Ask the expert: What Americans in France need to know about 401(k) and other pensions
Whether you are looking to retire to France or are working here, here's what you need to know about US private pension plans such as the 401(k) and IRA for French residents.
For many Americans, retiring to France is a dream. The idea of a calm life in the French countryside is understandably alluring, and thanks bilateral tax agreements between the US and France - France is an attainable and attractive destination for pensioners looking to live off their private American pension plans in the land of cheese and wine.
"France is the bees' knees for American retirees", summarised tax expert, Jonathan Hadida in an interview with The Local. Thanks to the US-France tax treaty, US-sourced pension income is only taxed in the United States.
Hadida explained exactly what Americans in France - both of retirement age and pre-retirement - should know about their American private pension plans.
For those of pre-retirement age (below 59 and a half years old)
One of the most common questions Americans in France have regarding their pension contribution plans is whether they can continue contributing from France.
For 401(K)s, the answer depends on whether you are working in France as a posted worker or whether you are working on a French contract. Posted workers can continue to contribute to their 401(K)s, but those on French contracts cannot.
The reason for this is quite simple - 401(K)s are employer-pension plans. Posted workers can continue to report their 401(K) contributions in the way that they normally would while based in the United States - on the W2 tax form in Box 1.
As for Americans working in France on local (French) contracts, "Generally what happens is that you have to roll it into an IRA with a US-investment broker to manage your funds", Hadida explained for those looking to continue contributing.
As for IRAs (Individual Retirement Accounts), it is possible to continue contributing from France. However, you must have earned taxable income in the United States.
"There are two ways Americans in France are able to avoid double taxation - via foreign income exclusion or the foreign tax credit," Hadida told The Local.
"Basically, you wind up in the same position, but these are two different ways of getting to the same place.
"If you go with the foreign income exclusion option, then this is great because it goes straight off the top and writes off the first $120,000 of income in 2023. But the problem is that this means you have zero taxable income in the United States, so you cannot contribute to an IRA.
"On the other hand, with the foreign tax credit you still have taxable income in the United States so you can still contribute to an IRA.
"The foreign tax credit tends to be a good option well for those living in France because taxes are generally higher in France than they would be in the United States."
READ MORE: Ask the experts: What do Americans in France need to know about investments and pensions?
The next step would be to determine whether it is advantageous to continue contributing to a traditional IRA or a Roth IRA.
"I generally recommend that it is best to make it a contribution to a Roth IRA as you will get the benefit of tax free growth for as long as you hold the money in the Roth and no tax upon distribution. Americans in France generally don't need the 'deductible' contribution which is a benefit of the traditional IRA", Hadida explained.
However, the decision to stick with a traditional or Roth IRA depends on your income and tax bracket, as well as how much you would like to contribute.
If the Roth IRA is not possible for you, Hadida offered an alternative solution: the backdoor Roth contribution. In order to do this, "you contribute to a non-deductible IRA contribution and then roll the money over to a Roth IRA. There is currently no threshold for this", the tax expert explained.
Keep in mind that such a step would likely require the assistance of a tax or financial adviser.
What about Americans in France who have had their IRAs closed down?
Hadida warned: "There has been an ongoing issue with people having their traditional IRA accounts closed by US-based banks when they realise you are not living in the United States".
This issue of having Americans abroad having their IRAs closed is also linked to challenges some Americans have experienced with trying to open new IRAs while resident in France.
International Financial Advisor, Bryan Dunhill with Dunhill Financial, an American-expat advisory company, told The Local that whether IRA closures depend on the US-based bank, and for the most part occur because "banks are concerned about the possibility of misadvising clients".
Luckily, according to Dunhill, there is a solution for Americans in France who find themselves in this situation. "Basically, you need to go to an American expat advisory company who will be able to open a new IRA for you.
"For example, with Dunhill Financial, we are able to open up the same account with our provider, and we transfer all the securities in kind", Dunhill explained.
The financial adviser added that "you have to transfer the money within 60 days from the date that the original IRA is closed. Otherwise, there will be tax consequences".
As for your IRA, "everything that is earned within the plan until you take it out grows tax-free", Hadida explained. That being said, it is advisable to report your IRA or Roth IRA to French authorities as a foreign-based bank account. "It's safer to say yes - report them all. There is no real downside to reporting it. You can do this on the 39-16".
