Is Foreign Pension Plan Income Taxable in the US?

U.S. Taxation of Foreign Pension Plans

U.S. Taxation of Foreign Pension Plans

When a US Person has a foreign pension plan, there are may potential tax implications — and pitfalls — to be aware of. In general, while a foreign pension plan will usually grow tax-free or tax-exempt in the country of source (such as a UK SIPP) — the growth may not be considered tax-exempt under the US Tax Code and 402 rules. In general, U.S. persons are taxed on their worldwide income. In most circumstances, pre-tax contributions into a foreign pension plan are taxable, such as the CPF.  Sometimes, if there is a tax treaty in place, the specific tax treaty may allow for contributions from a foreign employer, on behalf of a U.S. person working abroad, to be tax deductible in the U.S. on the individual’s U.S. tax return — similar to a 401K. One example is with the US-UK Tax Treaty. Beyond foreign pension contributions, there are also issues involving the growth within the fund,  distributions paid out to the Taxpayer, and of course, FBAR, FATCA and Form 3520.

Is Foreign Pension Plan Income Taxable?

Is income from a Foreign Pension taxable in the U.S.?

As with most international tax questions, the answer is, it depends.

Common Issues involving U.S. Tax on Foreign Pension

Here are some of the more common issues to consider when evaluating foreign pension and U.S. Tax:

• • Has the foreign pension plan vested?

  • Have the contributions been taxed abroad?

  • Where was the Taxpayer residing when the pension was accumulating?

  • Is there a treaty with a foreign country?

  • Which foreign country was the pension earned in?

  • Was the Taxpayer a U.S. person at the time the pension was accumulating?

  • Is it already excluded from U.S. taxation (RRSP for example)?

Is There A Bilateral Income Tax Treaty?

When the U.S. has a treaty with a foreign country, it is generally because the United States is in good relations (or at least was in good relations) with the foreign country when the treaty was entered into. When there is a tax treaty (absent the IRS relying on the Saving Clause) the general rule is the foreign pension is not taxed until it is distributed or “available.” And, depending on whether it is a private pension, or public pension — and whether it is an actual pension or social security — it will impact which country may tax the income.

What If There Is No Bilateral Income Tax Treaty?

If there is no bilateral tax treaty, then there are generally no specific exceptions or exclusions to the U.S. taxing the foreign pension’s growth.  Common examples include Asian provident funds, such as: CPF, MPF and EPF.  In a more recent memo (recent as within the last 20 years), even in Singapore where the U.S. has good relations — and the retirement  contributions are mandatory (aka Singaporean CPF, Central Provident Fund) — the IRS determined:

• • Contributions are taxable; and

  • Growth within the CPF is taxable

Example of Foreign Pension & U.S. Tax Complexities

Jeffrey is a non-US person who resides in a non-treaty country and is about to retire. At 60, Jeffrey’s son and daughter-in-law move to the United States. Like all good parents, Jeffrey and his wife follow their kids to the U.S. Jeffrey becomes a Legal Permanent Resident/Green Card Holder since it makes travel back and forth, in and out of the U.S. much easier. He makes the United States his permanent home for now (more or less) and starts taking distributions from his non-treaty country pension.

How is Jeffrey taxed?

While the pre-U.S. Person contributions and growth (before he became a U.S. person), would not be subject to tax, the growth and contributions post-U.S. person status are presumably taxable.

When Jeffrey starts to take distributions, there are three (3) buckets to consider:

• • Return of Investment (non-US person deferred salary);

  • Growth within the fund while Jeffrey were a non-US person; and

  • Growth within the fund while he was a U.S. Person

In this scenario, Jeffrey may consider a Form 8833 treaty position — but he does not want to trip the Expatriation Wire.

Some Foreign Pension Plans May Be Excluded From U.S. Tax

Generally, if a person starts to receive distributions while residing in the US or even as a US person residing outside of the United States, there may be some tax liability to the US.

Many tax treaties (for private pensions) will give power to the country the person resides to tax the pension distributions.

If foreign taxes were paid, then Foreign Tax Credits may be available as well.

Has the Foreign Pension Plan Vested?

The issue of whether a foreign pension has vested and/or is “available” is also an important question, especially in countries in which there is no tax treaty.

For example, let’s say you are a U.S. Person and you have a foreign pension earned in a foreign country in which there is no tax treaty.

And, although the foreign pension is under your name, and has accumulated nearly $1,000,000 — it doesn’t actually vest (or at least the majority of it) under the foreign countries’ laws for another 20 years.

Now, if you start paying tax in the US on the growth and then it never vests, you may have significantly overpaid taxes – which may be impossible to refund (due to the strict time limits on claiming a refund from the U.S. Government).

Reporting Foreign Pension Plans to IRS

Beyond the tax issues involved with Foreign Pension Plans, there is also the issue of reporting the pension.

There are a myriad of different international information reporting forms, including:

• • FBAR

  • Form 8938

  • Form 8621

  • Form 3520

  • Form 3520-A

*Not all foreign pension plans are reported on each form, each year.

What if I am Out of IRS Compliance?

The IRS has developed various offshore tax amnesty to help safely get you into compliance.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure. 

Contact our firm today for assistance.