401K and IRA for foreigners in the United States?

We have been busy with other things in life since more than a year ago and just responded to questions/comments sparingly. I (Yannick) didn’t expect to do another post for a long time but obviously changed my mind because of the excellent question from Abhishek: are there any strings attached to these retirement accounts for foreigners?

If a foreigner plans to stay in US until retirement, then the answer is a straight-forward “no extra string”. For tax purpose, Abhishek has been in the States long enough (6 years) to be treated as a Resident Alien, same as a US citizen. So same rules and penalty apply regarding distribution and early withdraw.

If on the other hand, Abhishek plans to return to his home country after a few years, the answer depends on the tax policy of his home country and the tax treaty (if there’s one) between that country and US. It may very well be less strings (or one more way out) for foreigners. The key questions are usually:
How does the foreigner’s home country treat retirement accounts in US? Is the investiment in a US 401K or Traditional IRA treated as tax deferred as well? Is the Roth IRA treated as tax-free? If not, there’s little reason to use them except contributing to the minimum level in a 401K to get employer match.

If the answers for above questions are yes, then you can have the option to leave the money grow tax-defered or tax-free in US until you reach retirement. US still has the most efficient captial market and lots of long term potenial. So this could be a good diversification investment strategy. Be sure to choose an institution/custodian which keep accounts open when you leave the country. I also recommend to roll-over 401K balances into an IRA accont before you leave. 

What if I need to leave US and also need the money before retirement? First, you want to file a W8BEN with your US custodian to avoid a automated 20% tax withholding at the time of withdraw.  To avoid 10% early withdraw penalty, you need to see if a tax treaty allows a trustee-to-trustee transfer of your money from a US account to a pension fund in your home country.  If not, you want to see if you are okay with annuitizing your traditional IRA money (roll-over 401K to traditional IRA first) or just withdraw your Roth contributions. A SmartMoney article  summarized this approach very well. This applies to all US residents.

If however, you want all of your money within a few years and your home country doesn’t double tax you for incomes in US, then maybe the best bet is to bite the bullet of 10% penalty, while managing the withdraw in each year low enough to avoid US income tax. Income tax is usually much higher than 10%, therefore you may be better off doing withdraw this way, which is not available for most folks staying in US all the time.

In summary, if you don’t know your long term plan yet, you are likely better off by contributing to 401K and Roth IRA as long as your home country doesn’t double tax you for income earned in US. Please check out our ranked list for savings to manage the trade-off between tax-advantage and liquidity. BEST OF LUCK to Abhishek and all you visitors!

How much income paid for rent?

Intrigued by an MSNBC’s article titled Americans becoming increasingly house poor, Golbguru recently write an post inquiring people’s expense on housing. The MSNBC article only revealed that an average homeowner spends nearly 21% of their household income on housing, up from under 19% in 1999. Percentage-wise, Californian spend the most, 25.4% in 2005. The data includes many homeowners who bought their houses before the boom, thus, the 2 to 3% increase does not seem very dramatic. For more recent buyers, I do not know any friends who spend less than 25% (one couple bought earlier with 200K annual income) of their income on housing, most between 30 to 40%!

However, I did not find any percentage for renters. My further research found that the ratio really depends on the locality. In Golbguru’s case, he was able to pay only 11% of his gross household income (mainly two graduate students’ stipends) on rent, likely around $500 in a University subsidized apartment. Yes, an excellent job of Golbguru!

New York City is likely the other extreme, high rent and low vacancy. People not only need to get in line to rent an apartment, but also need to hire a professional broker for apartment hunt. According to New York City’s Economic Snapshot July 2006, the average monthly contractor and increased by 25% after adjusting for inflation, from $767 in 1991 to $956 in 2005. From the following picture, we can see average rent as % of average renter’s household income has also swelled from 34.4% in 1991 to 36.7% in 2005. It seems that not only the housing price soared, the rent was raised significantly too! I hope no one pay so much to stay in NYC. Of course, if you’re earning more than average renter’s household income and live under your means, you can beat those ratios.

