Foreign Pensions and US Tax: How the IRS Sees Your Non-US Retirement Plan

Why foreign pensions are hard for US tax

US tax law has a well-developed rulebook for US retirement plans — 401(k)s, IRAs, qualified trusts — and almost nothing built for anyone else's. A non-US pension has to be forced into categories designed for other things: an employees' trust, a grantor trust, an annuity contract, or simply a pot of investments. Each classification produces different answers to the questions that matter — is growth taxed now or later, are contributions taxable, and which information forms must be filed.

None of this changes what your pension is at home. It changes what it is to the IRS, and that is what your US return has to reflect.

Employer plans versus personal plans

The analysis usually starts with who funds the plan.

Employer plans — workplace schemes an employer sponsors and contributes to — are commonly treated as employees' trusts under US rules. The practical default without treaty relief is unattractive: employer contributions can be taxable to you as they are made, and vested growth may be taxable before you can touch the money. What actually happens depends on the plan's terms and on whether a treaty overrides the default.

Personal plans — arrangements you set up and fund yourself — are more exposed. Because you create and control the funding, some personal pensions risk being analysed as foreign grantor trusts, meaning the IRS treats the assets as still yours: income and gains inside the wrapper can be taxable annually, and trust reporting can apply. Where the plan holds non-US funds, the PFIC rules can stack on top.

The employer/personal boundary is not always clean — plans with mixed funding, transfers and consolidations need individual analysis — but it is the right first question to ask.

The Form 3520 trap

If a pension arrangement is a foreign trust for US purposes, ownership of it or transactions with it can trigger Form 3520 (and in some cases Form 3520-A). These are pure information returns, but the penalties for missing them start in five figures and are assessed automatically, which makes them among the most dangerous forms an expat can overlook.

The good news: IRS guidance (Revenue Procedure 2020-17) exempts many tax-favoured foreign retirement trusts from the 3520 regime, and ordinary employer schemes frequently qualify. The bad news: the exemption has conditions, not every arrangement meets them, and "my provider says it's just a pension" is not a classification. This is a determination to make deliberately, once, and document.

Where the treaty changes the answer

For Americans with UK pensions, the US–UK income tax treaty does more work than almost any other US treaty. Its pension provisions can allow qualifying UK plans to grow US-tax-deferred, can give relief for contributions to a plan in one country while working in the other, and set out which country taxes pensions and lump sums when payments begin.

Treaty relief is real, but it is not automatic in the way people hope: positions may need to be taken and disclosed on the return, and the details differ between plan types. We cover the UK-specific analysis — workplace pensions, SIPPs, lump sums and transfers — in our dedicated guide to US–UK pension taxation.

Reporting: the annual housekeeping

Whatever the tax answer, foreign pensions usually generate paperwork. Depending on structure and value, a plan may need to appear on Form 8938 under FATCA, on the FBAR, or both — and Form 8621 if PFIC holdings are involved. These filings owe nothing by themselves; their cost is entirely in being missed.

The pattern to aim for is boring: classify the plan once, settle the treaty position, and then report the same way every year. Most of the pension disasters we untangle began with a reasonable-sounding guess made a decade earlier.

When to get this reviewed

Three moments justify a proper look rather than rolling the prior year forward: when you join or transfer a plan, because classification and treaty positions are easiest to establish at the start; when contributions change materially, because employer funding levels can alter the US analysis; and well before you take any money out, because the taxation of lump sums and regular payments differs sharply and, once a withdrawal has happened, the choices have been made for you. A pension is usually the largest asset an expat holds outside a house. It deserves one afternoon of deliberate analysis more than it deserves ten years of hopeful guessing — and the earlier that afternoon happens, the more options remain open.