US citizens abroad with local country pension plans – e.g. Australian Superannuation or UK SIPP. US tax treatment of contributions and growth

 

A number of US citizens abroad face the question of how to treat their local country pension plans for US tax purposes. Generally, unless a retirement arrangement is approved by the IRS as such, it is viewed as nothing more than a regular saving’s account where neither the contributions nor the income is are tax deferred. That may lead to unpleasant results for US citizens abroad as most foreign retirement plans are not designed under the rules stipulated by the US Internal revenue Code (IRC).  That being said, there are two potential exceptions that provide tax relief to US citizens with non-US pension plans:

 

Exception Based on Tax Treaty Relief

There are a handful of tax treaties that override the IRC and allow foreign pension plans the same US tax treatment as US domestic pension plans. Such are among others the the Canadian, UK, German and Belgian pension plans. However, for US citizens residing in one of those countries where the local pension plans are “equalized” to US plans under a tax treaty, the US citizen is still required to disclose the reliance on a tax treaty in order to avoid US tax on contributions or plan earnings.  Thus for example, a US citizen residing in the UK who participates a UK based Self Insured Pension Plan (SIPP) can make tax free contributions and avoid US tax on plan earnings as long as they attach the proper disclosure on their US tax return.

 

Exception for Americans in Non-Treaty Countries

Historically, the Americans who reside in countries without a tax treaty with the United States, or those where the tax treaty does not specifically “equalize” local country pension plans to US equivalent plans could not benefit from making tax deferred contributions. Furthermore, they were required to report on their US tax return the annual earnings of their pension plan, thus creating a mismatch between the time when income is taxed in the country of residence and the United States. This mismatch was particularly troublesome for those without sufficient foreign tax credits available to offset the US tax liability related to pension plan contribution or earnings.  A partial relief became available to US citizens abroad with the creation Treasury Regulation §1.409A-1(b)(8)(iii)(B) and (D) in 2007.  While the regulation covers only certain employer sponsored retirement arrangements, and does not include self-sponsored schemes, it still benefits a large group of Americans abroad.  Many US citizens who work in countries without a tax treaty with the United States that specifically regulates pension plans can defer tax on both pension contributions and plan earnings as long as the pension plan they participate in is sponsored by their foreign employers.  For example, Americans who live in Australia may treat their Australian “Superannuation Plans” as equivalent to US plans for US tax purposes, despite the fact the US-Australia tax treaty does not specifically address pension plans the same way as the US-Canada or US-UK tax treaties.   

 

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Disclaimer: The content of this page does not constitute legal advice, and should not be relied upon for tax avoidance purposes. The facts and circumstances specific to your situation are the ones that ultimately determine the application of the rules. The text above is based on Taxential's interpretation of the US tax law from a general perspective only.

 

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