You may be familiar with the FBAR, but do you know what should be reported on the FBAR? Read below to find out the accounts that count, and the accounts that you can skip on this critical filing requirement.
FBAR: What Is It?
If you are a US citizen or resident who has an interest in a financial account outside the US, you may need to file a Foreign Bank Account Report (FBAR) to disclose these accounts. US partnerships, corporations, trusts, and estates are also required info on an FBAR. An FBAR is required if the total amount of all your foreign financial accounts exceeds $10,000. You can calculate the aggregate value by taking the highest annual balance of each account and adding them together. For example, if foreign account A had a maximum annual balance of $4,000 and foreign account B had a maximum annual balance of $7,000, the aggregate value is $11,000, and an FBAR is required.
What Should Be Reported on the FBAR?
Before you can calculate whether your account balances meet the FBAR filing threshold, you need to know what type of accounts must be reported. While a checking account is usually the first kind to come to mind, a multitude of other types of accounts may also be required info on your FBAR.
Let’s back up for a minute. What does it mean to have an interest in a financial account? According to the IRS, you have an interest in a financial account if:
- You actually own the account.
- You own the account jointly with another person.
- You have signatory authority on an account that you do not own—meaning that you have the authority to control the disposition of the assets in the account. A common example is an employee who has the authority to write checks from the employer’s account.
- You own more than 50% of a business that holds a foreign financial account.
Next, which accounts qualify as foreign financial accounts?
In general, deposit accounts such as checking and savings accounts, investment accounts, and most pension and retirement accounts are FBAR-reportable. Following is a non-exhaustive list of examples:
- Deposit and custodial accounts held in foreign financial institutions
- Financial accounts held at a foreign branch of a US financial institution
- Investment, securities, and brokerage accounts held in a foreign financial institution
- Foreign mutual funds
- Foreign accounts and foreign investment assets held by a grantor trust (foreign or domestic) for which you are the grantor
- Foreign life insurance or annuity contract with a cash surrender value
- Foreign retirement accounts, including employer-provided pension plans
What About Retirement Accounts?
Most employer pensions fall under one of two types: defined benefit plan or defined contribution plan. A defined benefit plan is generally an employer or government plan funded by the employer or government, which provides for a fixed benefit in case of retirement or death. In most cases, plan participants are not considered the legal owners, nor can they direct the investments or cause a disposition of funds. Moreover, you may not be able to ascertain the current value or balance of a defined benefit plan prior to retirement.
Due to the factors above, some practitioners take the position that these plans do not need to be reported on the FBAR. A conservative approach would be to report it on the FBAR using a reasonable estimate – if the plan provides for a residual cash benefit payable to the beneficiaries upon the plan participant’s death before retirement age, this amount may be used as the balance to be reported on the FBAR. If you are currently receiving benefits under such a plan, you can report the total annual payments as the FBAR balance.
A defined contribution plan is funded by the employer and often the employee as well; the employee can often direct the investments within the plan. Additionally, defined contribution plans almost always have a readily-ascertained value or balance. Thus, defined contribution plans should always be reported on your FBAR.
Several countries—such as Switzerland—have a tiered retirement scheme, with three pillars. The first pillar is often a social security-type program – a welfare program providing defined benefits for old age and disability. This type of plan is not FBAR-reportable. The second pillar is often an employer pension plan, funded by the employer and employee, which is FBAR-reportable. The third pillar is generally an individual or private retirement plan, which is also FBAR-reportable.
While a social security style of retirement plan provided by a foreign government does not need to be reported on the FBAR, some foreign retirement plans are a hybrid of social security and pension plan. These are generally compulsory, government-managed funds with contributions from both the employer and employee. Some notable examples are the provident funds of India, Singapore, and Hong Kong. Despite the similarities with social security-type programs, these types of pensions are FBAR-reportable.
Greenback Experts Know What Should Be Reported on the FBAR, and What Accounts You Can Disregard.
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