# 3rd Pillar and Investment Income



## Zendo

In Switzerland we have what is called a voluntary private pension saving plan. We have no real signature authority over the savings until we reach retirement age. Contributions to this voluntary pension are tax-deductible in Switzerland, at least prior to retirement. We don't even have to report these accounts before retirement. As a rule they are cash accounts.

It is clear that this does not relate to US tax obligations. So, I assume we are also required to list the interest somewhere on the 1040 form.

The question is: in the section on income of the 1040 form, where does the filer indicate the yearly interest from a 3rd pillar account. I'm not quite sure. Does it belong under "8a, taxable interest" or under 8b "Tax-exempt interest". Other than that, I see no other possibility.


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## Bevdeforges

If you get an annual statement of the interest that accrues to your account, then you'd list it as "interest income" line 8a. 
Cheers,
Bev


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## BBCWatcher

I can't leap to a conclusion yet. What are the funds invested in? Is there a tax treaty that suggests how these accounts ought to be treated?


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## Bevdeforges

In very general terms, the US doesn't often recognize "retirement savings" plans organized outside the US. If in doubt, it's generally safest to report the earnings/interest as interest. That way you haven't "failed to disclose" the income and on withdrawal, using the IRS annuity rules, you won't pay taxes on your investment in the fund (which includes the interest or other earnings you have already declared and paid tax on).

If the IRS should question or audit this treatment, you have evidence of "good faith" in that you have disclosed everything. 
Cheers,
Bev


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## Zendo

Basically, the Swiss 3rd pillar accounts are cash accounts. They were introduced to balance out the first two pillars, the first being Social Security, the second being the employer pension plan. There is a limit to the amount one can contribute per year. For 2013 it was SFR 6750. This amount is tax-deductible. Tax is first due upon withdrawal at retirement or at any other time of withdrawal after retirement. During the time when the account is active, one dosen't have to report any of it. Neither the account nor the interest. Interest is slightly better than a normal savings account, also due to the fact that it is cumulative. 

There is also the possibility of dividing up this kind of savings account into investment funds of some sort, but that is for people who enjoy the risk. For those people, they would probably have to treat the information according to line 9a in the 1040 form. But, I'm not sure about that. Anyway, for us Swiss the conditions are the same in terms of tax exemption/liability here. 

The accounts I'm referring to in this thread are pure cash accounts. In any event, as it turns out, in the long run this seems to pose a disadvantage to accidental Americans like myself. No "real" USP in their right mind should ever use this saving scheme, even if they stayed in Switzerland for an extended period of time. It probably wouldn't "pay" in the end. 

In my case, I don't expect negative impact. I just hope that the interest entered on line 8a, because it might appear slightly higher, dosen't cause a red flag for the IRS, given that the rest of my income information is rather modest and won't exceed the FEIE. But, I haven't done all the math yet. 

I agree with Bev and be on the safe side. Better to disclose the information. If the IRS has any questions they can give me a call.  Or meet me in a cafe in Zürich and we can talk about it. :yo:


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## BBCWatcher

It sounds like an age-based fixed deposit (or certificate of deposit) from your description. If it's actual bank or government bond interest, then yes, that's what I'd do, report the interest added to the account each year. Also on Schedule B, by the way.

It's the investment options within that account that might be "interesting" and probably best avoided, I agree.

Yes, I also agree that account makes less sense for U.S. citizens unless the yields are particularly good. Though you should get a foreign tax credit to apply against your Swiss income taxes, so at least there's that. Also please do check the tax treaty to see if there's anything favorable. Some of the tax treaties protect retirement savings accounts, and some don't.


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## Zendo

BBCWatcher said:


> It sounds like an age-based fixed deposit (or certificate of deposit) from your description. If it's actual bank or government bond interest, then yes, that's what I'd do, report the interest added to the account each year. Also on Schedule B, by the way.
> 
> It's the investment options within that account that might be "interesting" and probably best avoided, I agree.
> 
> Yes, I also agree that account makes less sense for U.S. citizens unless the yields are particularly good. Though you should get a foreign tax credit to apply against your Swiss income taxes, so at least there's that. Also please do check the tax treaty to see if there's anything favorable. Some of the tax treaties protect retirement savings accounts, and some don't.


The accounts I am referring to are purely cash accounts under the special conditions of the 3rd pillar contract. There are no stocks or bonds involved, thus no dividends. The interest is based on accumulated cash deposits. For this reason I don't think Schedule B is relevant here.

But, here's a hypothetical question: What if there _were_ stocks and/or bonds in such an account that took a loss, thus yielding no interest in the form of dividends. What does one do then? (not my case, but interesting to know).


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## BBCWatcher

Schedule B is also for interest income, and you just used the word interest. I don't know what else it would be. I don't think there's any possibility you can skip Schedule B looking at the instructions.


