401(k) Platforms For International Teachers: Isn’t It Smarter To Admit That I Can’t See The Future?

Plenty of American teachers have asked me about 401(k) platforms for international teachers.

Such platforms promise tax-free investment gains. In other words, the teacher doesn’t have to pay U.S. tax on the front end (because of the foreign income exclusion) yet the teacher still benefits by not paying tax on the back end when they sell, at the earliest, just before their 60th birthday.

I’m not qualified to comment on the validity of the tax-free status. I hired a tax lawyer to read through IRS tax laws that related to such platforms. She said it might be OK, that the loophole does have some merit. But she added that it wasn’t as air tight as a 401(k) for a resident American.

I asked Raymond James if they would stand by teachers if the IRS challenged the tax-free status many years from now. Raymond James’ lawyer said they wouldn’t be held accountable if this were to occur.  And that’s a fair thing to say.

Will such platforms be OK? I don’t know. There’s only one thing I do know: Nobody knows for sure.

Such an investment becomes a personal decision, as it does with any investment decision.

You have to weigh the potential risks and rewards. Investors that aren’t prepared to take risk of some kind can’t make money.  Here’s an example. Investors that build portfolios of stocks only (with no bonds) earn potentially higher returns.  But they also take higher risks to do so.

 There’s no such thing as a guaranteed free lunch, especially when we’re looking at a potential tax loophole. This isn’t the same as a U.S. based 401(k) or IRA. But it has the potential to be better.  Unlike most U.S. tax deferred plans, you don’t pay U.S. income tax on the money you deposit (if you earn less than the foreign income exclusion) and you don’t pay tax on the money you withdraw.  You can have your cake and eat it. But it carries slightly higher risk than a resident American’s 401(k).

If you ask me, “Should I invest in my school’s 401(k) I’ll say, “I don’t know.” I won’t say no. I won’t say yes. I simply don’t know. And that’s OK.  As with any investment decision, the risk / reward factor can only be answered by individuals.  

If you do decide to invest in an international teachers’ 401(k), here are the funds that I recommend, along with an explanation.  

Image by Pixabay

For further reading, here is an article comparing 401(k) plans.





andrew hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (Wiley 2011) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I'm happy to comment on your questions. However, please read the Terms of Use.

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4 Responses

  1. Peter Love says:

    “But it carries slightly higher risk than a resident American’s 401(k).” What is the extra risk?

    • Hi Peter,

      The slight, extra risk relates to the tax-free status. If you lived in the U.S., you could be guaranteed that your 401(k) wouldn’t attract taxes. But overseas, this is a slightly different animal. No financial firm will back you if things go sideways. That said, I want to stress the notion that I’m not saying you shouldn’t invest in an international teachers’ 401(k) plan. It’s entirely up to the individual, as I mentioned in my post.

      Cheers,
      Andrew

  2. Spencer says:

    I am confused as to why you are on the fence. You’ve shown in the linked article that the costs for the existing 401k options are quite high. Additionally one of the big benefits of a 401k is the pre-tax contributions but for the vast majority of American international teachers there is no US tax obligation on those earnings in the first place. As the current tax code stands the benefits of using a taxable account with lower costs, tax efficient investing and capital gains taxes on only the gains in all likelihood far outweigh the benefits of a “pre-tax” contribution (there is no benefit if you owe no taxes) and income tax rates on 100% of the redemptions from a 401k. Never mind the constraint of waiting until 59.5 (although there are exceptions). And the cherry on top is that the IRS may not recognize the 401k for non-residents working for non-US employers (penalties in your future?). I say steer clear of the 401(k) options that you’ve written about in your article “Comparing 401(k) plans for American International Teachers” which was last updated June 18, 2017.

    • Spencer,

      You have made some excellent points. The tax-free status doesn’t provide a huge benefit when compared to a taxable account of low-cost index funds (given their low, taxable turnover). And.. as we both know, the tax free status won’t be backed by a financial institution if things go sideways. That said, the investment choice is entirely up to the individual. That’s why I’m in no position to say, “don’t invest in this” or “go ahead and invest in this.”

      Cheers,
      Andrew

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