By Dr. Rajesh Ramanathan, WCI Columnist
Non-US citizen physicians make up a quarter of the physician workforce and the graduating medical education (GME) pool in the United States. International medical graduates (IMGs) include non-US citizen foreign medical graduates who complete US residency programs and US citizens who return to the US after completing medical school in the Caribbean, Europe, or elsewhere. This post is primarily directed towards those without US citizenship or permanent residency, and those that anticipate retiring outside of the United States.
In this post, I will provide a summary of:
- Employment visas and tax status
- Types of tax-advantaged accounts
- Strategies to manage these accounts for the non-citizen leaving the United States
As an IMG, I didn’t know during residency if I would choose to, or be able to, remain in the United States long-term. As a result, I eschewed tax-advantaged retirement accounts and contributed instead to high-yield savings accounts and taxable accounts. Given that my training period was long (9 years of postgraduate training), you'll soon see why that was likely a mistake.
Employment Visas and Immigration
Foreign medical graduates without US citizenship or permanent residency are dependent upon a work visa for employment authorization. While some training programs offer a dual-intent/immigrant-intent work visa (H1b), most GME programs offer a non-immigrant-intent exchange visitor visa (J1).
The J1 visa for medical trainees includes a home residency requirement. The home residency requirement mandates that the trainee must return to their home country upon the completion of clinical training for a minimum of two years, prior to qualifying for immigration to the United States.
As with any rule, there are several exceptions to waive the home residency requirement. The most common of these include a 3-year commitment to practice in a medically underserved area (Conrad 30 waiver) or a job at a Veteran’s Affairs Medical Center.
Further Reading
IRS Tax Status for Foreign Medical Graduates Without US Citizenship
For IRS purposes, resident aliens (non-citizens), including J1 and H1b visa holders, are taxed similarly to US citizens and those with permanent residency.
A resident alien is defined as an individual that passes the substantial presence test which includes meeting two conditions:
- 31 days of presence in the current year AND
- 183 days of presence during the most recent three-year period
Most practicing physicians and trainees will meet this threshold, so generally, IRS rules apply equally to IMGs and citizens.
Nonresident alien taxation is more complicated as it involves country-specific treaties that dictate taxation of US income and management of dual taxation. This is something that should be discussed with your accountant or lawyer.
Tax-Advantaged Investment Options for Non-US Citizens
Just as with US citizens, there are generally two types of tax-advantaged accounts available to the non-citizen.
#1 Pretax
Pretax accounts include a 401(k), 403(b), 457(b), and an HSA (health savings accounts).
Pretax accounts allow you to invest before having any taxes taken out on that money. You will be taxed on the withdrawals, but the overall idea is that you expect to be in a lower tax bracket at withdrawal (usually in retirement) as compared to when contributing (peak earning years).
Employers will generally offer a 401(k) or a 403(b), and sometimes a 457(b). The contribution limit for each of these accounts is $19,500 for those below 50 years of age. Furthermore, most employers will match a percentage of your contribution to a 401(k)/403(b) as an incentive after a certain period of employment.
Health savings accounts are available to those on high deductible plans, with contributions limits of $3,600/$7,200 for single/families. When offered through an employer, it is pretax. If it is done post-tax by an individual, it is still deductible at the end of the year. When used for health-related expenses, the withdrawals are not taxed. There is quite a range of expenses that can qualify for health-related withdrawals (glasses, contacts, dental work), so be sure to check that out.
#2 Post-Tax
Post-tax accounts include IRA and Roth accounts and are funded individually with after-tax dollars. This means that at withdrawal, no taxes will be realized regardless of your tax bracket. This is a great option during years of relatively lower-income (medical school, training, gap years). And, in higher-income years, can be done using a backdoor Roth IRA. Roth IRA contribution levels are $6,000 for those below 50 years and $7,000 if over age 50. If married, both spouses can contribute for a total of $12,000 in Roth IRA contributions. Roth IRAs are not tied to an employer. There are 401(k) Roth options as well, but we will not discuss that here.
Benefits of Tax-Advantaged Plans
Beyond the tax benefits on the principal, tax-advantaged accounts have tax-free compounding growth, which is a powerful force. In a taxable brokerage account, taxes must be paid annually on dividends and capital gains, but in tax-advantaged accounts the gains are not taxed, thus enabling even higher compounding growth. In that sense, pretax accounts have a triple tax benefit of tax-free contribution, tax-free growth, and withdrawal in a typically lower future tax bracket. This is what makes 401(k) and 403(b) accounts such great investment vehicles. An employer match sweetens the deal further by essentially providing free money.
