The SIPP (Self-Invested Personal Pension) & US Tax
For US Taxpayers who relocated from the United Kingdom (UK) to the United States, one common issue they have to contend with is how does the Internal Revenue Service treat certain foreign investments, accounts, and assets for tax and reporting purposes. For taxpayers who previously resided in the United Kingdom, one of the most common types of investments is the SIPP (Self-Invested Personal Pension). As the name connotes, it is a “personal pension” in which the investor has the opportunity to choose which investments they want to include in their SIPP. Likewise, the Taxpayer also has the opportunity to manage the investment. It is very similar to the 401K, in that contributions are tax-free and the growth within the SIPP is usually tax-free as well. The key question becomes, from a U.S. tax and reporting perspective — how is the UK SIPP treated? Let’s take a look at some of the basics of the UK SIPP for US tax and reporting purposes:
US Tax Implications of a SIPP
The United States and United Kingdom (US/UK Tax Treaty) have one of the most robust provisions involving how pension income is taxed. Presuming that a SIPP qualifies as a pension under the treaty, then the general rule is that the pension is not taxable until distributions are made out of the pension to the beneficiary taxpayer. In addition, contributions can also receive tax deferral treatment, similar to a 401K — in which the contributions to the SIPP are not taxable in the US (although for taxpayers residing in the United States, this issue is usually not the bigger concern as is how the IRS taxes the growth and distributions out of the SIPP). Generally, distributions made out of the SIPP can be taxable in the US unless exceptions or exclusions apply — and the IRS does not typically take the position that the 25% tax-free withdrawal from the SIPP is applicable under the US Tax Code.
US Reporting of the SIPP
The United States’ international information reporting requirements for a foreign pension such as a SIPP can be very complicated. From a baseline perspective, the SIPP would typically be reported on Form 8938 — along with the FBAR. Where the complexities arise, is whether or not the underlying investments that comprise the SIPP must also be reported separately on Form 8621 (for foreign mutual funds and equivalent) and Forms 3520/3520-A for foreign trusts.
For purposes of Form 8621, the general position is that until distributions are being made out of the SIPP, a taxpayer may take the position that the SIPP as a whole should be reported on the Form 8938 and FBAR — but that each investment within the SIPP (presuming no distributions have been made) do not need to be parsed out separately. There is the concern that after 2012 the PFIC reporting rules changed, and that Taxpayers who meet the threshold requirements for having to file a Form 8621 are now required to file the form even in a year that there are no excess distributions. Thus, the IRS may take the position that the mutual funds and other PFIC equivalent investments are still required to be parsed out and reported on form 8621 — even if there are no distributions — but there is no monetary penalty (currently) if form 8621 is not filed — although it can impact the amount of time the IRS has to go back and audit the return. Also, based on current regulations, as long as the SIPP meets the requirements of a Pension, Form 8621 would not be required.
Forms 3520 and 3520-A
IRS Form 3520 and Form-3520A refer specifically to foreign trusts. And, while most Taxpayers do not consider a foreign pension plan that they own for retirement the same as a foreign trust — technically, it could be considered an employment or grantor trust depending on how the contributions were made. Recently, in 2020 the IRS published Revenue Procedure 2020-17, which limits the duplicative reporting required for certain tax-deferred foreign retirement trusts and other tax-deferred trusts — to avoid requiring a taxpayer who is already reporting the assets on forms 8938 and FBAR to have to again duplicate the reporting by filing forms 3520/3520-A. The main concern with this Rev. Proc. is that the language is ambiguous regarding which foreign pensions and other tax-deferred trusts qualify for the exclusion.
Once a taxpayer is receiving distributions from the SIPP, then generally forms 3520 and 3520-A are required — but the taxpayer should consult with their Board-Certified Tax Law Specialist as to their overall strategy and pro/cons to each approach.
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