What Should US Expats Know About Rolling Over Super Funds
Published on November 11, 2024
by Nick Wee
Nick Wee, an IRS Enrolled Agent with 17 years of expat tax experience, specializes in US tax preparation, tax planning, and tax advice for US citizens and Green Card holders living and working in Australia.
Table of Contents
I’m a US citizen. Can I rollover my Australian superannuation fund without IRS problems?
Technically, they can. However, US expats in Australia may face complex challenges when rolling over their superannuation funds, especially if they’re moving funds into a self-managed super fund (SMSF).
While it might seem straightforward under Australian rules, the US tax system views this differently, which can lead to unexpected issues.
What does rolling over super funds mean for US expats?
Rolling over super funds means taking money from one super fund, like a retail fund, and moving it to another, such as another retail fund or a SMSF. Many people do this to have more control over their retirement savings or to consolidate multiple accounts.
However, to the US Internal Revenue Service (IRS), rolling over funds isn’t just a simple transfer.
Why can rolling over super funds be complicated for US tax purposes?
To the IRS, rolling over super funds can look like taking money out, putting it in your pocket, and then reinvesting it. This means the rollover might be treated as a taxable event, depending on the circumstances.
How does the IRS determine if the rollover is taxable?
Whether a rollover is taxable depends on whether the super fund is considered pre-tax or post-tax by the IRS.
If you have reported your superannuation on your US tax returns and paid taxes on it, then you’ve built a “basis” in the fund. In this case, rolling it over may not trigger additional tax.
If you haven’t reported your super to the IRS, then it’s seen as pre-tax income. When you roll over this untaxed income into a new fund, the IRS considers it similar to withdrawing and then reinvesting the money—making it a taxable event.
I want to know more about US taxes abroad
How can US expats avoid tax on rollovers?
To avoid triggering a taxable event when rolling over super funds, it’s best to work with a knowledgeable tax advisor and ensure you have declared your superannuation properly in the past.
If you’ve built a basis in your super by reporting it and paying US taxes, the IRS will not tax the funds again from the rollover. Proper reporting and good advice can save you from an unexpected tax bill.
What happens if the rollover is taxed?
If the IRS decides the rollover is taxable, you could face a significant tax bill.
If the funds were never previously taxed, the IRS may treat the entire amount as taxable income, leading to a hefty bill. Sadly, many expats only discover this after rolling over their funds, causing financial stress.
Why do US expats often get caught off guard by rollover rules?
Many US expats in Australia are unaware of the IRS rules on superannuation and rollovers.
In Australia, rolling over super funds is a normal, tax-free procedure, but the US tax system doesn’t see it the same way. This leads to confusion and often to unintended tax penalties.
What are the penalties for incorrect reporting?
Failing to report a rollover correctly can lead to substantial IRS penalties. Missing forms like Form 3520 or Form 3520-A can result in penalties up to US$10,000 per form.
The IRS can also impose additional penalties of up to 5% of the super fund’s value if information is not provided on time, creating a significant financial burden.
Can rolling over super funds lead to double taxation?
Not so much double taxation but rather the opportunity to use foreign tax credits to cover the US taxation of superannuation. Where the amount of rollover is significant and you do not have sufficient foreign tax credits to offset the tax resulting in a liability compared to if the rollover was not undertaken.
Why do some expats consider renouncing US citizenship?
Given the complexities and the risk of double taxation, some US expats in Australia consider renouncing their US citizenship. Doing so can simplify their financial lives, freeing them from US tax obligations, including those related to superannuation rollovers.
However, renouncing citizenship is a significant step that has its own requirements, including potential exit taxes. It’s important to weigh the pros and cons carefully with professional advice.
What is the best approach if you are considering rolling over super funds?
If you’re thinking about rolling over your super funds, the best approach is to seek professional tax advice before making any decisions. A tax advisor experienced in both US and Australian tax systems can help you understand the risks and guide you on the best way forward.
They can also determine if you have built enough basis in your super to avoid a taxable event and help you meet reporting requirements to avoid penalties.
Rolling over super funds can help you take control of your retirement savings, but it comes with unique challenges for US expats. By understanding IRS rules and working with a knowledgeable tax advisor, you can minimize risks and avoid surprises.