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## Bevdeforges

Normally, you have to fill out a Schedule B no matter what - if only to tick the little boxes at the bottom of the form as to whether or not you have $10,000 or more in foreign bank accounts.

Though you only have to itemize your interest income on Schedule B if it's over $1500 or so, I usually use the form to add up my various interest payments by bank - for my own convenience, not that of the IRS.

As for the cash account, I would think it would be reportable on your FBAR like any other account.

If you went the stocks and bonds route with such an account, I think you'd have to report gains (and losses) like capital gains - not at they were accrued over time. (My husband has a similar type of investment account here in France, and the bank sends him notifications of the individual stock gains and losses on sale. Luckily, he is not a "US person" and therefore does not have to report on any of this stuff to the IRS. Another reason for US expats to file separately from their NRA spouses.)
Cheers,
Bev


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## Zendo

BBCWatcher said:


> Schedule B is also for interest income, and you just used the word interest. I don't know what else it would be. I don't think there's any possibility you can skip Schedule B looking at the instructions.


I stand corrected. My mistake. 

What about the hypothetical question?


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## BBCWatcher

Zendo said:


> What if there _were_ stocks and/or bonds in such an account that took a loss, thus yielding no interest in the form of dividends. What does one do then? (not my case, but interesting to know).


Probably you would have crossed into the PFIC world and follow those ugly, complex QEF rules. Losses of any size are disallowed under those rules.

One solution is not to trigger PFIC treatment. For example, there's an exception for bank and insurance company stocks (equities) provided that's what you're actually buying and not, say, a stock in a holding company that's only 55% engaged in banking. If, for sake of argument, the retirement account lets you direct your savings into purchases of shares of UBS AG (a major Swiss bank that's clearly a bank -- at least not when it's a criminal enterprise  ) then (as I understand it) PFIC rules aren't triggered. You're then back into normal Schedule B sort of stuff with annual reporting of non-qualifed dividends from that stock. Yes, that's a rather weird, arbitrary loophole, but guess who has lobbyists to "help" Congress write the U.S. tax code. 

Bond holdings are OK, too, from what I understand -- corporate and/or government bonds. As long as the bonds are directly held and not via a bond fund. (Same with bank and insurance stocks. You have to own the stock directly, not via some middle man mutual fund, trust, etc.)

Singapore has an account that sounds like it's very similar to the one you're describing called the "Supplementary Retirement Scheme" or SRS for short. I have one and have written about it, but in hindsight my SRS was probably a mistake. You have to lock the money up for a minimum of 10 years, the ways you can direct the funds are quite limited, and the Singaporean tax benefits are mostly lost on U.S. citizens. So I haven't increased that account. Indeed, the account is currently worth less than when I opened it, though I'll remain patient. (I really don't have any other choice.) I've been very careful not to trigger PFIC rules there or anywhere else since I just don't want to deal with such complications absent a compelling reason. And there isn't a good justification from what I've found. U.S. savings and investments really are extremely broad, deep, and damn good. Singapore is supposedly one of the world's top financial centers (or centres), but the costs and fees here are ridiculous compared to U.S. norms. Annual management fees of 2% on unit trusts (Singaporean mutual funds) are considered perfectly normal and reasonable.

Maybe somebody thinks otherwise, but I find that access on the best terms to U.S. financial markets is one fairly significant benefit.


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## Zendo

Bevdeforges said:


> Normally, you have to fill out a Schedule B no matter what - if only to tick the little boxes at the bottom of the form as to whether or not you have $10,000 or more in foreign bank accounts.
> 
> Though you only have to itemize your interest income on Schedule B if it's over $1500 or so, I usually use the form to add up my various interest payments by bank - for my own convenience, not that of the IRS.
> 
> As for the cash account, I would think it would be reportable on your FBAR like any other account.
> 
> If you went the stocks and bonds route with such an account, I think you'd have to report gains (and losses) like capital gains - not at they were accrued over time. (My husband has a similar type of investment account here in France, and the bank sends him notifications of the individual stock gains and losses on sale. Luckily, he is not a "US person" and therefore does not have to report on any of this stuff to the IRS. Another reason for US expats to file separately from their NRA spouses.)
> Cheers,
> Bev


What if the combined interest in less than $1500? Does that mean one dosen't have to list it? The note under Line 4 of Part 1 indicates "If line 4 is over $1,500, you must complete Part III". I think this is what you are referring to. Now, what if it is under $1,500? Does that mean one is not required to list interest in Part I?

I have some moderate Swiss stocks - they are SMI (Swiss Market Index) stocks, nothing in connection with the US market - totaling less than $10,000 that I've had for several years, hoping they would throw out some dividends. As far as I can tell they haven't which is why I still keep them. So, there are losses here. What does one do with that? They are certainly not interest of any kind and can't be considered income. 

