Payouts from US pension plans - The new regulation
von Peter Scheller
Payments from US pension plans must be taxed in Germany if the beneficiary is deemed to be resident in Germany. This applies to both US citizens and Germans who have their main residence in Germany. Until now, the German taxation regime for payouts from these plans was very favorable. This has changed fundamentally as of January 1, 2025.
Which plans are we talking about?
We are talking about the following qualified pension plans:
• plans under section 401(a) of the Internal Revenue Code (including 401(k) plans)
• individual retirement plans (including individual retirement plans that are part of a simplified employee pension plan that satisfies section 408(k)
• individual retirement accounts, individual retirement annuities and section 408(p) accounts
• section 403(a) qualified annuity plans
• section 403(b) plans
• section 457(b) governmental plans.
This article only deals with plans that do not provide for a lifelong pension (annuities).
What has applied so far?
Previously, the payout less the contributions attributable to these withdrawals was taxed in Germany. If the plan term was longer than 12 months and the beneficiary was older than 60 at the time of payment, only half of the difference was taxed.
What applies from January 1, 2025?
From this date, payouts will be taxed at the full amount if a tax benefit was granted in the USA that is comparable to the tax benefit in Germany.
The USA grants a tax exemption for employer contributions to company plans and contributions by the plan holder can be paid from untaxed income. The tax incentives for all the above-mentioned US pension plans are comparable to those in Germany. This means that all payouts are fully taxed in Germany.
If the plan holder has made contributions from taxed income, the payouts based on this will be taxed according to the old rules, i.e. the difference between the payout less attributable contributions.
How are payouts from Roth plans taxed?
The old rules continue to apply to payouts from these plans. In Germany, tax is levied on the payout less the contributions attributable to it. If the plan term was longer than 12 months and the beneficiary was older than 60 at the time of payment (older than 62 if the contract was concluded after November 31, 2011), only half of the difference is taxed.
The question of whether the twelve-year period starts again after a rollover has not yet been clarified.
What do US citizens need to consider?
US citizens must also declare the payouts from the above-mentioned US pension plans in their federal income tax return. Double taxation is prevented or mitigated by the fact that German income tax can be credited against US income tax.
Payouts from Roth plans are tax-free in the US. This means that German income tax becomes a final tax burden.
What do German citizens need to consider?
Payouts from qualified or Roth plans are tax-free in the USA due to the double taxation agreement. In order to prevent withholding tax in the USA, the form W-8BEN must be submitted to the respective financial institution.
How are inherited retirement plans taxed?
In principle, US retirement plans are taxed in the same way as qualified or Roth plans (see above)?
Please note that the transfer to the heir is subject to German inheritance tax.
How are all US retirement plans taxed in Germany?
The individual income tax rate is applied to the taxable portion of the payouts. There is a flat-rate deduction of 102 euros per year for income from all pension plans.
How is the penalty tax treated in Germany?
If payouts are made before the age of 59 ½ and there is no reason for exemption, the payouts in the USA are subject to an additional 10% penalty tax in addition to the regular income tax.
It is unclear whether this penalty tax can be deducted in Germany.
Please note
Further information on all topics can be found in other articles on this website.
Author: Peter Scheller, Tax Advisor, Master of International Taxation
- Schlagwörter:
- 401(k) plan
- 403(b) plan
- IRA
- pension plans
- Roth IA
- USA
- Kategorien:
- Auswanderer / Expatriates
- Einkommensteuer / Income Tax
- USA
Kommentare
Kommentar von Ruth Mary Hall |
I would like for information on the taxation of U.S. federal pensions in Germany.
Antwort von Peter Scheller
There are various articles on this website.
If you need advice, contact me directly.
Kommentar von S. King |
Under German domestic law, a withdrawal or conversion from a retirement account could be seen as a taxable event (a payout). However, the US-Germany tax treaty provides special relief for movements within the US pension system. Specifically, Article 18A(1) of the treaty states that as long as the funds remain in a recognized pension plan, Germany will tax the income only when it is paid out to the individual, and not at the time it’s merely transferred or rolled over to another plan. source (scheller-international.com)
This means a rollover or conversion within the US (plan-to-plan transfer) is not considered a taxable distribution by Germany. I.e. Germany defers taxation until you actually take money out of the pension framework for your own use.
Will the new §22 Nr.5 EStG (2025) change the rules for conversions. Is it advisable under current low tax (in the US) to convert your SEP-IRA or 401 to Roth IRAs?
Antwort von Peter Scheller
The conversion to a Roth plan will not be taxed if Article 18A (1) DTC is applicable.
However, later withdrawals from the Roth plan will be taxed in Germany if the receipient is resident in Germany.
