Over 40 million people living in the US today are immigrants and according to USCIS, about 580,000 are coming in on an H1B visa. These people are constantly faced with questions about various investment options one of which is: can H1B visa holders invest in mutual funds?
People living in the United States with an H1B visa can invest in mutual funds which is a form of investment where the money collected from investors is invested in various securities like stocks, bonds, and other assets.
However, there are various considerations, constraints, rules, and regulations that one needs to abide by before investing in mutual funds while on an H1B visa in order not to breach one’s visa restriction. In the course of this article, we will provide you with valuable information you need regarding investment in mutual funds while on an H1B visa. Let’s begin!
Legal Regulations and Rules to Consider Before Investing in Mutual Funds While on H1B Visa
Every year, millions of Americans, including those on an H1B visa permit, save for their retirement with various mediums like mutual funds. The federal government is in charge of regulating all security markets via the US Securities and Exchange Commission (SEC), mutual funds included.
According to Investopedia, a mutual fund is a form of investment vehicle which offers shares to the public for investment. Mutual funds shares come in a stock fund, bond fund, market mix, and other categories.
For those living on an H1B visa permit looking to invest in mutual funds. As stated at the beginning of this article, you are allowed to. It does not violate your visa restriction. However, before you do, note that there are no direct rules, regulations, and limitations involved in the investment of mutual funds. Still, there are some legal information that you should be aware of. These include:
Before you invest in any investment scheme or packages in the United States while on an H1B visa, always check with your immigration advisor or attorney to ascertain if it would be in violation of your visa restriction. It is essential to note that you are not allowed to actively take part in most business opportunities like an average American with a green card.
The mutual fund regulation which dates back decades is one regulation that you need to be aware of. This regulation was specified in the Security Exchange Act of 1934 (SEA) which created the SEC, giving it command over the mutual fund industry.
Also, the Securities Act of 1933 states that investors are to receive specific information about securities that are offered for public sale.
Based on findings reported by Investopedia, the minimum investment amount for those on an H1B visa needed to invest in mutual funds ranges typically from $1,000 to $3,000. However, this amount can be more significant when it comes to institutional investor class funds. Also, some mutual funds companies allow investors, H1B visa holders included, to buy in without any minimum – meaning that with $10, $50, or $100, you can invest.
Not all mutual funds pay interest on investment. It depends on the assets held by the user in their fund portfolio. Only mutual funds like bond funds, money market funds, and interest-bearing funds pay interest to H1B visa holders because of their coupon-bearing debt security that they invest.
Tax Liability of Mutual Fund Investments for H1B Visa Holders
In the United States, the payment of tax is arguably held highly more than anywhere in the world. Even those who live in the United States with several immigration visas like those with an H1B visa are not exempted. However, investing is a good way to generate income, and your earnings are subject to taxation just like every other type of income. But with mutual funds, taxation can be quite a burden in some cases.
The income you are liable to receive from your mutual fund’s investment can be taxed as ordinary income or capital gains depending on how long your fund has held their assets, unlike when you invest in individual stock where your taxation based on your capital gain is not affected by how long you have held shares in a mutual fund. It is instead based on the time frame the mutual fund holds the assets that are in its portfolio.
In mutual funds, the distribution of dividends is usually taxed at the ordinary rate of income tax, with the exception of when they are considered to be dividends. Your income and short term capital gains are also taxed at the usual ordinary income for the tax bracket of an investor. Whereas, long term capital gains that are shared by mutual funds are taxed the same way as long term capital gains for individual bonds and stock.
The tax rate for capital gains is always lower than that of an income tax rate; however, the difference in their rates varies sometimes. If you make less than $78,750, you do not need to pay tax on your capital gain. But those who make up to $433,550 are mandated to pay a 15% tax on capital gains, and those you make in excess of that figure shall pay a 20% tax on their capital gains.
For instance, assuming you make exactly $80,000 and you receive $1,000 as your income from an investment after the sale of the stock. If you have been holding that investment for a year or more, you are mandated to pay $150 as your tax, which is equivalent to 15%. But if it’s a short-term gain, you shall pay the amount of $280 as your tax.
It is important to note that some international funds are not taxed due to the foreign tax credit. And in order to prevent double taxing, the IRS permits a credit for foreign taxes already paid.
Alternative Safe Investment Options for H1B Visa Holders
As an H1B visa holder living in the United States, in the absence of mutual funds investment, there are several other safe investment options that, to some is better than mutual funds, and to others, is just a common retirement investment saving plan. We’ll be showing some of the safe options of investment for H1B visa holders below:
401k
The 401k investment plan is a type of investment package offered by H1B visa sponsors. It is one of the most effective and easiest ways to save your money ahead of your retirement. As long as you are in a tax bracket of 10% and above, you are eligible to invest in the 401k. One of the main advantages of the 401k savings account is that you can save a portion of your salary directly to the account automatically.
Traditional IRA
The traditional Individual Retirement Savings account (IRA) is to many people, the most popular way to save for retirement if you are living in the United States with an H1B visa. In this type of saving, participants make savings deposits to an account, and then it grows tax-free. You only pay tax when you wish to make a withdrawal from your total savings upon retirement. However, there are certain withdrawal conditions and rules.
One of the main advantages of the traditional IRA is that you have a tax break on your contributions, a flexible investment choice, and a tax-deferred growth.
SEP IRA
SEP-IRA, otherwise known as Simplified Employee Pension Individual Retirement Account. This type of account has a common feature with the Roth IRA account; it allows your money in the account to grow without taxes until you decide to make a withdrawal. Some of the main benefits of the SEP-IRA account are that you have a bigger saving limit than that of the traditional IRA account, tax-deferred growth, and a totally complete flexible choice.
Roth IRA
The Roth IRA account is also another investment option open to people living in the United States with an H1B visa. It is different from the traditional IRA account in that your savings grows in the account, tax-free, and also, you will be able to withdraw your money when you retire without paying tax at the detriment of continuing to save regularly after tax. The main benefit of this savings option is that it has flexible use of your savings for expenses such as college fees. It also provides the benefit of a tax-free withdrawal when you retire and a no-tax payment upon withdrawal.
401k Solo
This is another saving option where you have to win a business or a temporary side job before you can take part.
Health Savings Account
This savings account is commonly known as HSA. This account has various uses which are not only for health-related purposes, but its main purpose is to provide Americans with an adequate health plan. The plan gives rewards to people who are able to hold on to some of their money in the account until their retirement age. Eligibility for this saving plan starts at a minimum of $1,500 – $7,000. However, this amount varies sometimes.
Other investment options open to H1B visa holders in the US include angel investing, real estate, and day trading. Choose one today and grow your wealth!