Foreign Pension Plan Contributions - When Taxable?

By Alex Oware on 06/24/2015 10:00 PM

A great number of US Expats have acquired and invested in one or more foreign pension plans or superannuation accounts available to them either in their host country or in a country where it makes fiscal sense to maintain a retirement account. While some expats have decided to make permanent residency outside of the US, many will return at some point – bringing with them all the savings accumulated in foreign pension.

 Retirement and Pension

 US expatriates working for foreign employers may participate in foreign pension plans. These plans normally have beneficial tax treatment under local law. Unfortunately, these foreign arrangements generally do not meet the US "qualification rules". As a result, the beneficial treatment under local law is often not available to US citizens working abroad.

In this article, we will take a look at different aspects of foreign pension plans and superannuation accounts and how you will be affected as a US Taxpayer.

Understanding Pension Plans and Retirement Accounts

US Expats returning to the United States will be expecting to simply roll the funds of their pension plan or superannuation account over into a US-based pension plan such as an IRA.  What many expats fail to realize, however, is that the majority of foreign pension plans are not transferrable to US-based retirement plans because they are not classified as a ‘qualified trust’ in the US Internal Revenue Code.  With this information in mind, it’s time to begin exploring other options.


In order to fully understand all available options on foreign pensions, one must first take a look at the overall structure of pension plans and retirement accounts.  Let’s first take a look at the primary benefits of these plans: Deferred tax.

 Funds that are accumulated in these plans remain untaxed until the time of distribution, which generally occurs during retirement age.  It is a general presumption that a taxpayer will be in a lower tax bracket during his/her retirement years and will be responsible lower tax rates in the future than he/she would have otherwise had to pay. As such, current tax rates are lowered by tax-free contributions to a pension plan.

there are certain foreign pension plans in which contributions are not eligible for deferral of US taxes.  This is generally either because it’s spelled out in an active tax treaty between the US and your host country or because there is no tax treaty between the US and your host country.

 Either way, if this is the case you will have been required to include all of your foreign pension contributions on your US expat tax return as taxable income; but that’s where it gets interesting for you. Because you’ve already paid US taxes on the funds which have been accumulated in your foreign pension account, you may be able to receive tax-free distributions from that account!

If you or your employer made pension contributions or you had any pension account earnings which were included on your US expat tax return every year, you now have what is known as an investment in the contract (cost).  This cost may be recovered without tax liability, but very specific rules must be followed. A list of these rules can be found in the IRS Publication 575 or by calling an experienced tax consultant here at O & G Tax and Accounting Services.

Once any invested cost in your foreign pension plan or superannuation account has been determined, you can begin to consider each of your available options.  Not considering the fact that you are unable to rollover your foreign pension funds into an IRA or another US-based retirement account, your available options have numerous similarities to US-based retirement accounts. Here they are:

  • You can choose to leave the funds in your foreign pension account until the time at which you retire.  During your retirement years, you will be eligible to receive distributions and include only the taxable portion on your US tax return.
  • You can choose to take a lump sum payment of your foreign pension funds or have them distributed to you periodically before you decide to retire. In this case, you would still only be responsible for paying taxes on a portion of the distribution. The benefit to this option is that you can, then, do what you please with the money, including investing in a US-based retirement account or pension plan.
  • You can choose to leave the funds in your foreign pension plan with the intention of passing them on to heirs.
Early Withdrawal or Distribution Penalties

The majority of US and foreign pension plans assess a 10% penalty on early distributions.  It’s important to remember, however, that this penalty does not apply to the non-taxable portion of your distributions. While this penalty only applies to the taxable portion of foreign pension distributions, many still wish to avoid it.  Here are a few ideas for steering clear of this 10% early distribution penalty:

  • Wait until you are at least 59½ years old before receiving any foreign pension distributions.
  • Communicate with the agency at which your foreign pension plan is held and establish a substantially equal periodic distribution for life – even if on an annual basis. Take time to review the allowable methods outlined in Revenue Ruling 2002.62 and IRS Publication 575 to ensure all distribution payments are in accordance with such methods. If you need further clarification on acceptable payout schedules, a qualified tax professional at O & G Tax and Accounting Services can guide you through the process.
There are a variety of circumstances including the location of your host country, the presence or details of an active tax treaty with the US, the type of foreign pension plan you have, and other circumstances which make your situation completely unique to you. Additionally, certain conditions such as carryover from unused foreign tax credits may be applied to reduce your tax liability on foreign pension distributions.
Unless you are extremely well-versed in international tax laws and the terms of the treaty (if applicable), the best thing to do is to consult a tax pro before you make any final decisions on what to do with your foreign pension plan upon returning to the US.

Credit: Taxes for Expats

***Disclaimer: I am a tax accountant and a CPA , but I am not your accountant or advocate (Unless you have signed up to my services). This communication is not intended as tax advice, and no tax accountant -client relationship results**