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