Essentially, this means that those of working-age (pre-retirement) do not have to worry about reporting to any capital gains French authorities. The reporting aspect comes once you begin drawing your pension in your later years.
For those of retirement age (over 59 and a half), looking to withdraw from pension funds
The picture for retirees is a bit different than for those still in the workforce.
"The reason we call France the bees' knees for American retirees is because US-sourced pension income is only taxed in America. That means when you take money out of your 401(K) or IRA, those are taxable at your tax bracket in the United States.
"You have to report it on the US-side and pay US taxes at your marginal rate", Hadida said.
The tax expert continued: "On the French side, US-sourced pension income is reportable in France for rate-purposes but benefits from a deemed credit.
"This means you put it on your French tax form, and you calculate the tax and you get a deemed credit equal to that. Ultimately, you wind up paying no French taxes on your US-sourced pension thanks to Article 18 of the US-France tax treaty".
READ MORE: Pensions: What should I expect if I worked in both France and a non-EU country?
How do I signal my US-sourced pension income on my French taxes?
Although you probably won't end up paying French taxes on your US pension, you do need to tell the French taxman about it. This is the same for all non-French income.
Dunhill explained: "You fill it in within box 1AL or 1BL on form 20-42 on the French tax return, then you claim it in on the 8TK of the 20-47 to say it is US-based pension income, and then you will get a tax credit from the French.
"It goes in and it goes out on the French side. Being a US-retiree in France is fantastic".
For both 401(K)s and IRAs, Americans in France should still keep in mind that early withdrawal (prior to the age of 59 and a half) can still lead to a 10 percent early distribution penalty. There are certain exemptions, such as first time homebuyers and higher education, but you should meet with a tax adviser to determine if you qualify.
This article is intended as an overview of pension and tax rules and does not constitute financial advice. If you have specific questions about your personal situation, we advise you to seek independent financial advice from a specialist in US-French rules.
Jonathan Hadida is a lawyer specialising in international taxation and advising expats - find more on Hadida Tax Advisors here. Bryan Dunhill is an international tax advisor with Dunhill Financial, an American-expat advisory company.
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For many Americans, retiring to France is a dream. The idea of a calm life in the French countryside is understandably alluring, and thanks bilateral tax agreements between the US and France - France is an attainable and attractive destination for pensioners looking to live off their private American pension plans in the land of cheese and wine.
"France is the bees' knees for American retirees", summarised tax expert, Jonathan Hadida in an interview with The Local. Thanks to the US-France tax treaty, US-sourced pension income is only taxed in the United States.
Hadida explained exactly what Americans in France - both of retirement age and pre-retirement - should know about their American private pension plans.
For those of pre-retirement age (below 59 and a half years old)
One of the most common questions Americans in France have regarding their pension contribution plans is whether they can continue contributing from France.
For 401(K)s, the answer depends on whether you are working in France as a posted worker or whether you are working on a French contract. Posted workers can continue to contribute to their 401(K)s, but those on French contracts cannot.
The reason for this is quite simple - 401(K)s are employer-pension plans. Posted workers can continue to report their 401(K) contributions in the way that they normally would while based in the United States - on the W2 tax form in Box 1.
As for Americans working in France on local (French) contracts, "Generally what happens is that you have to roll it into an IRA with a US-investment broker to manage your funds", Hadida explained for those looking to continue contributing.
As for IRAs (Individual Retirement Accounts), it is possible to continue contributing from France. However, you must have earned taxable income in the United States.
"There are two ways Americans in France are able to avoid double taxation - via foreign income exclusion or the foreign tax credit," Hadida told The Local.
"Basically, you wind up in the same position, but these are two different ways of getting to the same place.
"If you go with the foreign income exclusion option, then this is great because it goes straight off the top and writes off the first $120,000 of income in 2023. But the problem is that this means you have zero taxable income in the United States, so you cannot contribute to an IRA.
"On the other hand, with the foreign tax credit you still have taxable income in the United States so you can still contribute to an IRA.
"The foreign tax credit tends to be a good option well for those living in France because taxes are generally higher in France than they would be in the United States."
