this" refers to 401(k) plans and potentially other U.S. tax advantaged accounts.

Your employer is offering an instant 50% return on your investment on the first 5% of your salary. That's equivalent to a 2.5% salary increment, free. All those dollars then go into a highly U.S. tax advantaged account -- the "401(k)" -- typically with access to a broad range of low cost, well diversified investment vehicles. Check that of course, but most 401(k) plans are quite good in their fund choices. You're then able to withdraw funds as early as age 59 1/2 (rarely a bit earlier) without any tax penalty and indeed with tax advantages....

Of course that's a damn good deal! You should take all of that deal. Your spouse, too, if he/she gets a comparable deal.

If you can afford to exceed the deal -- to max out your 401(k) contributions -- you should. Tax savings are great, of course. I suggest choosing the Roth 401(k) variant if offered, which means you pay U.S. tax now then contribute from after-tax income.(*) Then qualified withdrawals in the future are U.S. tax free. Also if you can afford it, Roth IRAs. Then, if you think one or more children will attend a U.S. university -- or at least a non-U.S. university eligible to accept U.S. government student loan funds -- then you could take a look at contributing to a 529 education savings plan. New York's direct 529 plan is quite excellent, and it potentially offers some in-state income tax savings.

It looks like your income(s) will be above the limit for making a direct IRA contribution, but you're allowed to make what's called a non-deductible Traditional IRA contribution, park those dollars in a short-term U.S. T-Bill (for example), then convert all those dollars to a Roth IRA. This is called a "Backdoor Roth IRA." Yes, it's ridiculous, but it's allowed and well explained many places.

Spouse too -- his/her own 401(k) and IRA. I believe the 529 plan can be on a household basis if you do that.

Do you have a view on investing in Muni's? (Likely with ETFs so there is some diversification?)

I'm not sure if they are like treasuries and there is no withholding tax for foreigners, but if they are, then the higher return seems attractive.
U.S. domiciled municipal bond funds (mutual funds or exchange traded) are probably OK for non-U.S. persons as long as you don't mind the U.S. estate tax implications. If you're a "big whale" then direct holding of individual municipal bonds is better from an estate tax point of view (if you care), and as long as you're careful to control risk and diversify well.

That said, you can probably do better with high quality individual corporate bonds, again assuming you're a "big whale." The corporate bond interest and (if applicable) original issue discount and capital gains are U.S. taxable for U.S. persons, and so the corporate bond yields should reflect that. The tax savings with U.S. munis are really lost on you as a non-U.S. person, and you effectively pay for that loss in the form of lower yields even with equal market consensus assessments of risk. There are also Irish domiciled investment grade corporate bond funds available to avoid the estate tax issues (again, if you care).

(*) OK, this gets a little interesting as a New York City resident with state and city income tax. But I'd still lean toward the Roth variant for the "typical" Singaporean. Either way you'll do fine, but I think the Roth will end up a little better, especially if you're able to max out annual limits.

Last edited by BBCWatcher; 30-07-2019 at 07:36 PM..
BBCWatcher is offline   Reply With Quote
Old 31-07-2019, 09:06 AM   #1353
Member
 
Join Date: Oct 2018
Posts: 180
BBC, correct me if I’m wrong, but one potential tax planning opportunity for a temporary US tax resident is to contribute to traditional tax deductible accounts first (enjoy the tax benefit), and on the year you go back if you only work in the US for a partial year (lower US source income) you might be able to do a conversion to Roth at a more favorable tax rate. Once in a Roth, it can be withdrawn in full 5 years after conversion free of penalty or taxes.

If you stay in traditional accounts and are no longer resident, I believe the flat 30% tax rate would apply at the time you withdraw it, which may be higher than what you saved when you took the deduction at contribution. So I believe converting before you leave is a very important consideration.
celtosaxon is offline   Reply With Quote
Old 31-07-2019, 12:01 PM   #1354
Supremacy Member
 
Join Date: Jun 2010
Posts: 9,686
BBC, correct me if Iím wrong, but one potential tax planning opportunity for a temporary US tax resident is to contribute to traditional tax deductible accounts first (enjoy the tax benefit), and on the year you go back if you only work in the US for a partial year (lower US source income) you might be able to do a conversion to Roth at a more favorable tax rate. Once in a Roth, it can be withdrawn in full 5 years after conversion free of penalty or taxes.
That could work, but it's usually not the smart play if you're willing and able to max out annual contribution limits. If you're hitting the annual contribution limits then the Roth variant works out better because it effectively allows you to stuff more money into the account.

