{"id":460,"date":"2022-12-01T18:10:00","date_gmt":"2022-12-01T22:10:00","guid":{"rendered":"https:\/\/hrbcomlnp.hrblock.com\/expat-tax-preparation\/resource-center\/?p=460"},"modified":"2022-12-05T18:55:38","modified_gmt":"2022-12-05T22:55:38","slug":"international-retirement-plan-myths","status":"publish","type":"post","link":"https:\/\/hrbcomlnp.hrblock.com\/expat-tax-preparation\/resource-center\/income\/retirement\/international-retirement-plan-myths\/","title":{"rendered":"Debunked: Three myths about international retirement plans"},"content":{"rendered":"\n

Doing your taxes each year can be difficult enough.  Add international retirement plans into the mix, and taxes can get downright messy. In this globally connected era, more Americans are free to move overseas and live out their dreams of working and living abroad. During that time, it\u2019s common for workers to amass funds in international retirement accounts, contributing their own money and sometimes adding foreign employer contributions.<\/p>\n\n\n\n

Some Americans living overseas mistakenly think they can transfer money from their foreign retirement plans into U.S. plans, or vice versa, without owing taxes, like a qualified rollover in the U.S. They do this to try to defer taxation on the funds under the laws of either country until they withdraw the funds in retirement.<\/p>\n\n\n\n

But moving money between foreign and domestic retirement plans is more complicated than that. Here are three of the most common myths about these transactions, and their realities. Have an international retirement plan and haven\u2019t filed U.S. taxes yet? <\/strong>Get started now.<\/strong><\/a><\/p>\n\n\n\n

Myth: \u201cAs a U.S. resident, I can roll over funds from my international retirement plan into a U.S. plan, tax free.\u201d<\/h2>\n\n\n\n

This is false. U.S. residents with a U.S. qualified retirement plan generally won\u2019t owe taxes on certain distributions they receive during the year, if they transfer the distributions into another<\/em> U.S. qualified plan<\/em>. But transferring a foreign retirement plan to a U.S. one<\/strong><\/a> usually doesn\u2019t meet the qualified plan rules, because the plan is housed in a foreign country. In that case, if you tried to transfer funds from a nonqualified foreign plan into any U.S.-based qualified plan, the transfer is still taxable even if all other requirements are satisfied.<\/p>\n\n\n\n

Fact: Foreign retirement plan distributions are taxed under the general rule<\/h2>\n\n\n\n

If the distribution is taxable in the U.S., then the taxable portion is calculated under the \u201cgeneral rule\u201d for retirement annuity distributions. The taxable amount is the gross distribution minus the allocable share of its cost (after-tax investment in the contract).<\/p>\n\n\n\n

If both countries tax the attempted transfer, then you may be able to qualify for the foreign tax credit<\/strong><\/a>. The foreign tax credit is a nonrefundable credit with a carryover provision. It\u2019s intended to relieve double taxation by the U.S. and a foreign country. Usually, U.S. citizens and resident aliens can take the credit for the foreign income taxes they paid on the income they earned in the U.S. Foreign retirement plans, except for foreign social security and certain foreign pension plans<\/strong><\/a>, are also reportable under the Report of Foreign Bank and Financial Accounts (FBAR)<\/strong><\/a>, Form 8938<\/strong><\/a>, and Form 1040, Schedule B, Part III.<\/p>\n\n\n\n

Myth: \u201cMy new country has a tax treaty with the U.S., so my foreign retirement plan transfer isn\u2019t taxable in the U.S.\u201d<\/h2>\n\n\n\n

It depends on where you\u2019re now living. The U.S. signs tax treaties with foreign countries to define how the countries will treat tax issues between the nations. A few of these income tax treaties<\/strong><\/a>\u2014 including Canada<\/strong><\/a>, the UK<\/strong><\/a>, Germany, Belgium, and the Netherlands \u2014 include provisions on pensions. That\u2019s why it\u2019s a good idea for Americans abroad to examine their country of residence\u2019s specific tax treaty to determine the tax on retirement plans.<\/p>\n\n\n\n

Fact: Foreign retirement plans are not treated the same as qualified U.S. retirement plans<\/h2>\n\n\n\n

If you have a foreign pension<\/a>, it will most likely not qualify for the same retirement vehicle tax benefits as a U.S.-based 401(k) or IRA. Your contributions aren\u2019t typically tax-deductible on your U.S. income taxes, and you may actually be taxed on the plan\u2019s annual growth regardless if you\u2019re taking distributions or not. Additionally, employer contributions for foreign pension plans may also be considered taxable in contribution years. <\/p>\n\n\n\n

Myth: \u201cI closed out my U.S. retirement account and transferred the funds to a foreign retirement account. I can exclude this transfer on my U.S. return.\u201d<\/h2>\n\n\n\n

This usually isn\u2019t true. When you move overseas and transfer your U.S. retirement plan<\/a> balances into foreign retirement plans, these rollovers generally don\u2019t qualify for exclusion from tax unless a tax treaty provides otherwise.<\/p>\n\n\n\n

How to report international retirement plans on your U.S. taxes<\/h2>\n\n\n\n

If you\u2019ve got an international retirement plan, you\u2019ll likely have some reporting to do. You may need to file:<\/p>\n\n\n\n