Taxation of offshore solutions – for US investors

How US non-residents can make the most of their retirement savings while working abroad. 

For US citizens working and living abroad, the annual tax reporting requirements of the US Internal Revenue Service (IRS) are an unavoidable fact of life. The introduction of the Foreign Account Tax Compliance Act (FATCA) in 2010 underlines how interested the tax authorities are in every aspect of their overseas citizens’ financial affairs.

Expatriates therefore can face a challenge when it comes to considering how best to build up a decent retirement pot for the future whilst working overseas. The ideal solution must not only be flexible enough for their investments to grow tax-efficiently, but also offer complete peace of mind that it is compliant with US tax laws.

Neither of the two traditional US retirement plans, the Individual Retirement Account (IRA) and the 401(K) employee plan, is able to fully meet the potential needs of the typically well-paid expat pension saver. Although the IRA accepts contributions worldwide, these are capped at a low limits and both schemes have restrictions on access and withdrawals.  

Investing in an International Pension

So, once savers have maximised their annual IRA funding, where can they turn to, and stay within the IRS rules?

One potential solution is what is known as an ‘International Pension’. This is a global name for arrangements available to expatriates around the world to enable them to invest for their future retirement. 

Such an arrangement allows US non-residents to make the most of their offshore earnings, by investing for growth in a wider range of assets than they can in an IRA , then being able to take benefits tax-efficiently, wherever they are living at the time they decide to do so – including retiring as a US resident.

As well as greater investment choice, an International Pension allows earlier access to capital and growth than is available from traditional IRA/401(K) savings.

A number of providers in various jurisdictions offer International Pension plans suitable for different expatriates. The tax position of an International Pension for a US non-resident will depend on the jurisdiction the arrangement has been established in.

Choosing the appropriate jurisdiction

In choosing a jurisdiction and plan, investors will primarily need the reassurance that they:

  • incur no annual US Federal income tax liability on dividends and interest
  • are fully Internal Revenue Service (IRS) compliant and can pay out lump sum benefits, regular income or even death benefits to named beneficiaries
  • offer tax deferral, and access to an almost unconstrained range of investments. 

A good example of an appropriate jurisdiction with providers that can offer such reassurance is Malta - a full European Union and Commonwealth member and an internationally recognised financial service centre.  

The double taxation agreement that exists between Malta and the US allows retirement savings to be ’rolled up‘, with no immediate tax liability, and US tax to be deferred until retirement. This means that dividends and interest can be reinvested in the meantime, making a real difference to the potential final value. 

How our solutions could cater for your need?

Old Mutual International does not offer an International Pension, but offers Offshore Bonds that are a suitable investment solution for your International Pension to invest in.

Old Mutual International offers certain solutions (e.g. portfolio bond) that could be used as a convenient and versatile investment ‘wrapper’ for an International Pension to hold a wide range of different investments. These can include cash, unit trusts, investment trusts, open-ended investment companies, exchange traded funds and shares.

Holding multiple assets in one wrapper also means simplified, consolidated reporting, as individual asset paperwork, dividend receipts and tax certificates would not need to be included, which could result in cost savings and reduced time.

Although an International Pension can’t be topped-up once the holder returns to the US, clients can still review and manage the assets held in wrapper, to help ensure their investments continue to build towards in line with their retirement goals.

Important information - Please read carefully


Please Note