Foreign Pension Plan Treatment

[popmanrules]

Hello

I am a US citizen residing and working in South Korea for a company which provides a company pension plan. I'm in process of filing past due taxes since my relocation here as well as the year 2019. Foreign earned income and interest earned seem to be self explanatory in TurboTax Deluxe, however, I'm stuck on how to treat foreign pension account on my filing. 

Let's say my overseas originated pensions are comprised as set below:

A - National Pension Plan: Proportionally contributed through my earnings  before income tax

B - Defined Contribution (DC) pension plan: Company contribute into my pension account (under a brokerage account) on a yearly basis.  

Ultimately, my question boils down to what are measures that I need to take in TurboTax and relevant forms respective to each item above. 

Would deeply appreciate if you could help me out here so I can file them accordingly.

[SusanY1]

If you are not yet receiving distributions from these plans, you include the contributions that your company makes on your behalf to the defined contribution plan as part of your earned income when you enter your income in the foreign earned income section of TurboTax.  

You are not able to deduct this income as you might a retirement plan in the United States.  However, you are able to exclude the income as foreign earned income in the same manner as your foreign wages. 

The United States has a bilateral agreement with South Korea for their National Pension Plan, so for those contributions, you exclude the contributions made by you and your employer from your income (ignore them, do not list them on the return at all.)  You can learn more about that agreement here: U.S.-Korean Social Security Agreement.

[popmanrules]

Hi Susan,

Thank you very much, you're a saint!

Quick question on defined contribution by my employer. Based on your response, my understanding is that my defined contribution plan contributed by my employer is based on historical value at the time of contribution. Do I need to report on any unrealized gain or loss from this account? Also, how do I treat realized gain or loss when I receive distribution from such plan?

Thanks again

[popmanrules]

Hi Susan,

Thank you very much, you're a saint!

Quick question on defined contribution by my employer. Based on your response, my understanding is that my defined contribution plan contributed by my employer is based on historical value at the time of contribution. Do I need to report on any unrealized gain or loss from this account? Also, how do I treat realized gain or loss when I receive distribution from such plan?

Thanks again

[SusanY1 · Accepted solution]

Your defined contribution pension plan, depending on how and where it is invested may contain and be listed as a number of things that require some accounting that won't all be part of what TurboTax can do for you but I can point you in the direction of where you can find more information and since you're asking now, it won't become a huge problem for you even though it may start off sounding scary.

First, you may need to file Foreign Bank Account Reports or FBARs.  These are the easiest and least complicated of all.  You may already be familiar with them.  You will find what you need to know about those and can file them here:  FBARs

Once they are over certain values, you may need to also file with your tax return form 8398 (this part TurboTax can help you with.  You can find the instructions for that form here: Form 8398 instructions but the short of it is that if you are filing as a single taxpayer you will file this form once your foreign assets exceed $200,000 on the last day of the year or $300,000 at any time and you can double those numbers if you file a joint return with your spouse. 

Where things get trickier have to do with the assets in which your plan is invested and/or how it is structured.  If you have an individual set ownership in it, you may need to be concerned about filing Form 8621 - the Passive Foreign Investment (PFIC) form. 

This is not something TurboTax can help with as the form is not supported in our software, and it's a fairly specialized form that not a lot of tax advisers are experienced with.

 A lot of people give up when you start talking about PFICs but once you understand them and as long as you handle them properly, they really aren't that scary!   Only with PFICs do you have a requirement, potentially, to report annually some unrealized gains and losses.  

Because you could potentially be dealing with PFICs I do recommend some professional guidance, even though you do seem quite capable because this is an area of the tax code that is more complex than most and one of the few where we can't go back and fix it later! 

The key with PFICs is staying on top of the annual filing requirements once you understand what you have. They aren't too bad once you make the proper elections for them and keep up with the paperwork but without the proper elections you face some really punitive tax situations that get quite ugly (like tax rates at the highest marginal tax rate for the year for any taxpayer plus interest on income you didn't even receive!)  With the proper elections, though, they are just a slight annoyance of an extra form each year that you will quickly learn how to complete, I'm sure!