US Income Tax Impact on Foreign Pensions and Retirement Plans

David McKeegan, President of Greenback Expat Tax Services, loves answering readers’ questions about US income tax issues! Recently David was asked, “How will my foreign pension or retirement plan be taxed by the IRS?” In this video, David provides an overview of the complexities of foreign retirement investments and outlines some things you should pay close attention to in order to ensure you minimize the US tax liability.



Hi everybody. I’m David McKeegan with Greenback Expat Tax Services. Our question today is, How will my foreign pension or retirement plan be taxed by the IRS?

This is a very large, very complex question, and it will depend specifically on what country you’re living in, what country you plan on retiring in, and what the tax treaties between the US and your host countries say.

We’ll do a quick overview of some of the things you want to look for, and that’ll be a jumping-off point you can use. We highly recommend speaking to a professional if you have questions about this, specific questions that you need answered.

To begin with, the most important thing will be if or whether there’s a tax treaty between your host country where you’re earning and saving your retirement pot and the US government. If there is, you’ll want to look at that and see what it says specifically about how pension benefits will be taxed. If there isn’t, then it will depend on how you’ve contributed to these plans, whether you’ve been taxed as you’ve been contributing.

For example, an Australian superannuation fund, you’re taxed on that each year. All the contributions are taxed. So you build up a basis in those funds, which will then decrease your tax burden at retirement.

Now, another popular place for a lot of expats who are building up retirement savings is the UK. Oftentimes in the UK, if you’re working for a big bank or something like that, your retirement savings will be considered qualified — or qualified plans — as long as they’re with your company.

But if you look to move those funds out of the company account — let’s say you want to put them into a CIF, or you want to use one of the QROPSs, which is a UK-specific plan where you can move your pension out of the UK — this can greatly complicate your situation, and you want to speak to a professional to make sure that where you’re moving the money to will continue to be considered a qualified retirement plan by the IRS. Otherwise, you’ll lose your tax-deferred status. So instead of waiting until you retire to pay tax on that money, you have to start paying tax on the money as you go.

Specifically, with the QROPS, we looked into those quite a bit and, while they don’t seem to be illegal in any way, they do seem to be very complex financial transactions and there’s a lot of fees associated with them. I would question whether or not you’re better off using something like that, where a slight rule change between the tax treaty of the United States and Malta could put the whole plan in peril, and meanwhile you’re paying one, two, three percent in fees each year as you’re going along.

Again, this is a very broad, very difficult question to answer, generally speaking. If you have specific questions about this, please let us know and we’ll be more than happy to answer them. Maybe we’ll even do something on a country-by-country basis, if people are interested.

Retirement savings for Americans living overseas can be very difficult. You want to make sure you’re not falling foul of any of the IRS rules regarding [inaudible 00:03:44] bank account reporting of FATCA. You also want to make sure that your investments aren’t viewed as foreign trusts by the IRS, or PFICs by the IRS, because this will change the way, the tax-deferred nature, of the investment you think you’re making.

So if you’re investing in foreign mutual funds or foreign shares, you want to have a look at that. You want to talk to your professional about that, to make sure that the US will view those the way your host country views those. Otherwise, the tax-deferred nature or any tax benefits you think you may be enjoying, you might not be receiving on the US side of those investments.

That’s all for this week. If you have any questions, please let us know. Thank you.

More questions about your US income taxes?

If you are planning to retire abroad, download our free guide for Americans Retiring Abroad for all the US tax information you need!

Do you know 10 most common mistakes expats make?