Payouts from US pension plans - The new regulation

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