I attended graduate school on the west coast, where rents are high. University housings are both cheaper and more convenient compared to local rental market. I was earning 23K annual stipend, but paid about 28% of my gross income for one room in a 2-bedroom university dorm. Despite the small annual raise of 1-3% of my stipends, when I finally graduated, I was paying 39% of my gross for the same room. A very good strategy to move out PhD students faster!

Right now, with 2 full-time job income, Jacqui and I are paying about 7% gross including cell phones and utilities, not much better than Golbguru, but way better than people in NYC and myself before. However, we’re looking for a reasonable upgrade in the next few months to have more space.

My family’s story in Chinese stock market.

Following our blog friend’s post on Shanghai volume , I want to share with you my family’s stories in China’s stock market. My mom has been in the market since I was in the secondary school. She lost half of her capital after more than 10 year’s investment. Up to two years ago, she was still struggling. However, since this year, every night when I talk to my mom, she will tell me how much more she could have earned if she had hold the stock longer, or had bought more. She put all our family savings into it now.

And one of our relatives, an 80 year old lady, frugal for her whole life, put all her money in the stock market too. She does not know how to use computer or internet. So she keeps calling my mom to help her excute the trade.

Yes, it is this scary! And I just can not persuade my mom to take the money out of the market. No way she will believe me when she sees the stock price going up so fast every day. Sometimes, I want to make up some emergency stories to ask her for moeny, because that’s maybe the only way to ask her to get some of her money out of that market. But I will feel guilty if I lie. Very difficult situation

What is the gas mileage of your car?

Just came about an article on hypermiling: wringing every last ounce of fuel efficiency out of a car. The story starts with Wayne Gerdes’ going 2,254 miles driving a Honda Insight on a single 13.7-gallon tank of gas. When I bought my SUV, $600 a year on gas is maximum. Right now, I’m looking at north of $3000 a year (longer commute as well). This is indeed a large chunk of ongoing expense.

Here are the tips offered by the article:

• Brake sparingly.

Time the stoplights on your commute route, and avoid red lights by adjusting your speed.

• To idle is to sin.

If you’re going to be at a standstill for 10 seconds or more, cut off the engine.

• Speed kills.

Follow the speed limit, or go at a slightly slower speed. The optimal speed seems to be ranging from 45 to 55 miles per hour.

• Avoid the big chill.

“Today’s cars can’t kick into their most efficient mode — called “closed-loop operation” — until the engine is sufficiently warm.” Invest in an engine-block heater or always go the longest segment of a multi-segments trip.

• Beware of drag.

Closed windows and no A/C are best.

• Lose the weight.
• Pay attention to load.

Try to keep gas consumption at a constant level instead of trying to maintain a constant speed, why you and not be honked by drivers after you.

• Be not a hare.

Inflating tires to their maximum allowable pressure

• Set up for success.

Inflate tires to their maximum allowable pressure and use synthetic engine oil.

Using the tips, I got 28mpg out of a SUV rated at 24 mpg at an average speed of 65mph. How about you? If you want more hypermiling tips, visit GasSavers.org or Gerdes’ own Web site, CleanMPG.com.

Who can contribute to an IRA?

We are looking into the possibility of letting Jacqui stay at home as a housewife. However, we’re concerned that if it will impact our plan to catch up on retirement savings. So I studied IRS Publication 590, Individual Retirement Arrangements and found the following excerpts:

Traditional IRA:

• You (or, if you file a joint return, your spouse) received taxable compensation during the year, and

You were not age 701/2 by the end of the year.

Roth IRA:
Generally, you can contribute to a Roth IRA if you have taxable compensation (defined later) and your modified AGI (defined later) is less than:

• $160,000 ($166,000 for 2007) for married filing jointly or qualifying widow(er),
• $10,000 for married filing separately and you lived with your spouse at any time during the year, and
• $110,000 ($114,000 for 2007) for single, head of household, or married filing separately and you did not live with your spouse at any time during the year.

