U.S. citizens and green card holders are subject to tax on their worldwide income, including income from foreign pensions. If you’re an expat with retirement savings or pension income abroad, understanding how the IRS treats these plans is essential for staying compliant and avoiding costly mistakes.

The General Rule: Yes, Foreign Pensions Are Taxable

Unlike in many other countries, the U.S. does not automatically defer or exclude income from foreign pensions. In general, income from foreign employer plans, personal retirement savings, and government pensions is subject to U.S. taxation, though the timing and treatment may vary.

Types of Foreign Pensions and Their U.S. Tax Treatment

Let’s look at how the U.S. taxes various foreign retirement accounts:

1. Employer Pensions (Defined Benefit or Defined Contribution)

Examples: UK workplace pension, French retraite, Canadian defined benefit plans

• Contributions: Employer and employee contributions are not automatically deductible in the U.S. unless the foreign plan qualifies as a U.S. tax-deferred plan (very rare).
• Growth: Investment earnings inside the plan are generally taxable annually, unless the plan qualifies for tax deferral under a treaty.
• Distributions: Taxable as ordinary income when received. No capital gains treatment.

2. Personal Pensions

Examples: UK SIPP, Canadian RRSP, other private retirement savings

• Contributions: Typically not deductible on your U.S. return.
• Growth: May be subject to U.S. tax annually on earnings, unless covered by a treaty.
• Distributions: Fully taxable in the U.S., unless a treaty allows for exemption or deferral.

Note: RRSPs are a unique case covered under the U.S.–Canada tax treaty.

3. Government Pensions

Examples: UK State Pension, Canadian CPP, Australian Age Pension

• Generally taxed as ordinary income when received.
• Some treaties may exempt or reduce tax on these payments (e.g., U.S.–UK treaty allows exclusive UK taxation of UK State Pension).

When Does U.S. Tax Apply?

This depends on plan structure, treaty protections, and whether the plan is treated as a grantor trust, foreign retirement plan, or foreign corporation.

• During Accrual/Growth: Absent treaty relief, earnings inside the plan are often taxable annually under U.S. rules (not deferred).
• At Distribution: Most foreign pensions are fully taxable as ordinary income when distributions are received.
• Contributions: May not be deductible, even if they reduce taxable income in the foreign country.

Reporting Obligations

In addition to reporting pension income, you may have to report the account itself if it qualifies as a foreign financial asset.

• FBAR (FinCEN 114): Required if total foreign financial accounts exceed $10,000.
• FATCA (Form 8938): Required if specified foreign assets exceed certain thresholds.
• Some pensions may also require Form 3520/3520-A (if treated as foreign trusts).

The Role of Tax Treaties

Many U.S. tax treaties contain provisions that affect how pensions are taxed. Common treaty benefits:

• Exclusive taxation by the foreign country (e.g., UK State Pension).
• Deferral of tax on earnings inside the pension.
• Exemption of certain contributions or distributions.

However, treaty terms vary by country, and the IRS may interpret them narrowly. Proper disclosure and election (sometimes with a treaty position statement) is often required.

Example: Helen, a U.S. Expat in the UK

Helen, a U.S. citizen, works for a UK employer and contributes to a UK workplace pension and a SIPP.

• Her employer’s pension contributions and earnings inside the plan are taxable in the U.S. annually, unless she can claim treaty deferral.
• Her SIPP is considered a foreign grantor trust by the IRS, requiring Form 3520/3520-A reporting.
• Upon retirement, distributions from both plans will be fully taxable as U.S. ordinary income unless a treaty applies.

Final Thoughts

Foreign pensions may feel like a retirement safety net but under U.S. tax law, they’re often anything but simple. Understanding how and when the IRS taxes your foreign retirement income can help you plan smarter, avoid double taxation, and stay compliant.

The information in this blog post is for general informational purposes only and does not constitute professional tax advice. We strongly recommend consulting a qualified tax professional before making any decisions. US Expat Tax Advisor is not liable for any actions taken based on this content.

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