Post-tax Roth IRA accounts are equally valuable since the taxes have been paid upfront, the investment grows tax-free and the income from withdrawals is not taxed.
HSAs are also a fantastic stealth investment vehicle since the investments in an HSA can be completely tax-free by pretax contribution, tax-free growth, and tax-free withdrawal when used for medical expenses.
And by the way, the above accounts also provide varying degrees of asset protection!
These benefits make contributions to a tax-advantaged plan a no-brainer in most cases… except if you do not plan to remain in the United States long-term and therefore may withdraw early.
What Should You Do With Retirement Accounts if You Leave the US?
If you move from the US to another country there are three options to managing contributions in a 401(k): Leave it, cash out or roll it over.
Leave It
The most straightforward option is to leave the money in the 401(k) until you reach age 59 ½ years. You are not required to be a US resident to continue to enjoy the tax-advantaged compounding benefits of a 401(k). Keep in mind, however, that 401(k) fees will continue to apply, and you will need to make sure to receive communications in the unlikely event that your employer decides to terminate the plan.
Cash It Out
The second option is to cash out the 401(k), but be ready for a hefty IRS bill which includes a 10% early withdrawal penalty on top of ordinary income tax. For example, if you cash out $50,000 from your 401(k) and are in the 20% tax bracket, you will have a $15,000 tax bill. One strategy to reduce this tax burden is to time your withdrawal a year after your return to your home country so that you drop into a lower US income tax bracket.
Roll It Over
The third option is to roll over your 401(k) into an IRA. An IRA offers more exceptions to waive the early withdrawal penalty (note that you will still need to pay income taxes on the withdrawn amount). In a 401(k), the only way to waive the early withdrawal penalty is with total and permanent disability. Within an IRA, however, the early withdrawal penalty can also be waived for unreimbursed medical expenses, qualified education expenses, and first-time homebuyers. This offers a lot of maneuverability since that first-time home does not have to be in the United States. With regards to qualified educational expenses, the FAFSA site has a comprehensive list of qualifying foreign institutions.
A secondary benefit of an IRA rollover is that you would have total control of the funds and would not have to worry about employer fees, options, or the risk of the employer terminating the 401(k). One caveat with IRA rollovers is checking with your brokerage about a primary foreign address. Most major brokerages allow you to open an IRA with a local address and then change it to a foreign address. TD Ameritrade even allows for opening an IRA with a foreign address, but make sure to consult with your brokerage in these situations.
If you have investments in a Roth IRA account or other IRA account, all the above apply.
Taxation in Retirement Outside the United States
Once you have moved to your home country and are eligible for withdrawals, you can withdraw your contributions as a lump sum or a fraction.
If you choose to withdraw as a lump sum, it will be subject to a 30% withholding by your brokerage, unless your country of residence has a treaty with the United States. If the tax due on your distributions is greater than the withholding, you will have to pay the difference to the IRS. Alternately, if the distributions are less than tax withholding, you will have to file a Form 1040-NR to apply for a refund.
Fractional payments work similarly with a 30% federal withholding tax. However, most foreign nationals should be eligible for a refund of that amount as taxes typically only have to be paid in the country of residence.
Research your country’s tax treaty and tax code for management of a large income windfall in the United States or consult with a CPA/attorney versed in international tax treaties.
Concluding Thoughts on Investing for Non-US Citizens
If you are highly likely to return to your home country in the near term (within 2-5 years), pursuing retirement accounts in your home country with US income will likely be the most straightforward path for retirement investing. Keep in mind, however, that contributions to foreign retirement accounts are not deductible against your gross US income. Alternately, allowing that money to grow in a taxable, money market or high-yield savings would also guarantee liquidity when planning to eventually move your assets to your home country.
On the other hand, if you are planning to, or hoping to, remain in the United States for a longer time period, you should strongly consider maximizing tax-advantaged opportunities since there are still options if you do decide to eventually return to your home country.
At this point, I plan to stay in the US at least until retirement. As a result, I personally max out my 401k, backdoor Roth IRA, and HSA. I do that with the understanding that the tax-advantaged growth over time is going to far exceed any penalties/lump sum withholding taxes in the event that I return to my home country of India in retirement.
