Planning for Foreign Pension Fund Contribution and Taxation

If a U.S. citizen presently residing and working abroad who is a participant of a foreign retirement contribution plan, should review bi-lateral tax treaty with the country where it is held, as well as federal Internal Revenue Service (“IRS”) income reporting requirements to avoid tax penalties on those assets. Tax obligation may also involve recent or planned future transfer to an estate. For expats living abroad, contribution to a foreign pension fund usually means preparation for retirement. If already benefitting from a pension fund previously transferred to an estate trust, will or planned giving tax-exempt vehicle, depending on the jurisdiction domestic or foreign rules of tax treatment may apply.

Tax Treaties and Exemptions

Foreign pension funds in some tax treaty jurisdictions such as Canada, Belgium or the United Kingdom are exempt from filing income tax reporting with the IRS. Example is the U.S./U.K. Income Tax Treaty, which permits transfer portability of contribution plans without taxation by either jurisdiction where the account owner resides. Nationals of the U.K. may be participants of 401k pension plans in the United States or temporarily employed with a U.S. company abroad, and still be subject to limited tax obligation under IRC section 402(g), as well as bi-lateral treaty provisions guiding the tax treatment of earnings in a foreign plan. Foreign pension funds located host countries not recognized by U.S. signatory agreement of a tax treaty, are subject to domestic taxation if a fund is not considered a “qualified plan” under IRS rules.

U.S. Tax Treatment Guidelines

Foreign retirement funds not considered to be compliant with IRC section 401 rules, are those not structured in accordance with established U.S. federal IRS guidelines of tax-exemption. In most cases, contributions made to foreign retirement plans are not tax-deductible for U.S. tax filers. Matching contributions made by an employer are also not considered under standard IRS rules of tax-exemption. Trust transfers of pension fund accounts do not transfer tax-exemption to future beneficial interest. If the vested interest of the foreign pension fund participant is not at substantial risk of forfeiture at time contribution, standard rules of trust income tax for beneficiaries apply.

Other federal IRS rules to be considered are foreign privatized social security contributions which are treated as creditable foreign tax under IRC Title 26 CRF § 1.901-2. There are circumstances tax-exemption applies to foreign retirement plan investment supplements. U.S. tax compliant, offshore life insurance policy transfers are another common vehicle for continuation of retirement account tax-exemption (IRC §101[a]). If a foreign pension fund jurisdiction is located where there is no IRS reciprocal tax treaty, request assistance from a licensed CPA or attorney specializing in international estate planning and probate taxation.

Which Forms Should I File?

Plan participants must file income tax reporting to fulfill IRS requirements for foreign pension plans: Form 1040 – reporting annual (trust) income; Form 3520 – reporting contributions and distributions; Form 8938 – reporting plan assets; and Form TD F 90-22.1 – Foreign Bank Account Report (FBAR) to be compliant. Planned giving specialists can visit the IRS website for more information about foreign retirement account taxation and the possibilities for tax-exempt, gift transfer to a nonprofit charitable giving plan.

Foreign contribution funds, pensions, and retirement investment accounts are subject to federal Internal Revenue Service and international tax treaty rules to income reporting.

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