Save for College on H-1B Visa Using a 529 Plan

The 529 account is a government-provided plan specific to education. The money goes in after taxes, grows tax-free, and comes out tax-free if used for education-related expenses. It’s one of the best ways of saving for college. As an H-1B visa holder, you can open a 529 college savings account.

To open the account, you need the following

• • Social Security or ITIN number
  • A permanent US address
  • A beneficiary – one with a social security number already.

One of the cool features of the plan is that you can be the owner and the beneficiary as well. You can also change the beneficiary as long as the original and the new beneficiary are related.

This allows parents to get a jump start on these accounts before their kids are born, by opening the account and making themselves the beneficiary.

The post referenced earlier answers a lot of the questions I see come up in this space about opening a 529 plan if on a work visa.

College Savings, H-1B Visa, and Foreign-Born Kids

There are a couple of situations that make the 529 plan and other college saving options non-viable plans for those on H-1B visas and who have foreign-born kids.

The beneficiary must have a social security number or ITIN number to be able to use the funds in the plan.

Foreign-born kids, accompanying their parents on work visas, will be on H-4 dependent visas. The holder of this visa is not normally issued a social security number, and there are only a few cases when they’ll be able to get an ITIN issued to them.

The only way they’ll be able to take advantage of the plan is when and if their parents become permanent residents.

When this happens, they’ll be issued a social security number which will allow them to be beneficiaries of the 529 plan.

If your kids are very young, meaning you have years before college, and you are on a sure path to becoming a permanent resident, it’s worth consideration.

You can open the account with yourself as the beneficiary and change it later to the kids when they become citizens or permanent residents.

Priority Dates, Social Security Numbers, and 529 Plans

Before you sign up for the 529 plan, consider your priority date if on target for a green card. It’s your place in line for the green card application. The green card is processed when your priority date becomes current.

Countries that submit a high volume of applications have the longest time. For example, based on the latest visa bulletin (2)

India’s priority date for EB-3 filing is Jan 2012 while China’s is April 2018. This means immigration is currently processing green cards for those people who applied in Jan 2012 from India.

For new arrivals into the country from those two countries, this is a long time to wait and the chances of the foreign-born kids having social security numbers by the time they go to college are low.

For this group, the 529 plan is not very viable, and we should consider other options.

3 options are that are possible candidates for this situation.

Taxable Brokerage Account to Save for College on H-1B Visa

I have written extensively about taxable accounts and the flexibility the account provides. It’s also one of the best options for saving for college, regardless of your visa status. As an H-1B visa holder with foreign-born kids, this is a very attractive option.

There are a couple of advantages of using this account to save for college when a 529 college savings account is not an option. It’s also very practical when you don’t know if your kids are going to go to school in the US. 

Taxable Account – Flexibility

The account can be used for different goals ranging from mid to long-term goals. You own the account individually, and you choose exactly what to do with it.

If you earmark it for college, and the kids end up not using it for college, you can choose to use the money for something else, with zero penalties, unlike a 529 account.

When you sell out of the account, if you’ve held the securities for more than a year, you end up paying long-term capital gains, which are taxed at a lower rate than short-term gains.

Taxable Account  – Tax Efficiency

Being a taxable account, it offers you the opportunity to do some tax-loss harvesting (3) 

Tax loss is a strategy to reduce tax liability. Just ensure you don’t fall prey to the wash sales rule, which will cause the losses to be disallowed by IRS (4) 

To minimize having to pay taxes on dividends yearly, invest in ETFs instead of mutual funds.

If you end up leaving the country permanently, there are some interesting tax benefits. There is no capital gains tax on this account if you are outside the US.  At that point, your home country may tax the account, but not the US.

Roth IRA Account to Save for College on H-1B Visa

We typically think of this as a retirement account, but it can be used for saving for college as well. It’s also a great choice if you don’t think your kids are going to go to school in the US, assuming you are only here for a couple of years. The requirements to open and fund the account are

• • Earned income
  • Income earned in the US
  • Have a social security number
  • Individually owned

The above requirements are easily met for an H-1B visa holder.

You fund the account on an after-tax basis. Your income must be below a certain threshold to be able to open the account. For 2022, your modified adjusted gross income (MAGI), should be below $144,000, and if married and filing jointly then it should be below $214,000.

If you are above this threshold, the backdoor Roth option makes this a moot point.

 In 2022, the max that can be put into the account is $6,000 ($7,000 if over 50). Ideally, both parents will each open an account.

The initial contribution can be withdrawn anytime, penalty-free for education-related expenses while allowing the earnings to continue growing for retirement.

If you withdraw the earnings for college expenses, the 10% penalty does not apply, but you’ll pay taxes on that.

At age 59 and ½, if the account has been open for more than 5 years, the earnings can also be withdrawn tax-free and penalty-free to pay for college expenses.

Where to Open the Taxable and Roth IRA Accounts

Even though you are eligible to open the account, not every brokerage will open this account for you. Some of the ones that will do it include TD Ameritrade, Schwab (I use these two), and interactive brokers. Take your time to investigate the ideal custodian for you.

I Bonds to Save for College on H-1B Visa

Another college saving option is the I series savings bond, issued in the parent’s name. You can purchase up to $10,000 in bonds each calendar year.

According to Treasury Direct, the current interest rate for bonds purchased through October 2022 is 9.62%. The rate is applied to the 6 months after purchase and is compounded semi-annually. (5)

The bonds can be bought by any US tax resident and since an H-1B visa holder is a tax resident with a valid social security number, you can purchase the savings bonds.

Under the Education Savings Bond Program, the interest earned by the I bond can be partially or completely excluded from federal income tax, if they are used to pay for qualified higher education expenses.

This calls for cashing the bonds in the same tax year you plan to pay for college expenses (6). 

Keep in mind that they earn interest for 30 years, but can be cashed after one year. If you cash them before 5 years you lose the previous 3 months of interest. 

Other Accounts

Other account types can be used for college savings, but since foreign-born kids without social security numbers are not able to take advantage of them, I have not included them in this list.

Need Help?

All the above plans can be combined to come up with something ideal for each family depending on your unique situation. We are here to assist you in any way we can. Click here if you’d like to set up a meeting and chat on the above topic or any other financial issues that affect foreign-born families in the US.

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Sources
(1) https://scholarships360.org/financial-aid/fafsa-no-social-security-number/
(2) https://www.boundless.com/blog/visa-bulletin/
(3) https://www.investopedia.com/terms/t/taxgainlossharvesting.asp
(4) https://www.investopedia.com/terms/w/washsalerule.asp
(5)  https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_ifaq.htm#tax
(6)  https://www.treasurydirect.gov/indiv/planning/plan_education.htm