Planning for Taxes and Retirement When Moving Abroad
When you first move abroad, there are so many things swarming through your head beyond asking, “How will this move impact my US expat taxes?” However, as many expats have found out, this should be one of the first questions considered.
One factor that is often considered too late is that of retirement planning. Should you opt to invest in a foreign retirement plan? Will you receive the same benefits on your US expat taxes as you would have with your domestic IRA or other retirement medium? Even though retirement planning in each individual country has its own individual characteristics, this article will attempt to the most common retirement planning issues we have seen with expats.
US Tax Treaties
One of the most important factors to consider when considering an investment in a foreign retirement plan is the existence and impact of a US tax treaty with the host country. If a tax treaty is in effect, it will typically stipulate that retirement benefits are taxable by only one country (this is a good thing!). Normally, this will be a treaty with the resident country. If an early distribution is taken, or there is a lump sum payment, the tax treaty may contain provisions to adjust the taxation approach.
It’s also important to remember that each treaty has a “tax savings clause” that allows the US to reserve the right to tax a US citizen’s income as if the treaty were not in effect. Some treaties will also specifically allow for US tax benefits to be extended to the retirement plans of foreign countries. For example, the tax treaty currently in effect between the US and the United Kingdom allows US citizens investing in UK pension plans to deduct contributions made to the plan. Furthermore, annual earnings from the plan are also not taxable until distributed. Rather, they are eligible for deferral until distribution.
We provide basic information on existing US treaties with specific countries in our country guides.
We receive questions from many of our Australian clients regarding their participation in the Australian retirement system, aka “Superannuation.” Thanks to an existing SSA Totalization Agreement, self-employed US citizens working in Australia have the choice to contribute to US social security or Australian Superannuation. US citizens employed by an Australian employer, on the other hand, do not have this luxury. Australian employers are required to contribute 9% of an employee’s salary to a Superannuation account. Employees will have an option to make additional voluntary contributions of their own.
US citizens who opt to contribute to Superannuation do not receive a benefit on their US expat taxes from doing so. Furthermore, the employer portion of Superannuation contributions are considered taxable income on US expat taxes, ineligible for the foreign earned income exclusion. If you decide to return permanently to the US after contributing into the Superannuation plan, you can request a full disbursement of the monies reserved for you in the plan. Upon departure, simply complete a Departing Australia Superannuation Payment form, which can be obtained from the Australian Taxation Office website.
Read more about being an expat in Australia in our US Expat Taxes Explained: Filing Taxes as an American Living in Australia article!
Qualifying Recognised Overseas Pension Schemes (United Kingdom)
In recent years, many US expats residing in the UK have been approached with the idea of transferring their UK pensions into Qualifying Recognised Overseas Pension Scheme (QROPS). UK residents who have ultimate plans to move abroad will receive greater tax benefits and have more management opportunity by moving their UK pensions into QROPS. This way, the funds can be moved to countries with no income tax, thereby eliminating the UK income tax on the distributions. In addition, the expat will have the opportunity to manage the currency, investment, and distribution (lump sum or annuity) of the funds from their QROPS.
However, how will investing in a QROPS affect your US expat taxes? Historically, it has been very difficult for US citizens to invest in QROPS, because many US plans do not permit transfers. Recently, some arrangements have been made that allow for US citizens to transfer their UK pensions into a QROPS. At this point, the tax treaty between the US and UK allows for favorable treatment of UK pensions on US expat taxes. However, once these funds are transferred to QROPS, it is likely that the US taxpayer will lose these benefits because the funds will be transferred offshore and no longer be eligible for treatment under the tax treaty.
Read more about being an expat in the UK in our US Expat Taxes Explained: Filing Taxes as an American Living in the UK article!
Registered Retirement Savings Plans (Canada)
Canada is another country with unique retirement plan options that also have a significant impact on US expat taxes. Canada offers its citizens the opportunity to invest in a Registered Retirement Savings Plan, or RRSP. There are several Canadian tax benefits associated with investing in an RRSP. Luckily, beginning in 2004, the US began offering a simplified method of reporting a US citizen’s interest in a Canadian RRSP. US citizens can defer income associated with their RRSP by making an election on their US expat taxes. This is done by filing a simple one-page form (Form 8891) that can be obtained on the IRS website, which allows the taxpayer to make the election and report any transactions associated with the account for that year. A Form 8891 should be filed for each RRSP.
Making the election allows the US citizen to defer taxation on the earnings of the RRSP until the funds are distributed.
Read more about being an expat in Canada in our US Expat Taxes Explained: Filing Taxes as an American Living in Canada article.
International Retirement/Pension Plans
Many companies have recently begun offering financial retirement plans specifically targeting expats. These retirement plans, often called “International Retirement Plans” or “International Pension Plans” advertise portability, flexibility and online management tools. These plans are seemingly a good fit for the expat as the expat can choose which currency to use, how and where to invest their funds and where to do it from. However, from a US tax perspective, these plans will likely not qualify for benefits or deductions on US expat taxes.
Therefore, if you’re considering investing in one of these plans, it’s important to have a tax professional evaluate all of the aspects of the plan to determine in advance whether it will qualify for US tax benefits. Conclusion Participating in a foreign pension plan can be a risky move that could potentially have a significant impact on your US expat taxes. The IRS has fairly strict rules for the deductibility of contributions to pension plans. Foreign pension plans are unlikely to meet these requirements, unless specifically stated in a US tax treaty. In addition, there are several foreign pension plans that are considered “foreign trusts” by IRS standards, thus creating many additional reporting requirements for the “beneficiary” of the trust, including an annual trust tax return filed separately from US expat taxes.
Questions About US Expat Taxes?
All of the reasons above illustrate why it is important to consider each plan carefully and how it will impact your US expat taxes. We also have a post that discusses Social Security and Medicare for retirees abroad and how it affects their US expat taxes. If you have any other questions or would like to learn about our expat tax services, please contact us.