Riester-Fondssparplan (Funds Savings Plan) US Tax, FBAR & FATCA
While there are many different types of savings plans available to taxpayers in Germany, one of the most common types of investment/savings plans is the Riester-Fondssparplan (“Fondssparlan”). This type of investment is used to promote consistent investments into various pooled funds in Germany as a “private pension.” In general, it can be difficult for taxpayers to stay consistent when it comes to investing in the market and by using the Fondssparplan as a mechanism to promote investment, taxpayers can accumulate a significant amount of wealth while minimizing certain tax implications overseas. Of course, these tax-deferred benefits available in Germany are not necessarily available under the US tax code to US persons who have a Fondssparplan account. Let’s go through the basics of the Fondssparplan.
Riester-Fondssparplan Taxation Rules
From a German tax perspective, taxpayers can set a particular amount of money that they want to invest each month into the plan, which primarily consists of different types of pooled funds. The taxpayer has an opportunity to determine which type of ETF they want to invest in, as well as which provider/foreign financial institution they want to bank with. While some of the benefits may receive tax-exempt treatment in Germany, from a US tax perspective, the IRS can tax the income unless the Taxpayer can show it may qualify for tax-deferred status under the treaty (although since it is a private personal pension – at least in part – this may not work).
Foreign Mutual Funds in a Riester-Fondssparplan
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 savings 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, such as Germany.
FBAR, FATCA & PFIC Reporting for Riester-Fondssparplan
Since technically the German Fondssparlan 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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