Understanding Your Obstacles
Before you start investing your money into your child’s savings, you need to understand the challenges of this as an H-1B visa holder. To begin with, your children likely won’t receive much federal financial aid or qualify for a vast array of grants available to US citizens. There are some scholarships designed for foreign students, but they’re few and far between.
You also need to pay attention to the timeline between when your visa ends and when your children will need to go to college. Will you be saving for US universities or your home country?
These challenges will affect how you plan and save for the future education of your child(ren).
The federal government specifically designed a 529 plan to help family members save for a child’s education. Funds deposited into a 529 account go in after taxes, so they aren’t subject to future taxes, even on the interest that accrues. However, this is provided that the money is used for expenses related to education.
To open an account, you must have a social security or ITIN number, which you do receive as an H-1B visa holder. You’ll also need a permanent address in the US and a beneficiary who also has a social security number. You can change this person if necessary in the future, as long as both the original and new beneficiaries are related.
For example, if you begin saving for your oldest child, and they receive a full scholarship to their university of choice, they don’t need the funds. Your younger child still has a few years of school left, so you transfer the 529 account into their name.
Another example works well for individuals who don’t have children yet but are expecting to soon. They can open the 529 accounts in their names, then transfer the ownership later when their children are born.
The downfall to this savings account is that foreign-born children in the US on an H-4 dependent visa do not typically receive social security numbers or ITINs. If you plan on becoming a permanent resident by obtaining a green card, your children will also become residents, and you can take advantage of the 529 plan.
Other Options for College Savings
The 529 savings plan has limitations, but a taxable account is more flexible. These accounts are used for various reasons, regardless of whether you’re saving for a short-term or long-term goal. The account is yours to do with as you wish, so if your children don’t go to college, you can use the money elsewhere without the penalties that come with a 529 account.
As long as you hold the securities for more than one year, you can retrieve the cash with long-term capital gain taxes rather than short-term, which are more expensive. When you pay taxes on the account, you reduce your tax liability. And if you leave the US for good, you don’t have to pay any capital gains tax unless your home country stipulates these taxes.
You can also use a Roth IRA account, usually called a retirement account. If your children may go to school in the US, this isn’t the best option. But if you don’t plan on staying in the country, all you need is an earned income from the US and a social security number, and you can open the account.
Funds enter the account after taxes. However, your income has to be under a certain level to open the account. Your contributions can come out at any time without penalty as long as it’s used for education purposes. The earnings can continue to grow and contribute to your retirement. When you turn 59 ½, funds from any accounts open for more than five years can be withdrawn tax-free.
Learning the rules that apply to you as an H-1B holder is crucial, especially when your kids are involved. What kind of savings can you provide for their education? Which accounts are best for you as an H-1B beneficiary, and which are disadvantageous?
As a foreign-born visa holder, it’s your job to care for your family, but you don’t have to do this alone. We at Visa2US are here to answer your questions and help you understand your rights under an H-1B visa. Contact us any time, day or night, and we’ll clarify the benefits you have under your new visa status.