Taxation of non-U.S. Pensions
In an increasingly global economy, workers are experiencing unprecedented mobility, American citizens living abroad often participate in foreign pension plans, which generally have beneficial tax treatment under the local country of residence law. Furthermore, participation might even be mandatory, and employers often make valuable pension contributions on behalf of their employees. However, even in light of all these benefits, American taxpayers must remain aware that not all foreign pension plans receive favourable tax treatment under U.S. tax laws and that participation could be detrimental to long-term financial planning goals, As the penalties for failure to report can prove to be significant. These groups of individuals will all have one issue in common,
What to do with their foreign pension benefits
To avoid retirement planning pitfalls, U.S. taxpayers with overseas pensions must carefully examine their pension plans under relevant U.S. tax laws and bilateral tax treaties. Foreign pensions are an area that American taxpayers can no longer ignore as the Foreign Account Tax Compliance Act (FATCA) and increased cross-border tax compliance suggests that the IRS may pull out the magnifying glass and take a closer look at these assets going forward (especially so-called “offshore pension schemes”).
Many countries allow workers to defer pre-tax dollars into retirement accounts that then accumulate tax-free until retirement. These systems of tax-deferred savings and investment exist everywhere for the same reasons they exist in the United States: governments want to encourage workers to accumulate private savings to support retirement expenditures without exclusive reliance on state pension systems.
Foreign pension plans commonly encountered by Americans abroad include:
UK Pension Transfers for US Connected Persons
As times have evolved so have our working conditions, thus more and more people are becoming transient, and this gives rise to many pension planning hurdles. UK pension transfers to the U.S. can be complex and tedious, as it stands the IRS does not allow for the Tax-Free transfer of foreign pensions into the U.S. Domestic equivalent. For US connected persons this may give rise to the below questions:
- How can I access my UK pension in the U.S?
- When will my UK pension be paid to me?
- What benefits can I take from my UK pension?
- How will my UK pension be taxed in the UK or/and the U.S?
- What forms need to be filed with the IRS with regard to my UK pension?
UK to U.S. pension transfer rules have changed in recent years. Many US citizens receiving a UK pension and living in the U.S. aren’t sure if they should be declaring their UK pensions and annual gains to the IRS, or if they’ll have to pay both UK and US tax on their income. Similarly, many of us are unaware of Inheritance Tax implications if we live overseas and have a UK pension.
What are your options?
- Leave your UK pension invested in your existing pension providers scheme
- Transfer your UK pension to another pension scheme in the UK such as a UK SIPP
- Transfer your UK pension to the U.S. using an International Self-Invested Personal Pension (SIPP)
- Transfer your UK pension to the U.S. using a Qualifying Recognised Overseas Pension Scheme (QROPS U.S.)
MWC Group have a team of advisors, with specialized knowledge, competencies and skillsets who can answer all questions and design a roadmap to navigate the complexities involved in transferring and ultimately protecting your pension plans. We can advise on the best route to help you achieve your financial goals and objectives.
For any individual who spent time working in the United States, there is a high probability you would have a company sponsored 401K. Complications arise when an individual encounters various life event’s such as:
- United States citizen who left the country and still have a 401k account.
- Foreign national who previously worked in the US, have left the US, and have a 401k account.
- Foreign national who switched jobs in the United States and left behind a 401k.
Fortunately, we can help!
What happens to the money in your former employer’s plan? Quite simply, you have a few options to consider, such as the following:
- Cash Out of the Plan
- Leave the Money in the Plan
- Rollover into Your New Employer’s Qualified Plan
- Rollover to an IRA
Whilst cashing out is rarely seen as advisable, due to a 10% penalty if done before age 59 ½ (or 55 if leaving employment at the time), leaving money in the previous employers scheme, or moving to the new employers scheme are both reasonable options.
Rolling over into an IRA may however be the best advice, as it comes with its own set of benefits and when executed properly will have no negative tax implications.
A Rollover IRA is essentially the same as a traditional IRA, with the exception of the source of the money being from the previous company scheme rather than from new regular contributions. Should you not already have an IRA, you can open one for the purpose of this rollover, should you have one already then you would be permitted to rollover funds into the existing IRA account.
Continued Tax Deferral
One of the main advantages of an IRA rollover is the continuation of the tax deferred treatment you had within your previous workspace scheme and whilst the rollover is a transaction that is reported to the IRS, no further tax is owed on a properly executed rollover at the time, any tax liability being deferred until encashment.
Increased Investment Options
The options as to which assets you are able to invest within your 401k are limited and often set by the employer or custodian. Whilst you will be given a selection of mutual funds, investing in an IRA would instead open up a universe of different assets, including individual stocks, property, bonds, bond funds and ETFs.
