When working abroad, it’s common to acquire a foreign pension plan. While some Americans will reside outside of the US permanently, many will return home eventually, and in doing so are faced with the question of what to do with their foreign pension plan investment.
You might be thinking that you can add your funds into a new US based pension plan like an IRA, but actually, most foreign pension plans are non-transferable because the US Internal Revenue Code does not classify them as a qualified trust. So what to do with your pension? There are a few options:
You can choose periodic distribution or take a lump sum payment. The benefit of this option is that you can turn around and invest the money in a US-based account, which could offer a better range of investment choices at lower fees. Again, you will have to pay taxes on the distribution. Try to avoid pushing yourself into a higher tax bracket when you’re making distribution.
In some countries you can transfer your pension to a new pension. These transfers can help you manage currency risk or estate planning. You want to make sure that the distribution method isn’t going to create future tax ramifications. You want to make sure you avoid instruments that would be considered PFIC’s, Passive Foreign Investment Companies.
You can simply leave the funds in your foreign pension account until you retire. Funds accumulated in foreign pension plans have the benefit of remaining untaxed until they are distributed, so it’s often a good idea to hold off distribution as long as possible. Once you retire and withdraw from the fund, you will have to include the taxable portion on your US tax return.
You may want to hedge the currency risk through a natural hedge in the portfolio or using hedging investments as outlined in our articles on currency planning.
One thing to remember is that most pension plans, both foreign and in the US, charge a penalty on early distribution. The penalty only applies to the taxable portion of your pension, but it’s still best to avoid if possible. You should wait until you are at retirement age before receiving any distributions from your pension plan (59 ½ in the US, unless you use special provisions in the tax code), and should always make sure your distribution method is in accordance with the allowable methods outlined in IRS Publication 1075.
Of course, each country has different rules and different tax treaties with the US, and foreign pension plans can vary. An experienced financial advisor can help you determine which option is best for you, and clarify any questions you may have.
If you have any doubts don't hesitate to contact our team, our advisors would be more than happy to clarify them.