I also have more than one account at the bank. Do I list each account separately with the interest from the account or just the name of the bank and the total interest?

Part III of Schedule B, Line 7a: There is some interesting wording here. For instance, what does "have an interest in ..." mean exactly? In my case, it probably dosen't matter anyway, because I'm over the minimum threshold, at least for my saving account. But, technically speaking I don't have signature authority over my 3rd pillar account, not yet. So, can I leave it out?


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## Zendo

BBCWatcher said:


> Probably you would have crossed into the PFIC world and follow those ugly, complex QEF rules. Losses of any size are disallowed under those rules.
> 
> One solution is not to trigger PFIC treatment. For example, there's an exception for bank and insurance company stocks (equities) provided that's what you're actually buying and not, say, a stock in a holding company that's only 55% engaged in banking. If, for sake of argument, the retirement account lets you direct your savings into purchases of shares of UBS AG (a major Swiss bank that's clearly a bank -- at least not when it's a criminal enterprise  ) then (as I understand it) PFIC rules aren't triggered. You're then back into normal Schedule B sort of stuff with annual reporting of non-qualifed dividends from that stock. Yes, that's a rather weird, arbitrary loophole, but guess who has lobbyists to "help" Congress write the U.S. tax code.
> 
> Bond holdings are OK, too, from what I understand -- corporate and/or government bonds. As long as the bonds are directly held and not via a bond fund. (Same with bank and insurance stocks. You have to own the stock directly, not via some middle man mutual fund, trust, etc.)
> 
> Singapore has an account that sounds like it's very similar to the one you're describing called the "Supplementary Retirement Scheme" or SRS for short. I have one and have written about it, but in hindsight my SRS was probably a mistake. You have to lock the money up for a minimum of 10 years, the ways you can direct the funds are quite limited, and the Singaporean tax benefits are mostly lost on U.S. citizens. So I haven't increased that account. Indeed, the account is currently worth less than when I opened it, though I'll remain patient. (I really don't have any other choice.) I've been very careful not to trigger PFIC rules there or anywhere else since I just don't want to deal with such complications absent a compelling reason. And there isn't a good justification from what I've found. U.S. savings and investments really are extremely broad, deep, and damn good. Singapore is supposedly one of the world's top financial centers (or centres), but the costs and fees here are ridiculous compared to U.S. norms. Annual management fees of 2% on unit trusts (Singaporean mutual funds) are considered perfectly normal and reasonable.
> 
> Maybe somebody thinks otherwise, but I find that access on the best terms to U.S. financial markets is one fairly significant benefit.


This is a bit over my head.  Can you explain what a PFIC world should look like? 

I do own a few SMI (Swiss Market Index) investment funds from a private bank totaling less than $10,000 and which haven't been throwing off dividends. 

I can't imagine that would trigger PFCI treatment, whatever that is?!!


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## BBCWatcher

Yes, probably they would/do. Just use your favorite search engine to read up on PFICs.

My sympathies in advance. 

Yes, you must fill out Schedule B Part III if Part I Line 4 is over $1,500. But is the IRS telling you that you must not fill out Part III if Part I Line 4 is $1,500 or less? No, they didn't say that.

Sure enough, read the introduction to Part III on Schedule B. There are other reasons you must fill out Part III. Having over $1,500 on Line 4 in Part I is only one of those reasons.


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## Zendo

BBCWatcher said:


> Yes, probably they would/do. Just use your favorite search engine to read up on PFICs.
> 
> My sympathies in advance.
> 
> Yes, you must fill out Schedule B Part III if Part I Line 4 is over $1,500. But is the IRS telling you that you must not fill out Part III if Part I Line 4 is $1,500 or less? No, they didn't say that.
> 
> Sure enough, read the introduction to Part III on Schedule B. There are other reasons you must fill out Part III. Having over $1,500 on Line 4 in Part I is only one of those reasons.


Thank you for you sympathies and advice. 

There's a expression we German-speakers use, that I think sums up the situation quite nicely: "It's always cooked hotter than eaten"  (sounds better in the original: "Es wird heisser gekocht als gegessen").

I'll have to research this PFIC rule to see how I have to deal with it. But, I can say this right now. If I decide to go along with all this and do the best I can to the best of my knowledge to comply with this FATCA insanity and, if the IRS deems it necessary to run after somebody who might not have gotten it completely right about a few thousand dollars and who, anyway, is eligible for the FEIE under any circumstances, then there is definitely something very wrong with the system. The IRS is certainly welcome to come over here and see how far they get. eace:


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## BBCWatcher

The IRS is doing very well in Switzerland.


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