An Australian superannuation fund, sometimes referred to as a “super,” is a defined contribution plan placed in by the Australian government. Before we go over the tax implications of transferring money between supers and 401(k)s, let’s go over some basics.
Employers must contribute 9.5% of wages and salaries if you’re an Australian citizen or permanent resident. There is no simple method for a direct transfer from an Australian superannuation fund to a US 401(k) plan. In nearly all scenarios, the taxpayer will have to take constructive receipt of the funds in order to initiate the transfer. In other words, you will have to obtain the money from superannuation account and deposit this money into your 401(k).
How to Transfer Money From an Australian Superannuation to 401(k)
Taking Money Out of the Australian Superannuation Fund
In general, if you’re a permanent resident or Australian citizen, you will not be allowed to take a distribution from your super until you reach your preservation age, which is typically between 55 and 60 years.
If you are aged 60 and over, benefits from most superannuation funds are tax-free in Australia. If you collect from a super and you’re between 55 to 59, tax is payable on any distributions that were not previously taxed.
In this scenario, superannuation distributions are made up of two parts: a taxable distribution and a tax-free distribution.
- Taxable distributions are parts of your superannuation that were not previously taxed, such as employer contributions and salary sacrificed contributions.
- Tax-free distributions are made up of government contributions and after-tax contributions.
When filing a US tax return, this distribution is not eligible for the Foreign Earned Income Exclusion (FEIE). Reducing US tax liabilities on the distribution of superannuation payments would entail offsetting the tax using the Foreign Tax Credit.
Contributing Money to the 401(k)
Employers and employees are permitted to contribute to 401(k) plans for retirement savings. In general, an employee younger than 50 can contribute no more than $19,500 for tax year 2020. Assuming the contribution is coming from an Australian superannuation fund and you’ve reached the preservation age (55-60 years), a larger contribution is allowed.
For tax year 2019, if you are age 50 years or older, you can contribute a maximum amount of $25,000. Contributions to a 401(k) plan are deductible from your adjusted gross income. Therefore, any contribution will shrink your taxable US income by the contributed amount multiplied by your marginal tax rate per your tax bracket.
Transferring Money From a 401(k) to an Australian Superannuation Fund
A 401(k) plan is a defined contribution retirement plan sponsored by employers on behalf of their employees. The name is derived from the section of the US Internal Revenue Code.
Generally, employees contribute money to their 401(k) accounts, which is sometimes matched by employers. The money is invested, and any growth on the earning is usually not taxed until distributed in most cases at retirement.
As is the case with transferring money from a superannuation account to a 401(k) account, there is no direct rollover. The funds must be issued to the taxpayer and deposited into the superannuation account.
Taking Money Out of the 401(k)
Any distributions taken after reaching age 59 ½ years are subject to ordinary income tax. Most 401k withdrawals taken before age 59 ½ are subject to regular income tax as well as a 10% penalty.
There are a few exceptions to avoid the 10% penalty, but unfortunately, none of these exceptions are applicable if the distribution is taken and the funds are deposited into a superannuation fund. Distributions are reported on Form 1099-R, which should be provided to your tax preparer.
Putting Money Into Superannuation
Depositing money into your Australian superannuation fund is as simple as making a deposit into your bank account.
These contributions are considered after-tax super contributions, so the maximum contribution per Australian tax year is 100,000 AUD. In some circumstances, depending on the balance of your super, a contribution of up to 300,000 AUD is allowed.
There is no tax consequence in Australia for this type of contribution, but depending on your aggregate level of a taxpayer’s contribution, there are possible tax consequences in the US.
If greater than 50% of the account fund balance was made by the taxpayer rather than the government or an employer, the superannuation account can be deemed a foreign grantor trust and will require filing Form 3520A or Form 3520. If not completed correctly, these forms carry fines up to 10,000 USD.
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