Understanding US Expat Tax Implications When Investing In a QROPS

Understanding US Expat Tax Implications When Investing In a QROPS
January 27, 2016

All over the world people are earning money and saving for retirement. But, unfortunately, US citizens (and permanent residents) living abroad have a harder time navigating the tricky world of pensions and retirement accounts due to complicated IRS regulations. Foreign bank accounts, including retirement and pension accounts, can either be a great benefit to your financial situation or a US expat tax nightmare.

Review Tax Laws in Both the US and UK

In the UK, pension plans set up by your employer are covered under the US-UK tax treaty. Generally, this means that distributions from the plan are only taxable in your country of residence. Of course all tax treaties are different, so be sure to check with your expat tax preparer to confirm. This is true for US citizens living in the UK, and for UK citizens living in the US. This is where the similarities end though. The tax laws of the UK are different than those of the US, and as such you need to be sure of the tax consequences before jumping into foreign retirement plans. The wrong plan could end up costing you more than the savings for retirement.

Understanding QROPS

A popular plan for UK expats is the QROPS – Qualifying Recognized Overseas Pension Scheme. This type of pension plan offers UK citizens more flexible options when it comes to investments and transferring the funds to beneficiaries. US taxpayers living in the UK, with a UK pension plan, may be tempted to transfer their funds into a QROPS plan, as they are highly advertised to UK residents. Unfortunately, the tax implications for a US citizen may negate any benefits from investing in a QROPS.

US Expat Tax Implications of QROPS

The US and UK tax rules are different; each defining “tax qualified” plans by their own laws and regulations. The IRS does not recognize QROPS plans as “qualified pension accounts.” Therefore, transfers into and out of the account are considered taxable events and must be reported to the IRS. The tax deferred benefit of a pension account, allowing you and your employer to deposit money before it’s taxed, is removed when you leave the ‘safety’ of a UK qualified employer pension. Because of this, any gains on the account are taxed at your highest US tax rate each year, even if you don’t withdraw the funds.

Most QROPS accounts are considered to be Private Foreign Investment Companies (PFIC) by the IRS. PFICs require extensive record keeping and tax filings to keep you current with the IRS. These filings are difficult, even for experienced expat tax preparers, and often require the taxpayer to do hours of research to find the information needed for the forms. Generally the cost of preparation of these forms will negate any and all UK tax benefits by investing in the QROPS account. Penalties for not filing these forms properly could run into the tens of thousands adding another layer of risk for investors.

If you are looking the US expat tax implications for Australian or Canadian foreign retirement plans check out this article here.


In addition to the IRS, US citizens also have to be aware of Foreign Account Tax Compliance Act (FATCA) regulations regarding their foreign pension accounts. FATCA  is regulated by FinCEN, another arm of the US Treasury department, and was designed to prevent US citizens from ‘hiding’ money in foreign banks to avoid taxation. Many foreign banks are required to submit reports under the FATCA laws, including transactions with a QROPS.

The temptation of easier, faster, and more money is hard to ignore. But, when it comes to the IRS, research is the key to saving you time, money, and stress. Be sure to check all the angles when it comes to your money and your future, as the IRS can be unforgiving and harsh when it comes to foreign accounts!

Questions About How Foreign Retirement Plans Affect US Expat Taxes?

It’s very important to consider each plan carefully and how it will impact your US expat taxes. Greenback is here to help. Our expat-expert CPAs and IRS Enrolled Agents are always available. Contact us today and we will get back to you within 1 business day.

The IRS tax code is 7,000 pages. Want the cliff notes version for expats? Let us help.
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