If you cannot afford to hit the annual contribution limits, sure, take a look at the approach you describe.

If you stay in traditional accounts and are no longer resident, I believe the flat 30% tax rate would apply at the time you withdraw it, which may be higher than what you saved when you took the deduction at contribution. So I believe converting before you leave is a very important consideration.
Yes, I agree. You probably don't want to stay in the Traditional variant even if that's what you choose initially.

Some employers don't offer Roth 401(k)s, so the decision is made for you. But you can then convert a Traditional 401(k) to a Roth IRA in a "favorable" tax year and upon separation, as you point out.
BBCWatcher is offline   Reply With Quote
Old 31-07-2019, 06:04 PM   #1355
Member
 
Join Date: Nov 2014
Posts: 166
IJust bear in mind that you still want your Retirement Account to be fully funded on your 55th birthday, and preferably not predominantly or fully from your Special Account. Cash works when the time comes, of course.
HI BBC,

why "preferably not predominantly or fully from your Special Account"? I thought that would not make any difference?

Thank you!
EagleToThesSky is offline   Reply With Quote
Old 31-07-2019, 06:16 PM   #1356
Member
 
Join Date: Nov 2014
Posts: 166
Hang on a minute.... As literally written the tax rules seem to suggest you can do what you describe and qualify for tax relief. However, the tax relief isnít worth as much as the 4%/year interest, in my view. So I think what you might want to do is to leave a $7,000 gap below the FRS with your shields in place, then make your cash top up of $7,000 for tax relief, then lower your shields. I wouldnít stay in the CPF Investment Scheme for 10+ years on the SA side, although you might consider staying invested over on the OA side.

Interesting idea ó worth trying once at age 55, I think. It just might work since for some strange reason the published tax rules donít exclude CPFIS(SA) dollars from RA top ups. Note that you cannot get tax relief for topping up your own SA in the same tax year. Iím assuming your SA is already at or above the FRS just before your 55th birthday, and then youíre trying to collect $7,000 of tax relief via a RA top up (only) for the year when you turn 55.
This shielding is interesting and useful if it works, assuming the shield is very short-term (could be less than a week), just for the shielding purpose.
- You got to keep a lot of balance in your OA and SA, which you can withdraw anytime after 55 (is the age correct?) and at the same time enjoy a very decent interest rate. Like you said before, it is a high-interest savings account
- for someone with enough cash, they can still top up to ERS and enjoy the CPF life to the extend possible
- for someone with high income after 55, they can maximize the tax relief

Hope this still works by the time I reach 55.
EagleToThesSky is offline   Reply With Quote
Old 31-07-2019, 06:46 PM   #1357
Junior Member
 
Join Date: Jul 2019
Posts: 12
BBC, correct me if Iím wrong, but one potential tax planning opportunity for a temporary US tax resident is to contribute to traditional tax deductible accounts first (enjoy the tax benefit), and on the year you go back if you only work in the US for a partial year (lower US source income) you might be able to do a conversion to Roth at a more favorable tax rate. Once in a Roth, it can be withdrawn in full 5 years after conversion free of penalty or taxes.

If you stay in traditional accounts and are no longer resident, I believe the flat 30% tax rate would apply at the time you withdraw it, which may be higher than what you saved when you took the deduction at contribution. So I believe converting before you leave is a very important consideration.
That could work, but it's usually not the smart play if you're willing and able to max out annual contribution limits. If you're hitting the annual contribution limits then the Roth variant works out better because it effectively allows you to stuff more money into the account.

If you cannot afford to hit the annual contribution limits, sure, take a look at the approach you describe.


Yes, I agree. You probably don't want to stay in the Traditional variant even if that's what you choose initially.

