Debunked: Three myths about international retirement plans

At a glance

Have an international retirement plan? Learn fact from fiction in this helpful guide.

two expats looking at international retirement plans online while outside

Doing your taxes each year can be difficult enough.  Add international retirement plans into the mix, and taxes can get downright messy. In this globally connected era, more Americans are free to move overseas and live out their dreams of working and living abroad. During that time, it’s common for workers to amass funds in international retirement accounts, contributing their own money and sometimes adding foreign employer contributions.

Some Americans living overseas mistakenly think they can transfer money from their foreign retirement plans into U.S. plans, or vice versa, without owing taxes, like a qualified rollover in the U.S. They do this to try to defer taxation on the funds under the laws of either country until they withdraw the funds in retirement.

But moving money between foreign and domestic retirement plans is more complicated than that. Here are three of the most common myths about these transactions, and their realities. Have an international retirement plan and haven’t filed U.S. taxes yet? Get started now.

Myth: “As a U.S. resident, I can roll over funds from my international retirement plan into a U.S. plan, tax free.”

This is false. U.S. residents with a U.S. qualified retirement plan generally won’t owe taxes on certain distributions they receive during the year, if they transfer the distributions into another U.S. qualified plan. But transferring a foreign retirement plan to a U.S. one usually doesn’t meet the qualified plan rules, because the plan is housed in a foreign country. In that case, if you tried to transfer funds from a nonqualified foreign plan into any U.S.-based qualified plan, the transfer is still taxable even if all other requirements are satisfied.

Fact: Foreign retirement plan distributions are taxed under the general rule

If the distribution is taxable in the U.S., then the taxable portion is calculated under the “general rule” for retirement annuity distributions. The taxable amount is the gross distribution minus the allocable share of its cost (after-tax investment in the contract).

If both countries tax the attempted transfer, then you may be able to qualify for the foreign tax credit. The foreign tax credit is a nonrefundable credit with a carryover provision. It’s intended to relieve double taxation by the U.S. and a foreign country. Usually, U.S. citizens and resident aliens can take the credit for the foreign income taxes they paid on the income they earned in the U.S. Foreign retirement plans, except for foreign social security and certain foreign pension plans, are also reportable under the Report of Foreign Bank and Financial Accounts (FBAR), Form 8938, and Form 1040, Schedule B, Part III.

Myth: “My new country has a tax treaty with the U.S., so my foreign retirement plan transfer isn’t taxable in the U.S.”

It depends on where you’re now living. The U.S. signs tax treaties with foreign countries to define how the countries will treat tax issues between the nations. A few of these income tax treaties— including Canadathe UK, Germany, Belgium, and the Netherlands — include provisions on pensions. That’s why it’s a good idea for Americans abroad to examine their country of residence’s specific tax treaty to determine the tax on retirement plans.

Fact: Foreign retirement plans are not treated the same as qualified U.S. retirement plans

If you have a foreign pension, it will most likely not qualify for the same retirement vehicle tax benefits as a U.S.-based 401(k) or IRA. Your contributions aren’t typically tax-deductible on your U.S. income taxes, and you may actually be taxed on the plan’s annual growth regardless if you’re taking distributions or not. Additionally, employer contributions for foreign pension plans may also be considered taxable in contribution years.

Myth: “I closed out my U.S. retirement account and transferred the funds to a foreign retirement account. I can exclude this transfer on my U.S. return.”

This usually isn’t true. When you move overseas and transfer your U.S. retirement plan balances into foreign retirement plans, these rollovers generally don’t qualify for exclusion from tax unless a tax treaty provides otherwise.

How to report international retirement plans on your U.S. taxes

If you’ve got an international retirement plan, you’ll likely have some reporting to do. You may need to file:

  • FinCEN 114 (FBAR) if you held over $10,000 in foreign accounts, including your foreign pension plan, at any time of the year
  • FATCA Form 8938 if your combined foreign accounts and assets are worth over a certain value
  • Form 8621 if the investment assets within your retirement account qualifies it as a PFIC
  • Form 3520 and possibly Form 3520-A if your retirement account is considered to be a private retirement account, opened separately from your employer-based retirement account

Or, you can simply let the experts at H&R Block figure out your reporting requirements for you, so you can rest easy that your taxes are done right. Start your expat taxes now.

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