Are you a foreign physician working in the United States? Are you maximizing tax-advantaged retirement accounts? Why or why not? Comment below!
What a nicely written piece! This should be useful not only to physicians but IT and other professionals who are in the country for short or intermediate term employment as well as for the many who plan to retire abroad after working here.
Thanks Jay! I totally agree that these are not physician-specific issues – although unfortunately as physicians we tend to put our own financial literacy on the backburner to clinical medicine quite often. This is equally, if not more, true for IMGs who have jumped through many hoops to get to where they are.
Glad you enjoyed it. These columns will be a new feature here at WCI and hopefully make the content even better than it has been!
What type of fund do you recommend putting in an HSA. I think White Coat Investor puts VTI, but Physician on FIRE puts BND.
Thanks!
Thanks M. (VTI is the Vanguard Total Stock Market ETF and BND is Vanguard’s Total Bond Market ETF)
I think the first thing is to refer to your written financial plan and the asset allocation you have set forth in that. Consider the investment portion of your HSA as part of your overall portfolio (401ks, Roth IRAs, taxables etc) and use that to guide whether to buy VTI or BND in accordance with your asset allocation plan.
With regards to tax efficiency of asset classes, there are multiple posts in WCI on that topic with some differing opinions. I think a safe strategy would be place your more tax inefficient assets in tax advantaged accounts and tax efficient assets in taxable accounts. So if you had to place VTI/BND in your taxable account vs. HSA, with all other things being equal, BND would better in the HSA since its slightly more tax inefficient. Hope that helps.
Look forward to hearing other people’s thoughts as well.
Out of curiosity, according to you why should HSA be treated as a part of the overall portfolio and not a separate entity for healthcare expenses in my older years? All things being equal – Put BND in 401(k) and VTI in a taxable account for the reasons you mentioned.
For my HSA ( even if we are just sticking to VTI and BND) – in my younger healthier years maybe stay a little more aggressive with VTI and gradually transition to BND for capital preservation in later years when I will probably be needing the money for medical expenses.
To take the so called triple tax advantage of HSAs I should be using the money in the account for healthcare expenses only correct?
I think either approach (fold into retirement accounts or give it a separate asset allocation) is reasonable.
But yes, only spend HSA money on health care if you can help it:
https://www.whitecoatinvestor.com/the-best-ways-to-use-an-hsa/
There’s no right answer here. But if you’re spending from it actively, you definitely need some of it (maybe the max out of pocket amount) in cash. If it’s just another retirement account, then treat it that way. We picked VTI just for simplicity since the HSA is a tiny portion of our retirement assets.
More info here: https://www.whitecoatinvestor.com/the-best-ways-to-use-an-hsa/
Excellent article, Dr. Ramanathan!
One thing I was wondering about is your thoughts on applying for a green card through EB-5, and if you have any ideas on that process and whether it’s financially viable. The way I understand it, you have to invest a million dollars and employ ten people. I think it *could* be a good alternative to waiting years on end in the green card backlog under EB-2 or EB-3, especially for Indian citizens such as myself. In my case, a million is almost all of the money I have that I’ll have to pull out of various places and concentrate on some individual investment, so I think it doesn’t really make financial sense, but it might in the future, given the projected waiting time seems to be at least a decade and a half for some of us.
Thanks Sundar. EB-5 is complicated topic with a lot of nuances, as you have probably found. I am far from an expert on the EB-5 and don’t have any personal experience. That said, here are some of my thoughts:
The EB5 program is currently inactive (as of 6/30/21) since it was not renewed in Congress. Most expect it to eventually be renewed. The things to keep a look out for is the ongoing fight in Congress over what represents a TEA (targeted employment area). With the Bhering ruling, the minimum investment to qualify for EB-5 in a TEA is back down to $500k from $900k. For non-TEA, the investment remains at $1 million. If you have $500k in assets immediately available, EB-5 is reasonable – but comes at a major risk due to the non-diversification of your portfolio. The main reason, as you stated, that Indian, Chinese and other high immigration countries consider it is the H1b cap and the resulting wait-times. However, for physicians, there are several more palatable alternatives:
1) If you are a physician on an H1b, you can become cap-exempt by working for an employer that is an accredited nonprofit institution, or a nonprofit/governmental research organization. This will make your green card petition cap-exempt and thus make your green card priority date current. (I have read that even privately employed physicians contracted at a cap-exempt institution that have filed cap-exempt petitions)
1) If you are on a clinical J1, the home residency requirement/waiver requirement applies even if you fall into EB5. So on a J1, i would think that you are better off getting a waiver, then filing for permanent residence as either EB1 (if you qualify) or filing EB2 with an NIW after your waiver period. Completing the 3 year requirement makes your green card petition cap-exempt so you don’t need to worry about the country-specific priority dates.
