How the U.S. Taxes Foreign Pensions and Retirement Accounts

Types of foreign retirement arrangements

• Government social security systems, such as Canada Pension Plan, UK State Pension or Mexico's IMSS
• Employer-sponsored occupational pensions, either defined benefit or defined contribution
• Mandatory individual-account systems, such as Chile's AFP, Mexico's Afore or Colombia's pension funds
• Voluntary personal retirement accounts, such as Canada's RRSP, the UK's SIPP or Australia's superannuation

Each category can be treated differently. For some plans the question is whether contributions and growth are taxed now; for others it is how distributions are taxed; for still others it is whether the plan is treated as a foreign trust.

When a treaty provides relief

Several U.S. tax treaties include pension articles. The U.S.–Canada treaty allows deferral of U.S. tax on income accruing in RRSPs and RRIFs until distribution, and the IRS has made that deferral automatic for eligible individuals without a separate election. The U.S.–UK treaty similarly provides that income accruing in a UK pension scheme is generally not taxed in the United States until distributed, and addresses contributions in some cases. Treaty provisions are specific, and many treaties — including several with Latin American countries — do not contain comparable deferral provisions.

Without treaty relief

If no treaty applies, a foreign employer plan is generally analyzed under the rules for nonqualified deferred compensation and nonexempt employees' trusts. Depending on vesting and plan design, employer contributions may be taxable when made, and investment growth may be taxable annually. Individual-account plans can present particularly difficult questions, including potential foreign trust reporting and, where the plan invests in foreign pooled funds, the passive foreign investment company rules.

Distributions and lump sums

When distributions are received, the taxable portion is generally the amount exceeding the taxpayer's investment in the plan, meaning after-tax contributions and amounts previously taxed by the United States. Tax-free lump sums allowed under foreign law — such as a portion of a UK pension or a withdrawal permitted from an individual-account plan — are not necessarily tax-free for U.S. purposes. Foreign taxes paid on distributions may be creditable, subject to the foreign tax credit limitation.

Foreign social security

Foreign government social security benefits are often addressed by treaty. Under some treaties, such as those with Canada and Germany, benefits paid to a U.S. resident are taxed as if they were U.S. social security benefits; under others, benefits may be taxable only in the paying country. Where no treaty rule applies, the benefits are generally taxable as a pension.

Reporting obligations

• FBAR: foreign pension accounts are generally reportable when the taxpayer has a financial interest and the aggregate threshold is met, with limited exceptions
• Form 8938: interests in foreign pension plans are generally specified foreign financial assets when the filing threshold is met
• Form 3520 and 3520-A: Revenue Procedure 2020-17 exempts certain tax-favored foreign retirement trusts that meet specific requirements; plans outside that exemption may still require foreign trust reporting
• Form 8833: treaty positions affecting pension income may require disclosure

Planning before a move to the United States

For people planning to become U.S. residents, the treatment of existing retirement savings should be reviewed before arrival. In some cases, a withdrawal, transfer or restructuring under the home country's rules before U.S. residency begins produces a better result; in others, remaining invested under treaty protection is preferable. The analysis should consider the home country's exit rules, the treaty and the investments inside the plan.

Sources and official references

• IRS — Rev. Proc. 2014-55 (Canadian retirement plans)
• IRS — Rev. Proc. 2020-17 (foreign retirement trusts)
• IRS — United States Income Tax Treaties A to Z
• IRS — Basic questions and answers on Form 8938
• IRS — Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad