Retirement Accounts Abroad

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Retirement Accounts Abroad

Whether you’ve worked overseas, you may be wondering if international pension income is taxed in the United States. You may incur taxation from both the United States and the other country (or countries), so it’s critical to understand how taxes operate before beginning to draw your pension. Here’s everything you need to know about international pension taxes.

Key Takeaways

  • Sorting up retirement benefits after working overseas may be a challenging labyrinth to traverse.
  • Pensions, annuities, trusts, and foreign governments are all examples of foreign sources of retirement income.
  • When IRAs, which are exclusively accessible to people with earned income in the United States, are not an option when working overseas, some firms enable employees to set up trusts.
  • When the tax situation gets too complicated, it is possible to renounce US citizenship.
  • Contacting an expert may help you optimize your retirement income while lowering your tax liability.

You may believe that the retirement regulations of the United States tax system are complicated. For people who have worked in another country, the tax consequences for retirement income might be an even more perplexing tangle of legislation and treaties. Anyone receiving a foreign pension or annuity payment must become an expert not only in US tax law, but also in international tax treaties and the tax legislation of the country from which the pension or annuity is received.

Consider seeking assistance if this is your first year dealing with your tax responsibilities after working overseas. International tax law and retirement holdings experts can help you get started. This will allow you to reduce your tax bill while increasing the amount of money you get from your retirement savings.

Foreign Retirement Pensions or Annuities

Foreign retirement income may come from a variety of accounts, including:

  • A pension plan or annuity provided by a foreign employer.
  • A trust set up for you by a foreign employer
  • A monetary contribution made by a foreign government or one of its agents (this could include a foreign social security pension)
  • monies received from a foreign insurance firm
  • An annuity is paid by a foreign trust or another organization.

Because of the complexities of establishing a pension with overseas revenue, you may be receiving an annuity payment from a foreign trust even though you worked for an American corporation abroad. Funding an individual retirement account (IRA) might be difficult at times since the majority of your income can be exempt from US taxes thanks to the overseas earned income exclusion and the foreign housing exclusion.

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Exclusions for overseas housing and foreign income enable Americans working abroad to minimize their earned income and avoid taxes in the United States. Nonetheless, these limitations often make it difficult to invest in IRAs. To be eligible to contribute to an IRA, you must have earned income in the United States or income subject to U.S. taxation. As a replacement, several American corporations set up a foreign trust for its workers who work overseas in order for them to save for retirement.

Treaty Trap

When it comes time to receive international pensions or annuities, the taxation depends on which countries retain the retirement assets and what form of tax treaty exists between the United States and the other nations involved.

Each nation has negotiated a unique treaty with the United States. Working with a tax counsel who is conversant with US tax law as well as applicable foreign treaties and tax legislation may make a lot of sense. These treaties often offer tax incentives and other instruments to help you reduce the amount of taxes you owe. Of course, some study will be required to ensure that you are accurately filling out tax forms in both the United States and any other nations in order to reduce your tax impact.

Tax on Foreign Pensions

A foreign pension is taxed favorably in many nations, but it does not normally qualify as a qualified retirement plan under the IRS tax rules. This implies that donations made by companies and their workers are not tax deductible. Because this is the norm, the payments you get from your overseas retirement plan are not regarded the same as a pension from the United States.

Contributions to non-qualified retirement plans, in fact, are fully taxed as part of your gross income. This implies that your overseas pension may be taxed twice: once when you contribute it and again when you withdraw it in retirement.

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Tax treaties with numerous nations resolve this problem, allowing the federal tax burden of the United States to be offset. However, you and your counselor must be familiar with the treaties and how to complete the documents for both the United States and the other countries concerned.

If you have pensions from foreign nations where you worked, you may begin studying tax treaties between the United States and those countries on the website of the United States Internal Revenue Service (IRS). Individual IRS publications exist for several of the larger nations, such as Publication 597—Information on the United States-Canada Income Tax Treaty.

U.S. Reporting Requirements for Investments

It is vital to correctly record any interests in foreign banks or investment businesses, in addition to complying with tax requirements when collecting overseas pensions or annuities. The US Foreign Account Tax Compliance Act (FATCA) mandates any institution that holds more than $10,000 in accounts for US citizens to transmit account information to the US Treasury Department.

Under this statute, U.S. residents who live in the United States must report any financial assets held at non-U.S. financial institutions that exceed $50,000 on their U.S. tax returns. Reporting becomes necessary at $300,000 for persons who do not live in the United States.

This may create a new kind of tax challenge for US people working overseas, since merely completing a form to disclose assets in non-US financial institutions might raise the probability of an IRS audit.

If your retirement funds are in a fund designated by the IRS as a Passive Foreign Investment (PFIC), fines for failure to submit may be severe. Capital gains from PFIC accounts are taxed at 37%. For certain overseas assets, there is no 15% long-term capital gains rate.

Investing overseas may also need paying substantially greater fees for investments than are charged by US institutions. According to the sixth edition of Morningstar’s Worldwide Investor Experience Study, there is a global trend toward decreasing fund fees; nevertheless, certain regions are implementing best practices while others need to improve. Here’s how each country compares in terms of fees and expenses:

Fees and Expense Scorecard
TopAbove AverageAverageBelow AverageBottom
AustraliaNew ZealandChinaBelgiumItaly
U.K.JapanHong Kong
South AfricaSpain

U.S. vs. Foreign Retirement Accounts

So, is it preferable to keep your retirement funds in the United States or in overseas accounts? This, too, is a difficult issue to answer since it is dependent on where you intend to be in retirement.

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If you intend to reside outside the United States in a country with a stable currency, you are often better off keeping the majority of your money in that country to avoid another key international investment risk—issues relating to the value of the currency you use for daily living costs. The easiest method to minimize foreign exchange issues is to keep your savings in the currency you will use most often in retirement.

Renouncing U.S. Citizenship

Some US citizens are quitting their US citizenship in order to avoid US tax issues. Choosing that path may impair your ability to receive Social Security. You become a nonresident alien when you abandon your citizenship (NRA).

The ability to collect Social Security depends on bilateral agreements between the United States and the foreign nation in which you live. Payments might continue in many nations, while your Social Security benefits will end in others. Benefits for relatives and survivors may be affected if your status is changed to “NRA.”

Before renouncing U.S. citizenship in order to escape the foreign-retirement tax quagmire, carefully evaluate the impact on Social Security payments.

As a nonresident immigrant, you may need to return to the United States for one full month (midnight to midnight) every six months to continue collecting Social Security payments.

The Bottom Line

The taxation of overseas pensions and the collection of Social Security benefits from abroad might be problematic. Seek expert guidance before drawing your pension or annuity if you’ve worked overseas and established your retirement wealth outside the United States. This allows you to maximize your retirement income while minimizing your tax burden in both the United States and the nation (or countries) where your retirement savings are kept.

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