Besides the age restriction for traditional IRA and the income restriction for Roth IRA, a person need to have taxable compensation to contribute to an IRA. The taxable compensation includes salaries, tips, bonuses, commissions, self-employment income, alimony and separate maintenance, nontaxable combat pay but does not include passive income derived from property and investment (Table 1-1, Page 9). However, a non-working spouse (aka a housewife) can contribute to either IRA with the same maximums given the working spouse qualifies for the above criteria (Refer to spousal IRA in the above document).

So the good news is that if Jacqui stay at home, both of us will be able to contribute to IRA though it’s not necessarily Roth.

How to better measure home prices?

As shown in the previous post, the median price is far from an ideal measure of home prices. In this softened housing market, a change in the types of houses sold may give people a deceiving picture of increasing prices. Here is an article titled The Follies of Measuring Home Prices from Rich Toscano.

In short, the median house is really a moving target, and the “median price” does not account for the difference in these houses and is therefore subject to the following follies:

• Changes in who’s doing the buying

. If only the rich are still buying the beachfront properties, we may see the median price increasing sharply in a declining housing market.

• Changes in what buyers are getting for the money

. “During the boom, as buyers reached the upper limit of what they could spend, they compensated for the lack of affordability by lowering their standards and buying less desirable homes. So for a couple of years, there, changes to the median price actually understated the extent to which individual home prices were increasing. Since the boom ended, the opposite has happened. Now, the extent to which buyers have been able to get more and more bang for their homebuying buck has not been entirely reflected in changes to the Median purchase price.”

• Home improvements
• Seller concessions

. The above two have been covered well in the Media, which may value tens of thousands of dollars but not included in the median price.

One of the best solutions lies in the Case-Shiller Home Price Index (HPI), which measures market price changes based on repeat sales of individual homes. Here is a graph featuring a comparison between Median Price and Case-Shiller HPI on San Diego’s housing market.

Looking at the Median Price (the red bars), you may think that San Diego’s Housing market hit the bottom b/w 09/2006 -11/2006 and rebounded back this year. However, CS HPI (the blue bars) shows a consistent decline throughout. Which one is correct? Correlating with sales volumn, we known the latter is the true picture.

For more metro areas and longer periods, you can plot graphs on the http://macromarkets.com.

To get individual home value and neighborhood demographics, I found http://www.cyberhomes.com/ very useful.

Housing Market Is On The Move In Southern California II

Nice excerpt from Ben’s Housing Bubble Blog:

The California realtors report on April sales. “Home sales decreased 27.8 percent in April in California compared with the same period a year ago, while the median price of an existing home increased 6.2 percent, CAR reported today. ‘April sales fell in part because of tighter credit standards and growing concerns about the impact of subprime loans on the market,’ said C.A.R. President Colleen Badagliacco. ‘Throughout the state inventory levels have increased to their highest levels in recent years, giving buyers more time to view a greater variety of homes and sellers who set realistic prices an edge in the market.’”

“‘Although the median price of a home in California continues to rise, this reflects the fall-off in sales in the lower-priced markets of the state where new home inventories and foreclosures are competing with the existing home market,’ said C.A.R. Chief Economist Leslie Appleton-Young. ‘Fewer sales from these regions coupled with modest gains in some of the stronger coastal markets are pushing the median price for the state up slightly.’”

This supports the analysis that this latest drop is worse for low-end markets suffered from the woes of sub-prime loans. A change in the mix of houses sold really skewed the median price data.

Housing Market Is On The Move In Southern California

According to Union Tribune “DataQuick expects to report today that the six-county Southern California region saw defaults rise nearly 159 percent last month to more than 9,200, compared with 3,562 in April 2006, and that foreclosures skyrocketed from 311 to more than 2,800 over the same period. San Diego’s defaults rose from 554 to 1,346, and foreclosures increased from 85 to 525, April to April.”

“But San Diego was painted as an area less vulnerable to any further major downturns, contingent on the health of the general economy. Reasons include relatively few unsold, newly built homes and new projects; steady if not improving job growth; and an earlier end to the housing boom than other markets where sales and prices are now in decline. … Prices, which had peaked at $517,500 in November 2005 and lately dropped to as low as $472,000 in January, have recovered somewhat to stand at a median $490,000. But they remain 10 percent or more below where they stood a year ago in many neighborhoods”.

