# Deducting 401k Contributions from French Income tax



## GCL

Greetings all:

I am a French US bi-national moving to France next year with my wife who is retiring there. I am self-employed in the US and will continue working in France as a _travailleur indépendant_. As a French resident I will be taxed on world wide income and subject to _cotisations sociales_.

I have an individual (or solo) 401k and will continue to contribute to it. (If my current provider doesn't allow foreign residents, I will find one who will.) 

My question is can I deduct the contributions from my French income taxes?

Thank you.

Gerard


----------



## Bevdeforges

Simple answer to your question is: no. A 401K is considered to be a form of national pension, at least when it's paid out to you. But if you'll be working in France (i.e. physically present in France while doing whatever it is you are paid for) then you must be paying into the French retirement and other tax and social insurance programs. (As an _independant_, you set up a business entity here and register with the appropriate agencies for health, retirement and other coverages for the _independants.)_

As a bi-national, you'll also be filing US taxes (as a resident) for the rest of your life - but be careful because if you take the US Foreign Earned Income Exclusion (to exclude your salary income from US taxation) then you can't deduct your 401K contributions from gross revenue for US tax purposes, so will wind up paying both US and French tax on your salary income (there is the Foreign Tax Credit you can use to offset taxes on salary paid in France against your US tax bill - however it can quickly get complicated). 

You should probably talk to a tax adviser in the US before you leave. It may be possible to convert your solo/personal 401K to an IRA account - while you won't be able to make further contributions once you're resident overseas, it may be possible to just let it lie and collect income until you reach retirement age and can begin to take distributions. The income from the account (401K or IRA) is not taxed by the French - and after you retire, you'll pay US income tax on your withdrawals, and receive a full credit at French rates on your French income taxes (with no "cotisations" deducted from the pension amounts).


----------



## Kid Charlemagne

Is there a possibility that you could switch your 401K to a Roth 401K once you move? That would simplify things; you'd be paying taxes as normal and taking deductions in the future tax-free, so worrying about deducting contributions wouldn't be a concern.


----------



## 255

@GCL -- It's not just that you can't deduct it, but you cannot contribute, if you take the FEIE, unless you are above the limits. Bottom line, you have to have "earned income" to contribute, and if you take the exemption for foreign earned income, you'll quickly have no income to get taxed on.

Additionally, purposely lowering your claimed earned income, in a bid to contribute is also not allowed. Of course, we don't know what you make, but if your income is over the FEIE limits, so you'd still have taxable U.S. income, you can contribute with that.

@Kid Charlemagne's recommendation is sound. There have been a few threads , on this forum, discussing using a "Roth Conversion Ladder" to transfer assets from a regular 401K/IRA into Roth's to reduce taxes. Ultimately, when you retire, if 100% of your income is from U.S. Social Security and Roth distributions, you'll owe zero tax to both the U.S. and France. Cheers, 255


----------



## GCL

Bev,

Sorry this response took so long but, I had a bunch of urgent non-important stuff to deal with. Eisenhower (French-friendly at the liberation of Paris, less so at Dienbienphu) reportedly said that 80% of urgent stuff is unimportant; how right he was.

First off, after reading your posts for years, I would like to thank you for all the great advice you've given.

Anyway, about the question in my post, I did some research and here’s what I found:

1. Re the FEIE, while I'm aware that excluded earned foreign income must be added back to MAGI for purposes of determining Roth IRA eligibility, I found this very interesting section in the Internal Revenue Code dealing with individual (or solo) 401ks (emphasis supplied):

IRC Sec. 415(c)(3)(B):

(B) Special rule for self-employed individuals. In the case of an employee within the meaning of section 401(c)(l), subparagraph (A) shall be applied by substituting "the participant's earned income (within the meaning of section 401 (c)(2) but determined *without regard to any exclusion under section 911 *for "compensation of the participant from the employer".

IRC 911 is our old friend, the FEIE.

2. With respect to deducting individual 401k contributions from French income, Art 18(2) of the Treaty (2004 protocol) says this:

Where an individual renders personal services and is a resident of a Contracting State but not a national of that State, and that individual is a participant in a pension or other retirement arrangement that is established, maintained, and recognized for tax purposes in the other Contracting State:

contributions paid by, or on behalf of, such individual to such pension or retirement arrangement shall be deductible from the income taxable in the first-mentioned State as if the contributions had been paid to a pension or other retirement arrangement….

The foregoing provision doesn’t help be because I’m bi national, but may help other self-employed in France who are not. Deducting your individual 401k contributions from French income taxes and then receiving them (French) tax free as “pension payments” would be a neat trick, if true. (I didn’t pursue my investigation, so this “too good to be true” scheme may not work; also, the treaty provision goes on to say that you must have started contributing to your 401k _before_ you become a French resident.)

3. For me, the only hope is to find a way to legally deduct my 401k contributions under French tax law, but initial research indicates that won’t be possible. On the other hand, as you have pointed out many times, the local French tax people can be very helpful.

3.1. But all this is getting kinda complicated for me, so I’m in the market for a French tax advisor per separate post.

Again, thank you for all the help you’ve provided to us tax-confused current (and future) expats. 

Best Regards,

Gerard


----------



## GCL

Kid Charlemagne:

Thank you for your reply. Transforming traditional 401k or IRA money into "Roth money" makes a lot of sense and we plan to do just that. Since my wife won't be working anymore our US marginal tax rate will be lower, and we will convert tax deferred money into Roth money until we "fill up" our tax bracket. (On the other hand, the way the market's been diving lately, we may not have much left to convert!) 

But I intend to work in France (self-employed) and I'm horrified at how much French income tax I'll be paying even after deducting all the French "cotisations sociales." So I'm trying to find a way to reduce my French taxable business income. 

It's true that it might not be so bad after you factor in the tax credits, but haven't crunched those numbers yet. I'm trying to rustle up the courage to do so, but just thinking about out is giving me a headache. Seems like it's time to farm this out to a real professional.

Cheers, 

Gerard


----------

