U.S. Tax and Financial Planning Issues Specific to Common International Pension Plans
Countries around the world have different pension and retirement accounts that U.S. expatriates and foreign nationals moving to the United States may own. Generally, the IRS is most concerned with non-U.S. retirement accounts that have a current cash value. Pensions that pay a percentage of final salary or pensions based on years of service usually do not require IRS reporting before distributions begin. Below are examples of U.S. tax issues for specific foreign pension and retirement accounts:
UK Pension Plans – Company Pensions and Personal Pensions (SIPPs) – UK pensions are popular among British expats living in the United States and U.S. expats in the UK. Fortunately, the comprehensive U.S.-UK double tax treaty simplifies tax reporting, especially with company sponsored pension plans. While living in the UK, a U.S. taxpayer may deduct, for U.S. tax purposes, contributions to their UK pension plan and the pension may grow tax deferred (see more U.S./UK financial planning strategies). Note that UK ISA accounts are not considered pensions for U.S. tax purposes.
Canadian Pension Plans – RRSPs, RRIFs, and TFSAs – The two most common Canadian retirement accounts are a Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TFSA). An RRSP is similar to a 401k. The U.S.-Canada double tax treaty provides protections for Canadian tax residents, but it is generally not advisable for U.S. taxpayers in the United States to contribute to an RRSP. On the other hand, a TFSA is a tax-free account. The U.S. does not recognize the tax-free nature of a TFSA and the accounts are taxed currently similar to a brokerage account.
Australian Superannuation – Australian Superannuation accounts are tax-deferred retirement accounts where employers and employees contribute. Unfortunately, the U.S.-Australian double tax treaty does not contain any provisions explicitly recognizing a Superannuation as a qualified foreign pension. U.S. taxpayers who own Superannuation should seek specialized tax advice to correctly report contributions, growth, and distributions from these pension accounts.