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Context

I am 24, live in the UK and just starting to think about long-term savings. I've heard that the UK lifetime ISA is one of the more effective ways to save for a first house/retirement. Since index trackers outperform interest rates on cash in the long term, I'm inclined to open a stocks and shares LISA.

Problem

I have US citizenship and am concerned that

If it is just a cash-based ISA, then there is no issue... Whatever interest the cash-based ISA generates will be reported as interest income on your US tax return.

Meanwhile,

a Stocks and Shares ISA, is more complicated for US citizens or Green Card Holders. The UK does not tax these ISAs, but the US does tax these and taxes them more harshly than a regular investment account [ref]

Question

For a US citizen, is a S&S LISA

  1. Just fine and this is all misleading, or
  2. Less advantageous than for a pure UK national, but still the best option going, or
  3. A suboptimal savings vehicle. If so, could you explain why and what a better alternative is? E.g. Would a cash LISA be better?

Thanks in advance!

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