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Article by Mohan Babu


Saving for a rainy day

The US government, realising the need to provide for its ageing population, encourages long-term savings in many ways. It does not discriminate against foreigners when it comes to tax breaks and incentives, reminds Mohan Babu

In my previous column, I wrote about investment opportunities available to Indians in the US. One of the main reasons why we come to live in a foreign land is to increase our net wealth. The initial few years are spent chasing the “American Dream” acquiring a car, furniture, paraphernalia, and in travelling around the country. Of course, the first few years are also spent in saving and helping family and folks back home. Most of us from a middle class background in India take great pride in the sense of belonging and attachment we have towards our families. Helping parents move into a nice flat or getting a sister married is almost de rigueur.

It is after a few years out here in the US that many of us start realising the duality of the lives we are trying to lead. It is then that we decide, if we are going to be here “for a while”, we might start planning for a secure financial future. The fact remains that some of the best technical minds may not be really good when it comes to financial management. Most people think that working towards a secure financial future means stashing away a sum of money in the bank every month or ‘investing’ in the stock market or any other investment avenue that may be the flavour of the day.

However, if one were to scratch beneath the surface, one would realise that financial planning involves a long-term holistic view. In India, we have the concept of pension and PPF (Public Provided Fund) that we contribute to. Most of the “career track” professionals are assured of a gratuity or pension when they retire. This concept is absent in the US and most companies do not even have a formal ‘retirement plan’ other than the common 401-Ks. Hence, the onus lies on the individual to secure his financial future.

The US government, realising the need to provide for its ageing population, encourages long-term savings in many ways. It does not discriminate against foreigners when it comes to tax breaks and incentives. Of course, it requires a tremendous amount of research and due diligence on the part of every individual to seek the best options available. Individuals must constantly endeavour to educate themselves about all the saving incentives available to them. I have been trying to research some of the avenues available to Non Resident Indians like myself. These are:

Social Security: Almost every person living and working in the US pays a part of his/her salary towards a social security fund. The percentage of deduction varies, but is generally between 6 to 8 per cent of one’s salary. Employers are also required to contribute an equal amount towards social security. The federal government pools this amount collected from individuals and companies and holds it in a large fund. People generally become eligible to get social security benefits when they turn 58, or in some cases, if they lose the ability to earn a living or become disabled. Even foreigners are required to contribute to the social security fund and they are eligible to get the benefits. The only catch is that a person becomes eligible to get social security benefits only if they contribute into the system for at least ten years. H1 visas are issued for a period of six years and if a person does not apply for a Green Card and leaves the country after six years, he loses the benefits of his contribution.

There is also a lot of debate going on about the future of social security system in the US. People are starting to doubt if the fund that is dwindling will be available to them when they are ready to retire in fifteen or twenty years. This is because the baby boomers (a large percent of current population) are starting to age and are becoming eligible for social security benefits. The current contribution into the system is less than the expected outflow, hence it is becoming increasingly difficult to factor social security into one’s future financial planning.

Retirement Savings: Most working people in America like to contribute a part of their salary towards retirement saving plans like 401-K. Most companies also encourage employees to save by opening an account for them and allow employees to ‘rollover’ their accounts in case they switch jobs. Some employers also match a small per cent of contributions that their employees make. 401-K accounts are easy to set-up and manage. They can be set up with almost any financial institution like a bank, broker or savings fund. One can contribute any amount (up to about 10 percent) of one’s pre-tax salary into the account and one need not pay any tax on contributions made. The catch is that one cannot withdraw from the account till one retires, generally after turning 58. Withdrawals from a 401-K account are penalised heavily and there is little incentive to withdraw prematurely.

However, people are allowed to take a loan against their 401-K savings, but even this is highly regulated. A loan is generally allowed only for specific reasons like child’s education, down payment on a house etc.

Educational savings: People are also allowed to save a part of the pre-tax dollars they earn by contributing to an account called Roth IRA. This is a special tax incentive given to individuals who want to save for their children’s education. The amount can be withdrawn (without any penalty) to pay for any educational expense.

Buying a House: Another popular form of tax saving investment in the US is to buy a house. There are two strong reasons that motivate people to buy houses. One reason is the appreciation in property and savings experienced by property owners who live in a house for a while (and save on rent). Another motivation is the tax break, which is given to people who invest in their primary residence. Most people take a mortgage to buy a house and then make monthly payments. There are two components of the monthly payment the principal and the interest. The interest paid towards mortgage is ‘tax deductible’, i.e. one can reduce the amount from one’s gross earnings and pay a lesser tax.

Foreigners, even those on H1 visas are not precluded from buying property in the US. I know a number of Indians here on a H1, who have invested in houses. The only caveat is that buying a house restricts one’s mobility since it is not extremely easy to sell a house and move out overnight. There are a number of costs involved in buying a house and it is generally assumed that the costs will be amortised over a period of time. One loses all the benefits (of buying a house) if one were to sell it within a year or two, unless the property has appreciated substantially.

Saving for the future is something that comes naturally to most Indians. However, as many NRIs in the US are realising, saving requires a lot of thought, planning and research, and a dollar saved and prudently invested could add up to many more.





About the Author

  • A Bio and profile of the author, Mohan Babu, can be found at his homepage
  • Mohan has authored a book on Offshoring and Outsourcing (Publisher McGraw Hill, India), a link to which can be found here
  • Mohan has also authored an Online book on "Life in the US," available for free download.
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    For FAQ, Trivia and Information on Life in America, visit the Ask-A-Desi section

    ©Mohan Babu: All Rights Reserved 2005

    Mohan Babu is an international consultant trying to find the ‘sweet spot’ where IT meets business. E-mail: mohan He is also the author of a recent book on "Offshoring IT Services"

    All rights are reserved. Mohan Babu ("Author") hereby grants permission to use, copy and distribute this document for any NON-PROFIT purpose, provided that the article is used in its complete, UNMODIFIED form including both the above Copyright notice and this permission notice. Reproducing this article by any means, including (but not limited to) printing, copying existing prints, or publishing by electronic or other means, implies full agreement to the above non-profit-use clause. Exceptions to the above, such as including the article in a compendium to be sold for profit, are permitted only by EXPLICIT PRIOR WRITTEN CONSENT of Mohan Babu. 

    Disclaimer: This document represents the personal opinions of the Author, and does not necessarily represent the opinion of the Author's employer, nor anyone other than the Author. This Article was originally published in Express Computers


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