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U.S Tax Impact from portability between non-US retirement plans

Transfer of funds from one pension plan to another may be treated a taxable event in the US (there is no official document to substantiate the tax exemption).


Many Americans are working abroad. Many of them will be participating in the retirement plan in a foreign workplace which they believe is similar to a section 401(k) plan in the US. Most taxpayers make crucial mistakes believing that IRS treats foreign retirement plans just like domestic ones as the IRS does not generally tax contribution to foreign plans, the accumulated yet undistributed income in foreign plans and distribution from foreign plans.

Normally US expats do the following steps on the suggestion of US accountant who lacks extensive experience with international tax matters

  1. Filing timely form 1040 reporting the wages from the foreign company
  2. Disclosing the existence and location of the foreign savings account on Form 1040 Schedule B(Interest and Ordinary dividends)
  3. Claiming the foreign earned income exclusion on Form 2555
  4. Reporting the interest income from the Foreign savings account
  5. Filing electronically an annual FinCEN form 114 to notify the IRS about the foreign savings account

A US accountant may mistakenly assume the foreign retirement plan is similar to sections 401(K) plan in the US and thinks will not have any issues until they start distribution from the plan. US expats will make the maximum annual contribution to the Foreign plan and the amount in the plan continues to grow and also gains on passive investments.

If the lack of tax deferral is not enough to get your attention, there should be a long-list of information reporting duties and the steep penalties for violations.

Based on a recent study by the US Government Accountability Office (GAO Report) criticizing the IRS and Congress for allowing the perpetuation of a complex, obscure and inconsistent system. The US tax and information reporting problem of US persons with foreign retirement plans are well documented in the GAO report issued in Jan 2018. The GAO reports start by underscoring the size of the problem, there are nearly nine million US citizens living abroad, many of whom have interests in local retirement instruments. It then describes the distinct way that the US tax system treats domestic versus foreign retirement plans. The GAO report says that – contributions by employees and employers and passive earnings such as interest, dividends and capital gains within a qualified retirement plan generally are not taxed until the employee receives the actual distribution from the plan. By contrast, the GAO report says that Foreign workplace retirement plans are not ordinarily considered “qualified plans” under the IRC so US expatriates working as employees do not receive the same benefits as their counterparts with “qualified” domestic plans.

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