German Pension Plans & US Tax, FBAR & FATCA
In many foreign countries, governments establish different types of investment plans to assist taxpayers with saving for retirement. This is especially true in countries in which the government may not provide substantial benefits necessary to maintain a standard of living a person wants to maintain in their retirement years. As with many countries, Germany has created its own private pension plan in order to assist taxpayers with saving for retirement. There are some tax advantages to these plans and possible deductions –– but they do not necessarily translate under the US tax system. Let’s take a look at some common US tax and reporting scenarios for German private pension plans.
US Tax of German Private Pension Plans
When it comes to a private pension plan in Germany, there are three main components which are:
Contributions made to the plan
Growth within the plan; and
Depending on whether or not the pension plan is considered qualified under US tax law –– oftentimes it is not –– will help determine the tax rules involving the foreign pension. In general, even though contributions to private pension plans in Germany may receive tax deductions in Germany, those contributions are still typically grossed up in total income for US tax return. As to growth within the plan, again, depending on whether or not it is considered a qualified pension plan or not will help determine whether the growth is taxable. If the pension plan is employment based as a result of working for an employer in Germany — there may be some wiggle room under the US Germany Tax Treaty to avoid tax on the growth, whereas if it is simply a private pension plan – which is essentially just an investment wrapped in a private pension name –– then the growth would presumably be taxable. In most scenarios, distributions will be taxable as well — but the taxpayer may be able to apply a treaty election or foreign tax credits.
Foreign Mutual Funds in a German Pension Plan
Foreign Mutual Funds within a German Private Pension Plan can lead to an unnecessarily complex tax scenario. For example, ownership of Foreign Mutual Funds within the pension plan could lead to the dreaded PFIC tax situation (Passive Foreign Investment Company) – which results in tax-deferred treatment during the growth phase but then during the distribution time, taxpayers can end up paying double to triple what they would’ve paid if it was a US mutual fund. There are some exceptions for foreign mutual funds in pension plans with treaty countries.
FBAR, FATCA & PFIC Reporting for German Pension Plan
Since technically the German Private Pension Plan is a foreign financial account, it is reportable on one or more international information reporting forms, such as the FBAR (FinCEN Form 114) and FATCA (Form 8938). The FBAR and Form 8938 or not mutually exclusive from each other — and therefore taxpayers may be required to file the FBAR on both forms. If the foreign investment also contains items such as mutual funds, ETFs, or SICAVs, then the investment may become subject to Passive Foreign Investment Company reporting on form 8621. There are some potential exceptions and exclusions from reporting on 8621, but they are limited. In addition, the Internal Revenue Service does not require duplicative reporting of the same asset on Form 8938 and Form 8621— although if the taxpayer has multiple types of investments and categories of investments (RRSP, RRIF, Investment Accounts, etc.) — both forms may still be required. While the failure to report these accounts may result in significant fines and penalties, the Internal Revenue Service has developed various amnesty programs to assist taxpayers with safely getting into compliance with a reduced penalty, or even a complete penalty waiver.
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