“Our tax code is so long it makes War and Peace seem breezy.” - Steven LaTourette
One of the most common financial questions expats ask is: how does the US tax foreign savings and retirement accounts? It is an important consideration, as the answer informs everything from whether to open a checking account overseas to long-term retirement planning strategies. In this article, we’re going to recap and clarify the US tax rules relating specifically to overseas savings and retirement accounts for expats.
In this article, you’ll learn about:
• Reporting foreign savings accounts
• Reporting foreign retirement accounts
• Taxation of foreign retirement distributions
• Should expats save in the US or abroad?
Reporting foreign savings accounts
First off, just having a savings account abroad doesn’t open you up to any new US tax liability. However, it may need to be reported under FBAR and FATCA rules.
To recap, FBAR reporting is a requirement for any American (including expats) who has over $10,000 in total combined max balances in foreign financial accounts that they have signatory authority over at any time during a given year.
FATCA reporting is a separate requirement for Americans who have financial assets registered abroad with a total value of over $200,000 at the end of the year, or $300,000 at any one time (thresholds are doubled if you doing a joint filing)
While there are subtle differences in exactly which types of accounts qualify for each, foreign savings account balances qualify for both FBAR and FATCA reporting if the total of the combined balances of all of your non-US financial accounts exceeds the minimum reporting thresholds.
FBARs are filed on FinCEN Form 114, while FATCA reporting means filing IRS Form 8938.
Reporting foreign retirement accounts
US reporting of foreign retirement accounts varies depending on the type of account.
Most foreign retirement accounts qualify under FBAR and FATCA reporting rules if they are individual (rather than national social security) accounts, and depending whether your total combined qualifying foreign account balances exceed the respective reporting thresholds.
Some types of foreign retirement accounts trigger further reporting requirements too.
Notably, investing in foreign pooled funds (such as mutual funds or ETFs), which the IRS classifies as Passive Foreign Investment Companies (PFICs), mean additional complex reporting. It’s worth seeking advice before investing in this type of retirement account, as they can trigger additional taxation, too.
Some foreign retirement funds, such as Australian Superannuation funds, may be considered to be foreign trusts, also triggering additional reporting.
Even if you only have standard employer pension account, your employer’s pension contributions may be taxable. Meanwhile, foreign state social security pension contributions aren’t reportable to the US.
Taxation of foreign retirement distributions
In general, all Americans must report their worldwide income and pay US federal income tax on it. This includes pension income, keeping in mind qualified pension plans such as a 401(k) and IRAs may have certain US tax benefits.
While many types of foreign pension distributions enjoy a similar tax exempt or reduced tax status to US qualified pension plans in a foreign country, they aren’t generally considered as qualified retirement plans by the IRS and so don’t typically enjoy the same favorable tax treatment in the US. - Nathalie Goldstein EA, MD at MyExpatTaxes
Some US tax treaties recognize and address this issue, notably the Double Taxation Agreements (DTAs)s the US has with the UK and Canada, however the majority of DTAs don’t, leaving most foreign pension distributions liable to normal US income tax for Americans living abroad.
As a result, expats should consult an expat-specialist financial planner to help them address this important issue and minimize their future US tax liability when saving for retirement.
If you live in a country where a tax treaty does address this issue, you will have to file Form 8833 with your federal tax return to claim the tax treaty benefit. Keep in mind, the tax treaties are not straightforward for Americans, especially concerning pension income distributions. While the majority specify residence based taxation of pension income distributions, this benefit is not exempt from the Savings Clause of each treaty, meaning as a US Citizen, you cannot use it.
Should expats save in the US or abroad?
Unfortunately, there isn’t a single, simple, universal answer, as it depends on many factors, not least your financial planning goals and where in the world you live and plan to live in the future.
Alongside the reporting and tax rules (and details of the DTA with the US) of the country where you live, the other significant factor is whether you plan to return and live in the US after you retire.
DTAs are significant, and some countries have a big advantage in this respect for savers.
For example, if you live in the UK, thanks to the relatively generous DTA that the US has with these countries, you will receive the same tax-free benefits whether you live or save in the US or in the country where you live.
Belgium and the Netherlands on the other hand are examples of countries where it’s normally better to save in the US, as you won’t get the same tax deferral or distribution benefits otherwise, while if you live in Spain or Germany, you won’t get these benefits at all!
Some expats in fact, such as those who work remotely, choose where to live based on where they can benefit most in terms of minimizing taxes and retirement saving, both while they’re working, and then again perhaps moving country when they retire.
As an example, while France has higher income tax rates than the US, thanks to a clause in the US-France tax treaty that US Citizens are eligible to use, it allows US pension income to only be taxed in the US, so that Americans who retire in France with pension income from the US will pay lower tax rates compared to if they lived in some other European countries.
Decisions relating to long-term saving and planning for retirement should always be made after seeking advice from your financial advisor. This is especially true for expats, due to the more complex nature of cross-border financial planning.
If you have any questions, don't hesitate to contact us.
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