# 401K/403b contribution from US income while in France



## pdetombe

Hi,

this is my first post to the forum, so please be gentle /w me 

I am about to move to France January 2019 /w my wife .. my tax home will be France.

I have income from work in Germany and continued work in the US (at a public University) and also receive a pension from the state of IL (from previous State employment) in the US ..

As I understand it, the pension will only be taxed in the US, my German income will be taxed in Germany (the work is performed there; will take either foreign exemption or tax credit in the US for that income), while my US income will be taxed in both the US and France.

My question is the following, I can substantially (8%) reduce my US income by contributing to both a 403b plan and a 457 plan .. however, how will that be treated by the French government? can I report only 20% of the remaining income in France as I would do for the IRS in the US?

I looked everywhere on the internet and around on this forum, but cannot find the answer .. any help/advise much appreciated ..

Pieter


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## pdetombe

*401/403 correction*

oops, meant 80% reduction by contributing to 403 & 457 .. also, assuming that my German income will need to be reported in France but that I can take credit for taxes already paid in Germany in France ... ;-}
P.


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## Bevdeforges

I'm not certain about the 403 and 457 plans, but for IRAs and 401K plans, you cannot contribute to them from income that is excluded from US taxation. It depends on how you're doing the work. If you are "telecommuting" then you are considered to be working in France (i.e. you are doing the work while you are physically located in France) - and your earned income can be excluded (via form 2555) on your US income tax returns.

If you're commuting back to the US to work there, then the income is taxable in the US, and yes, you can take the deduction for your contribution to the retirement funds.

There is a provision in the US-France tax treaty that allows you to deduct your contribution to a retirement fund of this sort (i.e. set up and recognized by the IRS) from income taxed in France in the same manner as in the US. However, you declare the entire amount and then indicate the contribution as a deduction under the appropriate provision of the tax treaty.

Actually, If you are physically working back in the US for that income, I believe that you simply report that income on your French declaration - and indicate on the form 2047 (for reporting foreign source income) that you are working outside the country and the amounts will be adjusted on your French tax assessment so that you're only taxed on that income in the US.

Take a look at IRS publication 54 for some of the gory details - but there are a few options and choices you can make in all that as well.
Cheers,
Bev


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## pdetombe

Thanks much,

That helps .. still ..

Q? is there a limit to to amount one can contribute from US sourced income into a US pension fund (of the 401K type) under French Tax law ... in the US its about 24k for each plan (so total of about 48k$ or something like that, and 80% max of monthly income) ... but, would France set a limit?

P.


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## Bevdeforges

pdetombe said:


> Thanks much,
> 
> That helps .. still ..
> 
> Q? is there a limit to to amount one can contribute from US sourced income into a US pension fund (of the 401K type) under French Tax law ... in the US its about 24k for each plan (so total of about 48k$ or something like that, and 80% max of monthly income) ... but, would France set a limit?
> 
> P.


It's not "fun" reading, but take a look at the consolidated edition of the US-French tax treaty 
https://franceintheus.org/spip.php?article704 

Basically, what the tax treaty says is that for these "retirement funds" that are treated as "pensions" they will be handled under French law the same way they are under US law. (Article 18 is the section on pensions).

The US tax treaties are sufficiently vague in many respects that you can usually make a "good faith" stab at interpreting what they mean and it will fly. In general, there are no "specific" rules or limits for particular US items on the French returns. (Just as there is no particular recognition of "foreign" types of financial items for US tax purposes.)
Cheers,
Bev


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## pdetombe

Thanks Bev .. great help ..

For me, I think, the best approach then would be to live of my IL US pension (US taxed only) and my German income (taxed in Germany and France and excluded from US) and tax defer most of my US regular income ... that job is only for a few years, and once I am finished, I can draw on that account for pension (again US taxed only) ...

If we want to join the French health care system we need to pay fees (very reasonable of course) .. its about 10% of income I understand ... would the 10% premium/fee apply to total income, or is the US tax deferred income (into the 401k) also shielded from those premiums?

Thanks again !

P.


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## Bevdeforges

pdetombe said:


> If we want to join the French health care system we need to pay fees (very reasonable of course) .. its about 10% of income I understand ... would the 10% premium/fee apply to total income, or is the US tax deferred income (into the 401k) also shielded from those premiums?
> .


This is where that stuff comes in about reporting worldwide income. In France, you declare all worldwide income, and then declare (again) on a separate form any foreign source items that are subject to exemptions or exclusions or whatever. For determining the income on which your "cotisation" for health cover is based, they take the full number before the various exemptions and exclusions.

But as far as I know, the sécu fee is something like 8% of total income after the 1st 9K euros or so.

As far as the 401K is concerned, you apparently can take the deduction from the gross income - but when you start withdrawing from the 401K on retirement, it's the total amount you withdraw from the fund that counts as your income for calculation of the health care premium. 
Cheers,
Bev


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## pdetombe

Thanks,

still confused .. when you say "As far as the 401K is concerned, you apparently can take the deduction from the gross income -" 

so, contributions to the 401k are still deducted before the calculation of the cotisation on the amount that is left? your earlier sentence "For determining the income on which your "cotisation" for health cover is based, they take the full number before the various exemptions and exclusions" it appears that it is not exempt for calculation of cotisation.

maybe I am reading it wrong?