Some employers don't offer Roth 401(k)s, so the decision is made for you. But you can then convert a Traditional 401(k) to a Roth IRA in a "favorable" tax year and upon separation, as you point out.
Thanks folks.

Presumably the "right" strategy for me and my spouse is to contribute to the traditional 401k offered by our respective companies as much as it is affordable for us for the upfront tax deduction and to also contribute to our 529 college savings programme for the savings and expense that immediately via a part-time masters/mba while working and prior to our return to Singapore, to convert of 401k to a Roth IRA.
jpcd89 is online now   Reply With Quote
Old 31-07-2019, 06:48 PM   #1358
Supremacy Member
 
Join Date: Jun 2010
Posts: 9,686
why "preferably not predominantly or fully from your Special Account"? I thought that would not make any difference?
It's better if your Retirement Account (formed on your 55th birthday) is predominantly and fully funded from your Ordinary Account dollars. That's because your Special Account earns a higher interest rate. That's the whole point of Special Account "shielding," really.

I don't think it's a good idea to underfund your Retirement Account in order to make $7,000/year deposits for tax relief. The tax relief is nice, and (assuming it works) I see the value in getting one episode of tax relief while you have your SA/OA shields in place. But the tax relief is not so wonderful that you'd forego the attractive 4%/year that RA earns -- at least, I don't think that makes much sense.
BBCWatcher is offline   Reply With Quote
Old 31-07-2019, 07:03 PM   #1359
Supremacy Member
 
Join Date: Jun 2010
Posts: 9,686
Presumably the "right" strategy for me and my spouse is to contribute to the traditional 401k offered by our respective companies as much as it is affordable for us for the upfront tax deduction and to also contribute to our 529 college savings programme for the savings and expense that immediately via a part-time masters/mba while working and prior to our return to Singapore, to convert of 401k to a Roth IRA.
If you're not going to be maxing out your 401(k) -- because you cannot afford to -- yes, that makes sense. Note that you and your spouse are still eligible for "backdoor" Roth IRAs, so the applicable maximum here is 401(k)+IRA. If you're anywhere below that total maximum contribution limit (due to affordability concerns), then the Traditional 401(k) is fine to start.

The New York 529 Direct plan isn't too exciting when the educational spending is immediate or near immediate. In that case you'd have to invest the funds in the Vanguard Short Term Reserves Account (the most conservative fund within that 529 plan), but the interest paid is miniscule, and thus the tax savings are also miniscule. It's really not worth doing in that "cash in, cash soon out" scenario. You're restricting those dollars too much for too little reward. A 529 plan is really for medium-term (or longer) time horizons, to give that money time to grow.

However, the I Bond, a type of U.S. Savings Bond, looks pretty good for these purposes. You can purchase up to US$10,000 per individual per year (so up to US$20,000 between you and your spouse), they're U.S. tax deferred while held, and if you cash them in and use the proceeds for qualified educational expenses then the interest is U.S. tax free. Also, I think they're U.S. tax free when you become an ex-U.S. person, and they're not restricted to educational spending -- no tax penalty if you need the cash for other purposes. And once you have a U.S. Social Security number and open a Treasury Direct account to buy them, I think you're able to buy savings bonds and Treasuries in the future, too, even if you're an ex-U.S. person. If you wish.

The only catch is that you have to hold them for at least one year (actually more like 11.1 months since you can buy them about 3 days before the end of the month and that counts as if you bought on the first of the month), and if you redeem them before 5 years you lose 3 months of interest. But that's still a good deal, and they'll track the U.S. inflation rate -- that's what the "I" means. They're also the safest place you can park U.S. dollars since they're U.S. federal government general obligation bonds. And it's quite possible New York State and New York City won't tax them either if you use the proceeds for qualified educational expenses -- or even that they won't tax them regardless, because they're federal debt. (I'd have to double check that.)

Last edited by BBCWatcher; 31-07-2019 at 07:06 PM..
BBCWatcher is offline   Reply With Quote
Old 31-07-2019, 09:04 PM   #1360
Supremacy Member
 
Join Date: Jun 2010
Posts: 9,686
I did some more checking on U.S. savings bonds. The interest is indeed state and local income tax exempt, for everyone. That's pretty attractive as a New York City taxpayer (state and municipal).