Kommentar von US citizen |
Inherited IRA
As US citizen living in Germany I was taxed in Germany with inheritance tax. In the US I am taxed on distributions (tax code section 408(d)(3)(C). 10YearPlan. In Germany I am also taxed on distributions. To pay the very high German taxes I have to sell stocks out of the inherited IRA. Selling IRA stocks to meet US and high German taxation at a fixed time means to sell stocks even with high losses. I am not double taxed, I am multi taxed on the inherited IRA. The DBA doesn't solve this double/multi taxation. For US citizens Germany is definitly not a reasonable decision to move to.
Kommentar von Steven |
Why should the distribution of an inherited IRA be taxable under the double taxation agreement at all? In Article 18 of the DTA it refers to a beneficiary in consideration of past employment. That doesn't apply to an inherited IRA. That IRA was in consideration of past employment the original IRA owner: " 1. Subject to the provisions of Article 19 (Government Service; Social Security). pensions and other similar remuneration derived and beneficially owned by a resident of a Contracting State in consideration of past employment shall be taxable only in that State."
With that distribtions from inherited IRAs don't fall under the DTA.
Antwort von Peter Scheller
Withdrawals from any kind of qualified US-Pension plan (401(k), IRA etc.) does not fall under Article 18 or 19, if the plan was funded or co-funded by the employee. The highest German fiscal court ruled that it falls under Article 21 (Other income). If the recipient of the payment is tax resident in Germany the payments will be taxed in Germany.
Kommentar von US Citizen |
If that would be true, US Citizens living in Germany would be discriminated by exluding them from the advantage of the double taxation agreement other citizens profit from.
Antwort von Peter Scheller
You know, why US citizens living in Germany are discriminated against when it comes to income taxes?
The reason is the saving clause, which largely excludes US citizens from the protective effects of the double taxation agreement. The US includes this clause in all of its double taxation agreements.
Double taxation therefore only exists because of the Saving Clause in Article 1 (4) DTC Germany/USA. If this provision applies, the US must credit the German income tax (Article 23 (5) DTC Germany/USA). This is done by providing the relevant information in the US tax return.
If there is discrimination, it stems from the US and its claim to tax its own citizens completely independently of their residence.
To blame Germany for any possible tax discrimination is to misunderstand the real cause, which is the unrestricted tax claim of the US against its own citizens.
Kommentar von US Citizen |
If a state funds tax deferred plans, often over a very long period of time (up to 60 years), it definitely should have the right to tax those plans wherever the designated beneficiary lives (Förderstaatsprinzip). Inherited-IRAs are funded by the USA as long as the Inherited-IRA exists. To credit the German tax as you mentioned above does not feel right to me, especially because of the "Förderstaatsprinzip" and Protocol Number 19 belonging to the Agreement (DBA) and considering what I just said about the character of Inherited-IRAs. I believe Article 23 (3 a) DTC / DBA should be applied. And of course Article 25 Mutual Agreement Procedure DTC / DBA any US Citizen who lives in Germany being double or even multi taxed on income should bear in mind.
Antwort von Peter Scheller
That is a good point.
However, when states negociate a treaty both parties have to make concessions. And Germany had to accept for example the saving clause and other provisions related to this issue.
Despite that these provisions are following the old OECD modell. In modern treaties Germany concluded with other states, that the state which provided tax benefits on contributions have at least the right to tax pension payments at source.
And this treatment results also in the exclusive right of the US to tax payments out of German tax beneficial pension plans if the recipient of the payments relocates to the US.
Just to be clear. Payments from US or German pension plans fall under Article 18 (1) or 21 (1). In both case the state of resicence has the exclusive right to tax the pensions and withdrawals from pension plans. Wheather that is fair can be discussed but is irrelevant. As far as I know the IRS or US treasury accept this result. Therefore, there is no room for the mutual agreement procedure.
That the US can also tax the payments from US pension plans to US-citizens who are resident in Germany is the result of the US tax system (and cosequently of the saving clause in Article 1 (4)). Therefore, the US have to credit the German tax against the federal US tax. This is explained in a new article: https://scheller-international.com/blog-beitraege/tax-discrimination-against-us-citizens-in-germany.html
Kommentar von US citizen |
US citizen living in Germany / Inherited IRA
If - as you mentioned above - Germany has an exclusive right to tax Inherited-IRAs of US citizens living in Germany because of the double agreement, does Germany then follow exclusive German rules to tax Inherited-IRAs. Or even worse, lacking qualification of Inherited-IRAs for German tax purposes within the German Law, does Germany then exclusivly tax Inherited-IRAs with the highest possible tax on the highest possible taxable proportion?
Again, it doesn't feel right to me to credit exclusivly created German taxes for Inherited-IRAs against US taxes. I still believe Art. 23 (3 a) should be applied for lacking qualification within the German Law and a mutual agreement procedure should be started in both countries to insure justice and equal rights compared with other 'tax citizens'.
Antwort von Peter Scheller
Germany has the right to tax the IRAs if you are tax resident in Germany.
Please read: Tax discrimination against US citizens in Germany?
Einen Kommentar schreiben