Great information, Dr. Ramanathan. I learned a few things, specially about the Bhering ruling! I’m not a physician myself (I’m an engineer), but your post has got me thinking about exploring cap-exempt jobs in my area.
I am a permanent resident ( Green card holder), have not decided about taking Citizenship in the USA yet, or definite plan of retirement in the US or India. My portfolio is not 403B heavy, instead invested more in the Vanguard. Do you have any recommendations for a person like me, who has not decided about where to retire?
Hi Aarti, there isn’t a clear right answer here. Factors to consider is how much of the taxable account contributions do you anticipate using if you were to move back to India prior to retirement, the amount you may need in retirement in India, and other retirement savings vehicles you may anticipate using.
If you anticipate needing some money for relocation costs, home purchase etc, it makes a lot of sense to keep that money in a taxable account – and if you need it in a shorter horizon, to consider a safer investment such as cash or bonds.
If you are truly putting money away for retirement, the 403b and the Roth backdoor would be really good considerations. The benefits of the employer match and the tax-free growth are likely going to surpass your tax liability as long as you still have a relatively long horizon. I would encourage you to play around with an online 401k match calculator or compounding interest calculator to see what the growth of money can be in a tax-protected space. I think you’ll find that the power of compounding growth and free money through the match will outstrip any early withdrawal or lump-sum penalties. Furthermore, if you took your money out as a monthly pension starting at 59 1/2, you would only pay the taxes in India and not in the United States due to rules against double taxation.
Thank you for your relevant post. Would you know about what happens to social security if you retire to your home country?
If I am not a US Resident (greencard holder) anymore because I chose to retire abroad, am I still eligible to receive it? If not, so all those years of contributing to SS was for nothing? Does this mean it is better to be a US citizen first before retiring abroad? I tried looking for answers online but I am not clear about it.
Thank you.
Yes, green card holders can get Social Security.
https://www.visitorscoverage.com/social-security-benefits-eligibility-for-green-card-holders/
Even if they are living overseas they may still be able to receive their benefits. But it varies by country.
https://www.investopedia.com/ask/answers/110614/how-can-i-receive-my-social-security-benefits-if-i-want-retire-outside-us.asp
Hello Dr Ramanathan, great initiative with the website. I am a J-1 alien physician in a clinical fellowship and would like to open a trading account. JP Morgan is the first company that I turned to as I have a bank account with them, but they do not allow J-1s to open investment accounts with them. What are my options now and the best companies for J-1s to open a IRA trading account?
Why not start with the best places and ask them if you can open an account? You know, Vanguard, Fidelity, Schwab etc.
great article! do you happen to know if any mortgage companies will loan to someone on a H1b visa?
More info here:
https://www.stilt.com/blog/2018/01/get-mortgage-permanent-non-permanent-resident-alien-us/
https://www.stilt.com/blog/2019/09/h1b-mortgage/
Sounds to me like FHA is your best option and you’ll need a credit score to get that.
Tanner, sorry I meant to reply to your comment. Kindly see my reply below in the separate comment. Thank you 🙂
Yes, you can seek mortgage even whenyou are on a H1b visa. You obviously, will get the best rates if you have a good credit score and since you have a high pay (being on H1b) you will qualify easily.
However, there are also several Mortgage Lenders these days which will lend home loans to H1B visa holders with No to okayish US Credit history – people who have recently arrived in the US on a H1 visa.
More details here: https://homeabroadinc.com/buying-house-and-obtaining-a-mortgage-home-loan-on-h1b-visa/
Hi,
A very informative post! I am a resident on J1 visa and recently opened a Roth IRA. I was informed by my collegue that J1 visa can not open a Roth/back door Roth. Do you happen to know if that is true?
I don’t think that is true at all.
https://www.mybanktracker.com/blog/retirement/non-us-citizens-retirement-accounts-401k-iras-286254#:~:text=The%20short%20answer%20is%20%E2%80%9Cyes,traditional%20or%20Roth%20IRA%2C%20too.