Many American expats or green card holders living in the United States own foreign pension plans and non-U.S. retirement accounts. Participation in non-U.S. pension plans may be mandatory when living in another country and employers often contribute as part of total compensation. Individuals enjoying local country tax benefits may not have thought much about the U.S. tax consequences of non-US pensions which could be severe.
For U.S. taxable investors, the U.S. tax treatment of foreign pensions varies greatly. Most foreign retirement plans do not receive preferential tax treatment under U.S. tax laws and bilateral tax treaties. This means that complicated U.S. tax reporting is required on an annual basis.
The Foreign Account Tax Compliance Act (FATCA) and other international tax initiatives make proper tax compliance essential. Foreign retirement accounts are increasingly scrutinized by the U.S. government (IRS). It is important for American expats and green card holders to properly report these foreign retirement accounts and review how they fit into their long-term cross-border financial plan.
Introduction to the U.S. Income Taxation of Non-U.S. Pension & Foreign Retirement Accounts
The tax reporting of a foreign pension plan by a U.S. taxpayer is more than just listing the account on a Report of Foreign Bank Accounts (FBAR or FinCen 114). There may be several other U.S. tax obligations imposed on individuals with non-U.S. pension plans. This may include reporting and paying tax on employer contributions and annual income on investments. The following IRS forms are associated with reporting non-U.S. retirement accounts:
- Form 3520 & Form 3520-A (Foreign Trust Reporting)
- Form 8621 – Passive Foreign Investment Companies (PFIC)
- Form 8938 – FATCA Form (Foreign Asset Disclosure)
- FinCEN Form 114 (FBAR)
Many of these tax forms are complex and carry significant penalties for failure to file. In addition, investors who own non-U.S. listed mutual funds (Passive Foreign Investments Companies (PFICs)), even in a pension plan, may have additional tax reporting obligations (IRS Form 8621).
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.
Other Foreign Pension Plan Reporting
Most foreign pensions do not enjoy tax favored status by the IRS. Examples of private pensions and foreign government sponsored pension plans include:
- Hong Kong Mandatory Provident Fund (MPF) and HK ORSO
- New Zealand KiwiSaver
- Swiss Pension Plans – Pillar 2 and Pillar 3
- Singapore Central Provident Fund (CPF)
- Employees’ Provident Fund (India)
- Various Private and Public German Pensions
Absent an income tax treaty that provides pension tax benefits, U.S. taxable participants in a foreign pension plan may not make tax deductible contributions and must take extra steps to properly report pension assets on their U.S. tax returns.
Incorporating a Non-U.S. Pension Plan into a Cross-Border Financial Plan
A non-U.S. pension may grow to be a large financial asset of many individuals. Not only should individuals understand the unique U.S. tax treatment, but they should also understand the investment options. Many non-U.S. pensions may have incredibly high fees and less than ideal investment choices. From a long-term financial planning perspective, current participants may want to reduce their contributions to a minimal amount only to receive an employer matching contribution. A financial advisor with expertise in cross-border investing and financial planning will be able to help allocate and integrate a foreign pension account into an overall investment portfolio.