Thanks and best,

P.


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## Bevdeforges

There are two phases to any 401K plan.

In the first, you are earning money at a job of some sort (i.e. "earned income"). In this phase, you declare your salary and then somewhere down the form you deduct the amount of your contribution to your IRA or 401K or whatever. (Assuming that you are NOT using the Foreign Earned Income Exclusion to simply exclude your earnings, due to being an overseas resident.) 

Let's say you earn $10,000 and deposit $2,000 in your 401K. So, you declare $10,000 of income and deduct the $2,000 for a net result of $8,000 of AGI (Adjusted gross income).

As I understand it, the French will also allow you the $2,000 deduction for a pension contribution - so you declare $10,000 (converted to euros) in foreign source income, and the $2,000 as a deduction from that income for a pension contribution. Same result - net $8,000 of income from the US. If the French hit you for tax on the $8,000, then the amount of tax you pay to the French then becomes eligible for the Foreign Tax Credit against your US tax bill (in the next tax year - because you pay French taxes a year in arrears).

If you are doing the work remotely from France, you definitely want to consider just claiming the FEIE, which removes the whole $10,000 from your AGI. However, check the terms of your retirement fund - you may not be able to contribute anything if you aren't declaring taxable income from your employment.

OK - on to Phase 2. When you retire, you start making withdrawals from your 401K. The US considers the total amount of the withdrawal to be regular income and will tax you on it. France will expect you to declare the total amount of your withdrawal as "foreign pension income" - and you receive a tax credit equal to the amount of French tax your withdrawal would have cost you. Net-net, you don't pay any French income tax on your ultimate retirement fund withdrawals, but you do pay full taxes to the US.

One big unknown in all this, though, that I mention just for your reference is that of "social insurances" on your US (and potentially German) income. Technically speaking, if you are tax resident in France, you should be paying French cotisations (social insurances) on all employment income - certainly if you're working remotely from France and not traveling back and forth to the US to work.
Cheers,
Bev


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## pdetombe

Thanks,

That is very helpful .. as it turns out, IL is one of those states that has opted out for social security for state employees .. was kind of a surprise to me when I moved there back in 1996 local gov. opting out of a social safety net ... anyway ... so, you don't contribute nor are you eligible for social security .. I was a state employee for some 12 years and only after moving into another (non-state) IL University did I start paying social sec. premiums. When I draw on SS it will be hit with a so called "Windfall" deduction, but that is a totally different story altogether .. it actually makes sense in terms of the non-linear return of social security which I personally support.

I fully expect to be paying French cotisation on my German income ... In addition, I would expect to pay it for my current US retirement income (from the state of IL) ...

What I don't know is whether I pay cotisation on US source salary on work done in the US that is "diverted" into a 401k ... 

Once that 401k starts generating income in retirement, I expect to pay cotisation on the distribution, but if it was already charged before, that seems like double "taxation" .. i.e. pay 8% when you put it into the 401k, and pay 8% "again" when you take distributions .. does not seem right .. or I am missing something?

thanks and sorry to be so obtuse -- or a pest ... ;-} 

P.


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## Bevdeforges

> What I don't know is whether I pay cotisation on US source salary on work done in the US that is "diverted" into a 401k ...
> 
> Once that 401k starts generating income in retirement, I expect to pay cotisation on the distribution, but if it was already charged before, that seems like double "taxation" .. i.e. pay 8% when you put it into the 401k, and pay 8% "again" when you take distributions .. does not seem right .. or I am missing something?
> 
> thanks and sorry to be so obtuse -- or a pest ... ;-}


Oh, you're definitely NOT being a pest. This stuff is pretty obtuse under the best of circumstances and your situation is kind of complicated.

I think the first issue you need to clear up (and I'll admit I'm not sure about this at all) is the matter of taxability of your US source earned income. It sounds as though you will clearly meet the French requirements for being tax resident in France (namely, main residence in France including family and "centers of interest"). I know the US will claim that you owe US income tax on earned income made while physically present in the US - and so it's up to you to claim back your foreign tax paid to France from the IRS using the FTC.

For French purposes, your 401K contributions are considered a social charge/payroll tax, so deductible from your gross income for purposes of calculating your French income taxes. How they will deal with the income (i.e. count it gross or net) when it comes to figuring the 8% for your health care contribution is a whole different issue. (They simply use your income tax declaration as a basis for determining your income for purposes of calculating the cotisation.) I suspect they may allow you the deduction for the deferral into the retirement plan, but you should probably be prepared to explain this to CPAM when you apply to enroll. 

You have to have 3 months of residence before you can enroll - and the fact that you are working AND drawing one or more pensions is going to confuse the heck out of them. You're also expected to have some form of health care cover during those 3 months. If you're working, it's normally expected that your employment is responsible for paying for your health care insurance. You may want to consider taking private insurance for the first year in France, if only to tide you over until you can get things sorted out with CPAM. (It is not uncommon for a "plain old vanilla" registration with CPAM to take "a few" months.)
Cheers,
Bev


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## pdetombe

Thanks ...

very insightful and helpful .. 

Indeed, was planning to take out private health care insurance for the first year .. makes sense, and then sort it out later .. 

Best,

P.


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