Access to a greater range of fixed interest
As mentioned in the last point, the investment options you have are far greater within an IRA and this includes the range of fixed interest assets such as bonds and bond funds. This is important to have at your disposal as your near retirement. It is at this time that there is often a case to make to ‘de-risk’ your investment and move into a less aggressive portfolio for greater capital security in the final years or months before needing access to your funds. Having the number of investment options increased will allow you to take such action if deemed appropriate at the time.
Flexibility to trade
Within a standard 401k there are normally restrictions on how many times you can make trades during a year in order to take advantage of the markets or rebalance your portfolio in terms of risk. An IRA will allow you to rebalance as and when you see fit and have the ability to make trades to take investment opportunities as they arise.
Within all plans there are fees, however the IRAs tend to have lower investment fees than 401k’s in general. Also going back into the aforementioned investment universe being far greater within an IRA, the selection of fund choices will include those with typically lower ongoing charges, such as ETFs and of course access to ‘clean’ Institutional funds that pay no trail commissions and thus have lower fees than their Retail class counterparts.
Simplification and better communication
As you move from one job to another during your career its quite possible that you can end up with a collection of retirement accounts, that may or may not still suit your investment preferences or risk profile. Consolidating those schemes into one manageable IRA, will almost certainly make this easier to manage. Plus, its often a case that communication with a previous employer’s scheme can be arduous and will no doubt mean, in the case of multiple schemes, having to provide signed documents and identification to each individual scheme when communicating.
Estate planning and Inheritance Tax
Upon your death there’s a good chance that your 401k will be paid in one lump sum to your beneficiaries, which could give rise to an inheritance tax liability. Inheriting an IRA also has its own regulations but will offer a greater range of pay out options, giving greater flexibility again.
Flexibility of withdrawals
Depending on your circumstances and financial planning you may be wishing to take the funds at regular intervals, be that yearly or quarterly for example. Your IRA will allow this degree of flexibility whereas most 401k accounts will not, forcing you to leave the money or take it on one go. Your IRA will also give you the option when withdrawing as to which asset/s are sold to fund this, rather than an even split across your portfolio.
Whilst there are many benefits to an IRA, it is only fair to weigh these up against any potential drawbacks. Which are as follows:
You plan to retire early
If you withdraw funds from your IRA before age 59 ½ there is usually a 10% penalty for doing so. In the case of a 401k there is an additional rule that comes into effect, which means that if you leave an employer at age 55 or later, you are able to take funds out of their scheme free of penalty. If however you rollover into an IRA then you will need to wait until 59 ½ to avoid this penalty.
You plan to retire late
With many people choosing these days to work later in life, there are additional rules to consider. Ordinarily you have to take what are referred to as Required Minimum Distributions (RMDs), from your IRA and or 401k, starting in the year that you turn 70 ½ . These are based on the value of your account as of previous year end and life expectancy tables set by the IRS. If, however you are still working at age 70 ½ you won’t have to take the RMDs from your existing employers’ scheme.
If you were to be subject to a lawsuit in the future, there are rules to protect your 401k. Should someone win a judgement against you your 401k assets are shielded against your 401k being accessed. Whereas an IRA doesn’t have such protection. They are generally protected from filing for bankruptcy, but in respect to other claims, state laws may vary.
The Roth Option
The option of an IRA rollover opens up the possibility of a Roth account. With a Roth IRA you pay taxes on the funds you contribute, when you contribute them and then no tax upon withdrawal. The opposite being true of a standard IRA. A Roth IRA also gives you the freedom to not have to take the Required Minimum Distributions at age 70 ½ , or indeed ever. So, if it’s likely that you will be a higher rate taxpayer when you start taking the funds from your IRA, the Roth may well be in your interest. To learn more about how you can optimise your current 401(K) plans get in touch with an adviser today to take control of your retirement.
In the aftermath of FATCA many non US banks and Insurance companies were not onboarding US clients, reluctant to adhere to the new more onerous reporting rules. MWC Group has sought out providers in Switzerland that will provide solutions to US connected clients and established terms of business with household names.
The 3rd pillar pension plan is a private pension scheme available to people living and/ or working in Switzerland. Originally introduced as it was believed the combined Pillar 1 and Pillar II pensions would not be sufficient to provide a comfortable level of income in retirement for most.
In particular 3rd pillar solutions (3a/3b) that allow lump sum and regular saving options. Regular savings solutions also have the flexibility to increase and decrease contributions as lifecycle events occur and are international in nature. Meaning, in most cases one can continue to contribute as and when one is relocated to another country. Additionally, embedded within this is the possibility of life and disability related cover.
With differing investment strategies our experienced consultants can ensure the plan is in line with your risk profile and is fully understood in context of your overall objectives and financial planning.