If you are an Australian expat who is living and working in the US or a US Expat in Australia, it’s quite possible that you hold significant retirement savings in both countries. Whether you plan to retire Down Under or in the States, it’s important to understand how these assets get treated between the two countries so that you can take this into account in your retirement planning.
Accessing US retirement funds as an Australian tax resident
If you are an Australian tax resident when you choose to draw down your US retirement savings accounts (including 401Ks and IRAs), the Australian Tax Office (ATO) will likely tax the growth of your fund as income, as you draw down. You will be taxed on the growth accumulated over the life of the fund, regardless of whether the growth was earned prior to becoming an Australian tax resident.
The timing of withdrawal from your US retirement accounts can be very important if you wish to limit Australian taxes, and it’s best to seek professional advice from financial experts who have an understanding of both locations.
US tax treatment of superannuation
As super is not covered under the Australian/US tax treaty, it can be a very complex and often grey area for US tax purposes.
If you’re a US taxpayer, the tax treatment of your superannuation fund will vary depending on a number of factors, including the type of fund, your employment income levels and how much you’ve personally contributed to the fund.
One thing to note is that even though your superannuation guarantee contributions are not included as assessable income on your personal Australian income tax return, if you are a US taxpayer then super guarantee contributions are assessable for US taxes.
Earnings within the fund will either be taxed each year as part of your US income tax return, or when you draw down from your superannuation account.
There can be additional issues for some
Additional issues can arise if your personal contributions exceed employer contributions or if you’re a member of an SMSF. This may lead to your fund being deemed a “Foreign Grantor Trust” on your US return. This treatment leads to earnings within the fund being taxable on your US tax return at your personal tax rate and additional reporting obligations to the IRS. Further, if your super is considered a foreign grantor trust and you hold any investments deemed “passive foreign investment companies” (PFICs), such as Australian domiciled managed funds or ETFs, then you will encounter harsh US tax treatment for these investments and even further reporting obligations.
Claiming social security or pension benefits
There is a social security agreement between Australia and the US, which makes it easier to claim benefits if you have been living between the two countries.
In Australia, you typically need to have been an Australian resident for minimum of 10 years before you can claim Age or Disability Support Pensions.
In the US, you must have forty ‘quarters of coverage’ to qualify for retirement payments. This refers to the number of calendar quarters you have been insured under the US Social Security System. In US documentation, this may also be referred to as Social Security Credits.
The agreement between the two countries means that periods of employment in Australia are treated by the US as contributions to the US system. In the same way, ‘quarters of coverage’ in the US are treated by Australia as periods of residence in Australia.
These periods are added together to meet the minimum periods required for the pensions offered by each country under the agreement.
If you reside in the US, you may be able to claim a pension from Australia without having to return, which wouldn’t be the case without this agreement. To claim an Australian pension while residing in the USA, you must have actually resided in Australia during your working life for a minimum of 12 months. To use the agreement to claim a US pension, you must have a minimum of 6 actual quarters of coverage.
Build assets where you intend to retire
One of the most common reasons we invest is to build assets to help fund our retirement, so it’s best to build them in the location where you intend to retire. If you hold all of your retirement assets in a foreign country, you will constantly need to convert cash to meet your expenditure needs. So, alongside market ups-and-downs, you’ll need to navigate currency fluctuation, which can greatly vary your return and erode your retirement funds.
Partner with experts who understand both locations
Always choose an accountant who understands both jurisdictions to look after your tax filing and provide taxation advice. To put yourself in the best position to achieve your financial goals, it’s also be beneficial to partner with a financial planner who has a good understanding of tax issues for Aussies in the US.
General Advice warning
The information provided in this blog does not constitute ﬁnancial product advice. The information is of a general nature only and does not take into account your individual objectives, ﬁnancial situation or needs. It should not be used, relied upon, or treated as a substitute for speciﬁc professional advice. Apt Wealth Partners (AFSL and ACL 436121 ABN 49 159 583 847) and Apt Wealth Home Loans (powered by Smartline ACL 385325) recommends that you obtain professional advice before making any decision in relation to your particular requirements or circumstances.