US Expat Specialist Retirement Planning

We offer advice with regards to international pension solution for non-resident Americans.  Even for those individuals who might one day return to the US, we offer a solution which offers a tax efficient and compliant retirement structure.

New filing responsibilities under “FATCA” require financial institutions all over the world to report accounts held for US taxpayers back to the US authorities. This has resulted in many financial institutions no longer willing to establish new, or maintain existing, accounts for American taxpayers.

Whilst it is possible for non-resident Americans to fund domestic US pensions, there are various restrictions in place with regard to employment status and annual funding limits. We offer solutions that are open to any US taxpayer, regardless of employment status, who currently resides outside the US.

Fact Check

• American taxpayers remain subject to US tax regardless of where they are physically resident.
• Non-resident American taxpayers can earn $101,300 tax free from employment in 2016 and can also claim limited tax relief against overseas housing costs.
• A number of US domiciled funds are no longer accepting money from non-US residents.
• Investments into non-US domiciled funds can be classified as “PFIC” investments and are subjected to much higher rates of tax and interest penalties.
• It can be difficult to fund a US domestic pension as a non-resident.

The Importance of having a Private Pension

As more and more employers cease offering employee pensions, and even less can accommodate US employees, the importance of funding a personal pension has increased significantly. Even for those lucky enough to have an employee pension, as people are living longer these plans are often not enough to offer a suitable level of income for the duration of retirement.

Employers with defined benefit pensions are faced with huge funding targets due to poor investment returns and with more members living longer in retirement. 80 of the 92 state funded pensions were underfunded as at the end of 2014. All S&P 500 defined benefit plans were deemed to be fully funded in 2007 but due to market conditions,
by the end of 2014 their combined funding deficit stood at $389 billion.

Funding a private defined contribution pension gives much greater security over assets as the benefits received will be inline with the level of personal contributions made and any investment growth made prior to retirement age.

Domestic US Retirement Options

It is possible for a non-resident American to fund a 401(k) or an IRA, however, there areUS Pension annual funding limits limits on how much can be contributed annually by the member. A 401(k) can be
‘topped up’ by the employer, however, in order to even fund a 401(k) there must be a US employer.

Whilst an IRA can offer tax advantages on either contributions or distributions (i.e. a ‘Traditional’ or ‘Roth’ IRA), typically the annual funding limits means that the plan will not hold sufficient value to support the member through retirement.

Both plans have a retirement age of 59½ and if any benefits are taken before this age a 10% tax penalty is usually charged on top of any income tax liability.

If an IRA is funded to the maximum allowance each year for 30 years
achieving 5% investment returns, this would buy an annuity worth roughly
$18,000 per year for a 60 year old retiree.

Our solution

The international retirement plan was specifically established for non-resident Americans. The key benefits are:

  • No upper limits on contribution levels.
  • Zero US tax on growth generated within the pension.
  • Tax efficient retirement benefits can be taken from age 50 in the form of:
    • An initial lump sum of up to 30% of the total balance, followed by
    • Direct income drawdown.
  • Annual accounting statement produced for Member’s US tax filings (Forms 8938 and FBAR will need to filed).
  • Transparent and cost efficient fee structures

Benefit Provisions

Members can commence taking benefits from their pension at any time once they have reached age 50. There is no requirement for the Member to retire from employment to start taking benefits.  Equally, there is no requirement to purchase an insurance annuity although it is an option.

Member’s can elect to draw benefits directly from the pension, starting with the oHappy Pensionersption to take a lump sum of up to 30% of the total balance. Under the international taxation treaty provisions, this lump sum is not subject to any US Federal taxes.

The residual assets can then be used to provide an income stream to the Member for life. The amount that can be drawn each year will vary depending on the Member’s age, health status and other such actuarial considerations. As a guide, between 6%-11% of the total value can be taken each year.

This income will be taxed as a ‘simplified annuity’ for US tax purposes. This means that a portion of the benefit received will be a return of the original capital contributions and not taxable, whilst the rest is treated as investment income and taxed in the year that it is received.

Tax treatment on death

On death of the Member, the value of the US IRP forms part of the Member’s estate forHappy family US estate tax purposes. This means that if the Member wishes for anyone other than a US spouse to receive benefits from the plan there is an overall estate tax allowance of $5.45m as of 2016.

If benefits are left to a US spouse there is no US tax. In either profile, there will not be any withholding tax in the Plan itself and the benefits can be paid out in the form of a single lump sum or ongoing income.

For more information on our financial planning services for US Expatriates please contact us