When Australian expats move overseas managing their superannuation in the USA can become difficult due to the IRS not providing a definitive ruling on super.
Australian expats are well informed on the virtues of contributing to their Australian superannuation accounts however when they move overseas to the United States, they are confronted with a completely different pension scheme that draws very few similarities to the Australian superannuation schemes.
A common issue with US-based Aussie Expats is the decision to opt into an Individual Retirement Account (IRA) or their employer’s 401K option.
This US Pension Guide seeks to provide some clarity on the different types of IRA’s and the options available to Australian expats.
There are various reasons as to why you would elect to proceed with an IRA but your circumstances will help guide this decision.
Essentially an IRA offers the following:
How does my Australian Superannuation get taxed in the United States?
There are several ways the IRS taxes your Australian superannuation accounts and although the legislation is outdated, the private rulings are still in the IRS’s favour.
Currently, Australian super is not recognised as a foreign pension but is classified as either a ‘Foreign Grantor Trust’ or ‘Employee Trust’ by the IRS. The USA-AUS double taxation agreement was completed in 1984 and at this time superannuation in Australian wasn’t compulsory and there were very limited privatised retirement schemes around either.
Presently, if you are a member of an Australian superannuation fund, such as an industry super fund you will be in an investment option (Balanced, Growth, MySuper etc) which is known as a pooled fund.
You are in this pooled fund with other members and the super fund invests these pooled monies to achieve a return for its members. Now you have no control over where your money is invested but if you have only been in that pooled fund for two years and the pooled fund bought a ‘PFIC’ 8 years ago and sells it whilst you’re a member, the IRS will tax you on the entire 8-year period that the pooled fund has held the investment.
Let’s also remember you are taxed at the highest federal tax rate as well and there is the potential for some US states to also levy a PFIC tax.
Further on Australian superannuation accounts, because they are classified as either a ‘Employee Trust’ or ‘Foreign Grantor Trusts’ the IRS will tax you on the capital gain and income distributions that your account received each calendar year. This is very disheartening, considering you don’t have access to those benefits yet you’re still liable for the growth of the account.
To learn more about saving for retirement in the United States please download our US Pension Guide to learn more.
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