|
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.
|
