US Taxation of Foreign Pensions: What Expats Need to Know

US Taxation of Foreign Pensions

Understanding foreign pensions can be difficult, especially when you already have to navigate the often-complicated US taxation process while living abroad! Whether you’re planning to retire overseas or move back to the US eventually, you should be aware of these facts regarding your foreign pension.

Foreign Pensions and US Taxation: The Basics

Over nine million Americans living abroad face US taxation as well as taxation from the country in which they reside. The size of the expat community makes the tax implications of foreign pensions an important topic. In general, the IRS does not consider foreign pensions qualified plans like those in the US. This means that Americans overseas are often shocked to see a higher tax bill because of their employer’s contribution to their foreign pension. Similarly, expats may find themselves subject to double taxation on foreign pensions in the US and their host country. To avoid over payment and make the most of your retirement savings, make sure you understand these facts about US taxation and filing requirements for foreign pensions.

Are Foreign Pension Plans Taxable in the US?

Most foreign pension plans are subject to US taxation. To understand the differences between US pensions and their overseas counterparts, let’s take a look at the tax treatment applied to foreign pension plans:

Taxation of Foreign Pension Contributions

Since foreign pensions aren’t qualified plans, employee contributions do not reduce the employee’s taxable US income. Similarly, employer contributions to a foreign pension fund increase the employee’s taxable income.

US Taxation of Foreign Pension Income

With certain US qualified pensions, income accrues tax-free. However, foreign pensions are treated as income of the participant which is subject to taxes annually. In some cases, this is punitive if the foreign plan fund invests in foreign mutual funds or exchange-traded funds. These are classified by the IRS as passive foreign investment companies, or PFICs.

Double Taxation on Overseas Pensions

Foreign pensions leave expats vulnerable to two kinds of double taxation. First, foreign pension fund distributions are taxed by the US and the country of residence. But in many cases, you can avoid being taxed by both countries by claiming a Foreign Tax Credit.

The second type of double taxation on foreign pension accounts occurs because, under US law, you’ll pay taxes twice – when they accrue and when they are paid out. Fortunately, tax treaties make it easier for Americans to participate in foreign pension plans without incurring double taxation. Make sure to find out if the US has entered into a tax treaty with your country of residence.

Reporting Requirements

The reporting requirements for foreign pensions are often complex, as additional requirements may exist on top of reporting employer contributions to foreign pensions and income earned from the pensions on your US tax return. You may also need to utilize the following forms, depending on your specific situation:

  • Form 3520 – required if you have any transactions with a foreign trust
  • Form 3520-A – required for trustees, and includes information the grantor needs to file Form 3520
  • Form 8621 – required if PFIC rules apply
  • Form 8938 – required for reporting on all foreign financial assets, including foreign pensions, if you meet the filing threshold
  • FinCEN Form 114 (aka FBAR) – fulfills the reporting requirement of foreign bank and financial accounts if you meet the filing threshold

Understanding which forms apply to your specific situation is not always straightforward, so consulting with an expat tax professional to determine US taxation requirements is a good idea.

Need More Info About Foreign Pension Plans and US Taxation?

Our team of dedicated CPAs and IRS Enrolled Agents can help! Contact us today for the expat tax advice you’re looking for, so you can get back to what you do best – enjoying your adventure abroad.