Sweden is one of the most beautiful places to which you could move. But, if you’re banking on a Swedish pension plan to help fund your retirement, you’ll want to find out the implications it could have on your expat taxes.
The Pros and Cons of Swedish Pension Plans
Let’s talk about the taxation of Swedish pension benefits when payments are received. So that this is an article you can read on your lunch break rather than a full novel, we’ll focus on pension benefits and not all of the benefits received under the Swedish social security program administered by the National Agency for Social Insurance. To give you a quick rundown on those other benefits, know that the benefits paid out under social security programs are taxed only in the country of residence, meaning a US person who retired in Sweden would only include social security benefits received on the Sweden tax return.
Back to the pension benefits! The first thing to know about the Swedish pension scheme is that they don’t enjoy any particular benefits from the US perspective. The benefits paid out under a pension are going to be taxed on your US tax return. The only question is: when.
Understanding pension fund taxation starts with looking at the money that is going into the pension. The money in the pension plan came from cash that you invested, cash invested by your employer, or growth on the investments. The first thing to know is the US government doesn’t recognize the Swedish pension plans, so this means that your contributions don’t reduce your income for US purposes, and contributions made by your employer are taxable. The growth may be taxable if you are a highly compensated employee. In short, the pension is taxed now. When money is taken out of the pension, you must factor in the money that was already taxed.
An Example of Swedish Pension Plans’ Tax Effects
For example, let’s assume that you receive USD 30,000 from the pension plan in one year, and the total value of the pension is one million dollars. The amount that you previously included in your income was USD 500,000. Since you already paid tax on half of the pension, then only half the USD 30,000 would be taxable, so you include USD 15,000 as pension income. Any tax paid on the distribution from the pension scheme could be used for the Foreign Tax Credit. The Foreign Tax Credit has a carryover provision, so any tax credit not used could roll forward up to ten years or one year back. The Foreign Tax Credit is grouped into categories, and pension belongs to the same group as employment income. So, if there is any remaining carryover from the years that you were working, this can go towards reducing the tax paid on Swedish pension income.
The important takeaway is that you should track amounts already included as income each year to track your cost. If you didn’t track your cost, then you will be taxed twice, which is something nobody wants. While the money from Swedish retirements is taxable, with careful tax planning and tracking, you might not experience an outlay of cash going to the US government.