If you’re working for a non-U.S. employer, be wary about participating in a retirement plan they offer you, according to CPA Lewis Kevelson, a partner in Marcum LLP’s tax and business services division. “In general, the IRS does not view foreign retirement plans as equivalent to U.S. retirement plans—unless there is an income tax treaty provision that allows treating foreign plan like a U.S. plan,” he said. Plans have to be deemed a Qualified Retirement Plan by the IRS in order for your contributions to be tax free and earnings tax deferred. If you’re participating in a foreign plan, then the employer contributions and earnings will be considered additional taxable income reportable on your U.S. tax return. “A lot of people make the mistake of assuming their foreign employer’s retirement plan is like a U.S. qualified plan.” You also won’t be able to rollover your foreign plan into a standard U.S. retirement plan.
Talk to your employer
If your foreign assignment is short, Kevelson advises discussing the issue about taxation with your employer to see if additional compensation can be paid in lieu of participating in the plan, so that contributions can be made to a U.S. based retirement plan, like an IRA. For those accepting assignments in a high tax country, like the UK, Kevelson advises that the worker can agree to participate in the plan and then plan to use the foreign taxes to offset the US taxes.
Remember social security
Thinking about your retirement savings while living abroad brings up the topic of social security contributions, Kevelson said. “If you’re living for two years in France working for a non-U.S. employer then you will be paying into the French system, but of course you won’t see the French retirement benefits.” He added that foreign social security contributions are typically higher than what U.S. citizens pay.
Check to see if the country has a tax treaty
The IRS has what’s known as a totalization agreement with 24 countries to help U.S. citizens contribute into the U.S. system while working abroad and to avoid exposure to paying social security taxes twice. The agreements lay out which country’s social security system you must pay into.
Remember to think through tax implications carefully and consult with a tax professional when you’re making the transition to another country. It’s important to keep your retirement savings plan in action, without getting hit with a major tax bill.
Working abroad image via Shutterstock