READ MORE: Ask the experts: What do Americans in France need to know about investments and pensions?
The next step would be to determine whether it is advantageous to continue contributing to a traditional IRA or a Roth IRA.
"I generally recommend that it is best to make it a contribution to a Roth IRA as you will get the benefit of tax free growth for as long as you hold the money in the Roth and no tax upon distribution. Americans in France generally don't need the 'deductible' contribution which is a benefit of the traditional IRA", Hadida explained.
However, the decision to stick with a traditional or Roth IRA depends on your income and tax bracket, as well as how much you would like to contribute.
If the Roth IRA is not possible for you, Hadida offered an alternative solution: the backdoor Roth contribution. In order to do this, "you contribute to a non-deductible IRA contribution and then roll the money over to a Roth IRA. There is currently no threshold for this", the tax expert explained.
Keep in mind that such a step would likely require the assistance of a tax or financial adviser.
What about Americans in France who have had their IRAs closed down?
Hadida warned: "There has been an ongoing issue with people having their traditional IRA accounts closed by US-based banks when they realise you are not living in the United States".
This issue of having Americans abroad having their IRAs closed is also linked to challenges some Americans have experienced with trying to open new IRAs while resident in France.
International Financial Advisor, Bryan Dunhill with Dunhill Financial, an American-expat advisory company, told The Local that whether IRA closures depend on the US-based bank, and for the most part occur because "banks are concerned about the possibility of misadvising clients".
Luckily, according to Dunhill, there is a solution for Americans in France who find themselves in this situation. "Basically, you need to go to an American expat advisory company who will be able to open a new IRA for you.
"For example, with Dunhill Financial, we are able to open up the same account with our provider, and we transfer all the securities in kind", Dunhill explained.
The financial adviser added that "you have to transfer the money within 60 days from the date that the original IRA is closed. Otherwise, there will be tax consequences".
As for your IRA, "everything that is earned within the plan until you take it out grows tax-free", Hadida explained. That being said, it is advisable to report your IRA or Roth IRA to French authorities as a foreign-based bank account. "It's safer to say yes - report them all. There is no real downside to reporting it. You can do this on the 39-16".
Essentially, this means that those of working-age (pre-retirement) do not have to worry about reporting to any capital gains French authorities. The reporting aspect comes once you begin drawing your pension in your later years.
For those of retirement age (over 59 and a half), looking to withdraw from pension funds
The picture for retirees is a bit different than for those still in the workforce.
"The reason we call France the bees' knees for American retirees is because US-sourced pension income is only taxed in America. That means when you take money out of your 401(K) or IRA, those are taxable at your tax bracket in the United States.
"You have to report it on the US-side and pay US taxes at your marginal rate", Hadida said.
The tax expert continued: "On the French side, US-sourced pension income is reportable in France for rate-purposes but benefits from a deemed credit.
"This means you put it on your French tax form, and you calculate the tax and you get a deemed credit equal to that. Ultimately, you wind up paying no French taxes on your US-sourced pension thanks to Article 18 of the US-France tax treaty".
READ MORE: Pensions: What should I expect if I worked in both France and a non-EU country?
How do I signal my US-sourced pension income on my French taxes?
Although you probably won't end up paying French taxes on your US pension, you do need to tell the French taxman about it. This is the same for all non-French income.
Dunhill explained: "You fill it in within box 1AL or 1BL on form 20-42 on the French tax return, then you claim it in on the 8TK of the 20-47 to say it is US-based pension income, and then you will get a tax credit from the French.
"It goes in and it goes out on the French side. Being a US-retiree in France is fantastic".
For both 401(K)s and IRAs, Americans in France should still keep in mind that early withdrawal (prior to the age of 59 and a half) can still lead to a 10 percent early distribution penalty. There are certain exemptions, such as first time homebuyers and higher education, but you should meet with a tax adviser to determine if you qualify.
This article is intended as an overview of pension and tax rules and does not constitute financial advice. If you have specific questions about your personal situation, we advise you to seek independent financial advice from a specialist in US-French rules.
Jonathan Hadida is a lawyer specialising in international taxation and advising expats - find more on Hadida Tax Advisors here. Bryan Dunhill is an international tax advisor with Dunhill Financial, an American-expat advisory company.
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