Pensions create another tax trap for #Americansabroad http://t.co/NxiuHD8KeX @JanetNovack
— US Taxation Abroad (@TaxationAbroad) August 4, 2014
The article referenced in the above tweet provides a good introduction to the complexities of non-U.S. pensions for Americans abroad. The reality is that many Americans abroad have them. Pensions are one more example of difficult it is for Americans abroad to both be U.S. tax compliant and do normal financial and retirement planning. It can’t be done.
Excerpts from this necessarily general but good overview include:
Expatriates working abroad often participate in a funded foreign pension plan of a foreign company. In order to avoid double taxation, these individuals should beware of the tax treatment of both contributions to, and distributions from, these foreign plans. To select the most tax effective approaches, one needs to know the general rules, the availability of foreign tax credits, and treaty provisions which may exist between the US and a foreign government.
While a foreign pension plan usually provides favorable tax treatment within its national jurisdiction, the general rule is that it is not a qualified retirement plan (“QRP”) under the Internal Revenue Code (“IRC”) for US income tax purposes and thus, any contributions are not deductible by the employer or employee on their US tax returns. In contrast, the IRC provides numerous tax benefits for participants in US QRPs, including an exclusion or deduction from gross income for contributions, investment in a tax-exempt trust, and favorable distribution rules, such as a tax free rollover.
The moral of the story is that as a U.S. citizen you can either:
1. Live abroad; or
2. Have a pension
But, its very difficult to achieve both.