# Foreign pension plan



## taxoptimizedinvestment (Jun 17, 2016)

I know a lot of expats have foreign work pension plans that are structured like a 401(k) account. However, to get the tax exempt benefit like a 401(k) plan, the foreign pension plan needs to meet strict US tax law requirements, and a lot of foreign pension plans aren't designed with US tax law in mind. The result is that the contributions by the employee and employer to the plan, and the investment income in the plan are taxed in the United States. Of course, if there is an applicable treaty clause, that might provide some relief, such as the US-Switzerland Income Tax Treaty which allows Swiss citizens who are US tax residents to exclude contributions to pillar two plans for up to five years when they are in the United States.

Additionally, you might need to report the pension plan on an FBAR, Form 8938, and Schedule B. 

I was told by someone that most accountants do not treat foreign pension plans differently from a US 401(k). Is that true? How do you report your foreign pension plan?


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## BBCWatcher (Dec 28, 2012)

taxoptimizedinvestment said:


> I was told by someone that most accountants do not treat foreign pension plans differently from a US 401(k). Is that true?


I doubt it.


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## Bevdeforges (Nov 16, 2007)

To be honest, "some" tax accountants may treat pension plans that are similar to the US IRA or 401K like they were the Real Thing, and then they just wait and see if they get away with it. Technically speaking, you need to check the tax treaty between your country of residence and the US (if there is one) to see what specific local pension plans may be considered (for treaty purposes) like the US ones. But in most cases, it's the other way around. A US IRA or 401K may be treated in other countries like a pension fund, but the US tends to be pretty tight about recognition going the other way.

Generally speaking, a self-funded pension scheme should be reported like any other investment account - be it a mutual fund or a brokerage account. The fact that it's for retirement purposes doesn't make it "special" for US tax purposes.
Cheers,
Bev


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## BBCWatcher (Dec 28, 2012)

The "foreign pension plan" could be, in no particular order:

1. A foreign social security system, typically funded with a payroll tax (often with some paid by the employer and some by the employee) and typically offering a defined benefit (a monthly payment) upon retirement. Assuming there's no social security treaty or tax treaty that says otherwise, generally only the retirement benefit is U.S. taxable, as ordinary income, less a Foreign Tax Credit if applicable.

Singapore is a notable exception. The general consensus is that the employer's share of payments into the Singapore social security system, the Central Provident Fund (CPF), are U.S. taxable as/when made, and they cannot be treated as foreign earned income for purposes of the Foreign Earned Income Credit. Then, after that, only the CPF gains are U.S. taxable -- the gains on both the employee's and employer's contributions -- as/when CPF credits them every year. "Ordinary" CPF is not a PFIC, but CPF allows some funds to be directed into PFICs if you choose. If you do that, you trigger the IRS's PFIC-related rules on those holdings. Singapore's CPF is really a state-sponsored "defined contribution" scheme, hence the different treatment. CPF is completely Singapore tax free, both in and out, so there is no Foreign Tax Credit available on the U.S. side.

2. A foreign tax-advantaged, private or semi-private, "defined contribution" scheme. Examples include Australia's "superannuation" accounts, the United Kingdom's ISAs, Canada's RRSPs, and many others. Canada's RRSPs, for example, are partially respected in the U.S.-Canada tax treaty (tax deferred). But if there's no tax treaty that says otherwise, they're just ordinary foreign financial accounts, and the U.S. tax treatment is generally just like what I described for Singapore's CPF accounts above. A Foreign Tax Credit is allowed if applicable.

3. A foreign "defined benefit" pension scheme. This is comparable to the "old fashioned," traditional pensions in the United States with an employer (private or public) investing into a group plan, with no individual accounting. Retirees then receive a monthly annuity benefit based on years of service, salary during that service, and other such factors -- sometimes with benefits continuing for survivors. Generally in this case there are no U.S. tax consequences except that the retirement benefit is U.S. taxable with the Foreign Tax Credit allowed. Foreign social security systems are generally like this, too.


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