As I remember, the housing market in San Diego headed south earlier than Los Angeles and San Francisco. The current slide was only from the drain of cheap money, which means that the market is vulnerable to further slides resulting from rising foreclosures and the weakening of local job market. Unfortunately, with depreciating housing value, foreclosures are rising really fast. With economy growth significantly slowed down, the job market is unlikely to absorb the loss in housing related jobs. So there are certainly more drops to come.

Tips on finding a competent real-estate agent

With a burst of U.S. housing bubble, affordable housing may finally come in a few years. I started to learn some knowledge on real estate investment a while ago. From what I learn, a competent real-estate agent is invaluable. Here is one interesting article from MSN titled Find a superstar real-estate agent.

Besides referral, the article listed eight questions to ask your candidate agents:

1. May I see your resume? This is an interesting one. I have been interviewed by many people, and didn’t expect that I can interview agents this way. I’ll take this advice.
2. What’s your commission? Only relevance to a seller?
3. What makes you special?
4. How often will I hear from you?
5. What’s your plan for marketing my home? Seller only.
6. How many transactions did you complete last year?
7. What do you know about the neighborhoods where I want to live? I’m surprised that information on crime and school performance are not allowed to be disclosed by real estate agents. Again, asking for information sources such as Sperling’s Best Places may come in handy.
8. Are you a solo agent or part of a team? This may impact how you evaluate the performance of this agent.

Now expensive U.S. Healthcare is also inefficient?

Two days ago a report from Commonwealth Fund came out comparing healthcare in five developed countries: United States, Germany, Britain, Australia and Canada. And the conclusion: “The U.S. health care system ranks last compared with five other nations on measures of quality, access, efficiency, equity, and outcomes.”

It is well-known that we have the most expensive healthcare in the world. And many people are proud of the fact that the U.S. has the most vigilant and productive market for biomedical research and pharmaceutical companies. I even read about envious comments on U.S. healthcare industry from a British economist on The Economist. However, it is undeniable that the paid price might be too high: we have fast growing insurance premiums; about 1/6 of total population is uninsured mostly because of affordability; need to pay the most for prescription drugs compared with everywhere else in the world…

How much more do we pay for health care compared to other countries? “Per-capita health spending in the United States in 2004 was $6,102, twice that of Germany, which spent $3,005. Canada spent $3,165, New Zealand $2,083 and Australia $2,876, while Britain spent $2,546 per person.” $6000 annual expense per-capita is a lot of money. For a family of four, that’s $24,000 per year. Twice that of other rich countries is simply too much, not a good buy!

However, U.S. healthcare providers are usually very proud of themselves for being the best in the world. Medical students have been trained to give patients the best care possible regardless of the cost, and we also know very well that how long (months and years) patients need to wait inline to have a non-emergent medical procedure done in UK and Canada. We actually read some similar stories on HMO or Medicare patients in the U.S.

Now why is U.S. healthcare also inefficient? Let’s take a look at the primary measures: infant mortality and healthy lives at age 60. Given the high prevalence of obesity and diabetes, I can understand why the U.S. did not do well in the later measure. However this is hardly the responsibility of the healthcare system alone, given the powerful commercials from fast food chains targeting our young children. Another convenience measure is also understandably low for the U.S. healthcare system: emergency room waiting time. If you have 1/6 uninsured people who on average need more serious interventions and only get medical care in various emergency departments of hospitals, how fast can you expect patients turned around there?

“The area where the U.S. health care system performs best is preventive care, an area that has been monitored closely for over a decade by managed care plans,” I am rather surprised by this measure. Vaccines in U.S. are usually expensive and not covered by health insurance. In fact, there are many such examples that private insurance companies put their short-term profitability above long-term societal values, which in the end, leads to higher medical cost for everyone.

In the end, I think that we are indeed paying too much for healthcare. Ethically and economically speaking, we should have a national program to cover uninsured 45 million people and free ERs from providing the care though expensive, but usually very late. Educating people to have a healthy life-style is at least as important as medical technology to reverse the increasing prevalence of chronic disease such as obesity, diabetes and heart disease.