Investments In Foreign Pensions & Annuities




I always liked the interestingly unique name, Phileas Fogg from "Around The World in Eighty Days". Having traveled the world through books, I always wondered how different life would have been if I had the chance to live & work in many different countries! 

Not so much any more as I encounter as clients, many US citizens who were based out of the country for a few years. Especially those who could have contributed into or had employers contribute into their then resident country's retirement accounts. These were either mandated by the resident's country's employer rules or were used as a tax saving strategy. 

What is a foreign pension or foreign annuity? 
A foreign pension or foreign annuity is a pension plan or retirement annuity received from a source outside the United States. This may be received from a: 
  • foreign employer
  • trust established by a foreign employer
  • foreign government or one of its agencies including a foreign social security
  • foreign insurance company
  • foreign trust or other foreign entity designated to pay the annuity
How is a distribution from a foreign pension or annuity treated?
The taxable amount of a distribution from such a foreign retirement account is generally the Gross Distribution minus the Cost/ the Investment in the contract. These distributions may be partially or fully taxable whether a Form 1099R is received or not. You can claim a treaty withholding exemption to the paying country, if that is not honored, you can claim an foreign tax credit on your US tax return for the taxes paid in the other country. 

Tax Treaties and How They Effect You? 
The United States has tax treaties with many countries to avoid double taxation. This also usually covers income from pensions/annuities. As a general rule, most treaties allow the resident country to tax pension/ annuity income. Each treaty must be carefully examined to determine,
  • The country of tax residency
  • The country to which taxes are due
  • Special taxation of government payments or social security payments
  • Special rules for lump sum payments
  • Check if the Tiebreaker rules apply if you are resident of both countries for that tax period (if the Tiebreaker rules cannot be determined by you, you can request the competent authority of each country to make the decision) 
Note: Please make sure that the Tax treaty being referred to is the most current one between the countries in question. 

Foreign Employer Contributions:  
Some of the foreign employer contributions may not be part of the Cost of the pension. This is usually the case if the contributions were made either:
  • Before 1963 by your employer for that work,
  • After 1962 by your employer for that work if you performed services under a plan that was in existence on March 12,1962,
  • After 1996 by your employer if you were a foreign missionary. 

Foreign Contributions When Nonresident Alien:
Your contributions or the employer's contributions are not part of your Cost if the contribution was based on compensation for services performed outside the US while you were a nonresident alien & not subject to laws of the United States or any foreign country. 

Foreign Social Security Pensions:
Generally tax treaties have special rules for foreign social security pensions. These may include the country making the payment to also be taxing the distribution. Unless otherwise specified in the tax treaty, the foreign social security payments are treated the same as foreign pensions or foreign annuity payments. Certainly, they are NOT eligible for the same tax treatment as US social security payments. The US has bilateral social security agreements with 25 countries. More information can be found on www.ssa.gov.  

Foreign Bank Account Reporting Requirements and Compliance:
The balances in the foreign pensions and other annuities have to be included to calculate threshold limits for both the FinCEN 114 and Form 8938. An interest in a foreign social security/ social insurance or similar program of a foreign government is not included in these calculations. 

Bibliography: IRC Sections 72, 1441,3405 ; IRS Publications 575, 54,590,939 etc; IRS Tax Treaty; Social Security Bilateral Agreements; Form 8938 & IRC Section 6038D

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As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. 
More of my contact information is on my website, www.mntaxsolutionsllc.com







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