Foreign Pensions and American Expat Taxes: Top Questions and Answers

Foreign Pensions and American Expat Taxes

When moving abroad to work and live, there are many considerations you must make. One thing that may not be top of mind, but is very important, is planning for retirement. In the US, hearing advice about maxing out your 401k and IRA contributions is very common – but you may not realize how complicated American expat taxes can be surrounding foreign pension plans when you begin working abroad. Here are the questions and answers you may be looking for when it comes to understanding your foreign pension!

Do Double Tax Treaties Cover Pensions?

The US currently has double tax treaties with about 70 countries, which typically states that each government must respect the tax benefits and structure of the other country’s plans, and retirement benefits are taxable by only one country. Places like Canada, the UK and Germany fully qualify the other country’s employer-pension system, which makes it easier on Americans abroad to participate in these foreign pension plans – though with the recent Brexit decision, foreign pensions in the UK could get complicated.

Some countries, like France, Spain or Australia, make it a bit more challenging by providing only limited agreement about how to treat pension plans in the other country. For US citizens participating in these foreign pension plans, very specific advice for American expat taxes may be needed when it comes to reporting the host country’s pension plan on US expat tax returns.

For countries without tax treaties with the US, participating in a foreign pension is not advised (if given the option). The US will not recognize these pensions as qualified, which makes reporting very complex and has punitive tax rates.

Is My Foreign Pension Treated as a Foreign Grantor Trust for US Tax Purposes?

This is an important question to ask if you decide to roll your foreign pension assets into a self-directed pension plan (like self-invested pension plans in the UK and self-managed superannuation funds in Australia) – or if you set up a self-directed pension in a country with no treaty provision that qualifies such plans.

When it comes down to it, structure of your foreign pension determines if it is treated as a foreign grantor trust. The determining factor is control – but it’s often hard to interpret exactly what type of control leads to this decision. Typically, the power to make decisions on the actual investments in a foreign pension is considered control and makes it a foreign grantor trust – even if you actually don’t exercise control over it. The ability to make such decisions is sufficient. This can trigger very complex reporting requirements, including filing Form 3520 and having to report underlying investments as PFICs on Form 8621.

If I Have US Retirement Accounts, Does That Trigger a Reporting Requirement in My Host Country?

Similar to how the US may not provide preferred treatment for your host country’s pension plan, your US pension may be treated punitively in your host country. There are some countries that only tax locally sourced income, which eliminates this issue. However, other countries may tax based on worldwide income, but will recognize the principle of tax deferral within a US qualified plan. And still other countries, like Canada or the UK, might treat US retirement plan assets and contributions as qualified – recognizing the deductibility of contributions and tax deferral on income within the plan.

Can I Contribute to My IRA and 401k While Living Abroad?

Usually, yes – these contributions are allowed by the US. However, you must make these contributions from non-excluded earned income. This means, if your foreign income is below the Foreign Earned Income Exclusion (FEIE) threshold of $100,800 for the 2015 tax year and you want to claim the exclusion, you won’t be allowed to contribute to the IRA or 401k, as all income has been excluded.

Additionally, if you are able to contribute, be mindful that contributing to a US pension while living in a country with high taxes could result in double taxation – due to the possibility of no tax benefit accruing from the contribution while distributions during retirement will still be taxed.

Need More Foreign Pension Advice Related to American Expat Taxes?

Greenback can help. Our team of dedicated CPAs and IRS Enrolled Agents are here to help you navigate the complicated nature of American expat taxes to make filing a hassle-free process – contact us today!