Unfortunately, you and your spouse aren't going to qualify for the educational tax deduction since your income is too high. So the interest is U.S. federal income tax deferred. Refer to IRS Form 8815 and its instructions for details.

Once you cease being a U.S. person the interest on U.S. Savings Bonds flips to non-taxable, and they are also excluded from U.S. estate tax consideration. But presumably you're only going to use them (if you use them) as a relatively short-term way to save up for education costs that are payable at least one year after purchase. And you should compare them with ordinary Certificates of Deposit (CDs) which can serve a similar purpose. There's a bank in Manhattan, Bank of Baroda, that's currently offering 2.75% on a 12 month CD. It's FDIC protected, and the minimum placement is a very reasonable US$1,000. The CD interest is city, state, and federal taxable (while you're a U.S. person living in New York City), but even so that would handily beat the current I Bond on a one year hold.
Shiny Things likes this.
BBCWatcher is offline   Reply With Quote
Old 31-07-2019, 09:08 PM   #1361
Junior Member
 
sgbsgb's Avatar
 
Join Date: Dec 2014
Posts: 49
Hi BBC, what is your opinion if i were to switch from iwda to the new vanguard fund vwra?
sgbsgb is offline   Reply With Quote
Old 31-07-2019, 09:14 PM   #1362
Supremacy Member
 
Join Date: Jun 2010
Posts: 9,686
Hi BBC, what is your opinion if i were to switch from iwda to the new vanguard fund vwra?
I don't think you need to switch existing holdings, but on a going forward basis VWDA is just fine. It adds a bit of emerging markets exposure not found in IWDA. VWDA's expense ratio is slightly higher, but it's still quite reasonable.
BBCWatcher is offline   Reply With Quote
Old 31-07-2019, 09:35 PM   #1363
Junior Member
 
sgbsgb's Avatar
 
Join Date: Dec 2014
Posts: 49
I don't think you need to switch existing holdings, but on a going forward basis VWDA is just fine. It adds a bit of emerging markets exposure not found in IWDA. VWDA's expense ratio is slightly higher, but it's still quite reasonable.
Thank you for your opinion.
sgbsgb is offline   Reply With Quote
Old 01-08-2019, 08:32 AM   #1364
Member
 
Join Date: Oct 2018
Posts: 180
BBC, how would you invest a sizable lump sum payout from your employer that represents 30% of your total NIA (the other 70% is fully in equities). Also note that you are a US Person in your late 40’s who has reached the limit of what can be excluded, deducted, exempted and credited on your US taxes.

Appreciate your advice.
celtosaxon is offline   Reply With Quote
Old 01-08-2019, 09:09 AM   #1365
Member
 
Join Date: Nov 2014
Posts: 166
It's better if your Retirement Account (formed on your 55th birthday) is predominantly and fully funded from your Ordinary Account dollars. That's because your Special Account earns a higher interest rate. That's the whole point of Special Account "shielding," really.

I don't think it's a good idea to underfund your Retirement Account in order to make $7,000/year deposits for tax relief. The tax relief is nice, and (assuming it works) I see the value in getting one episode of tax relief while you have your SA/OA shields in place. But the tax relief is not so wonderful that you'd forego the attractive 4%/year that RA earns -- at least, I don't think that makes much sense.
Hi BBC,

Thank you.

- fully aligned on the SA shielding
- on the tax relief vs 4% interest, I think it depends on the tax rate applicable to the person. If the tax rate is much more than 4%, it might be profitable. Also, I think it can stretch to more than just one year. Of course, the more years one is considering, the higher the tax rate needs to be, as the 7k topped up in later years suffer opportunity costs (the 4% interest) longer.

Let me know if my understanding is not accurate. Thank you.
EagleToThesSky is offline   Reply With Quote
Reply
Important Forum Advisory Note
This forum is moderated by volunteer moderators who will react only to members' feedback on posts. Moderators are not employees or representatives of HWZ. Forum members and moderators are responsible for their own posts.

Please refer to our Terms of Service for more information.


Thread Tools

Posting Rules

Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are On