Eritrea and the US are the only two countries in the world to tax its citizens irrespective of their physical location. Whilst Eritrea offers its non-resident citizens a reduced rate of tax at 2%, the US seeks to impose the same level of taxation to its residents and non residents. This means that regardless of physical location, US citizens remain subject to income tax of up to 39.6% on their earnings and the same again on unearned income arising from investment portfolios – with a possible 3.8% surcharge for those generating more than $250,000 of unearned income. Alongside this there is an additional complication when considering where US taxpayers can invest. Long-standing legislation in the US looks to aggressively tax US taxpayers where investments are made into Passive Foreign Investment Companies (PFICs). A PFIC is, in broad terms, any non-US company or fund that does not distribute income to the US on an annual basis. This means 99% of non-US funds are deemed to be PFICs and US taxpayers cannot structure a globally diverse investment portfolio without suffering penal tax charges and reporting responsibilities. In addition to this it is extremely difficult for US taxpayers to invest in US tax compliant structures for their retirement. Below you will find the basic information on two plans offered to US taxpayers with their funding restrictions: 401(K) For any non US resident taxpayer who is employed by a US company or self employed, it may be possible to fund a 401(k). This does come down to employer discretion and many overseas employees are not allowed to contribute. Employees are entitled to contribute $17,500 per annum which can be topped up by an employer to $51,000 depending on the individual’s earnings. For those over the age of 50, it is possible to increase these amounts by $5,500 as ‘top up’ contributions. INDIVIDUAL RETIREMENT ACCOUNTS (IRA) Any US taxpayer can invest into an IRA – however the annual cap on the contributions is $5,500. This means if an individual contributes the maximum allowance to an IRA for 30 years receiving 5% investment return – the plan will be worth about $500,000 at retirement. If the balance was used to purchase an insurance annuity, one could expect to receive about $30,000 per annum for life. To put this in context, the average cost of a nursing home in New York is $106,500 which is expected to be more than $190,000 by 2030. This all being said, the average size of a 401(k) in 2013 was a mere $90,000 whilst the average IRA was worth $81,000. If a retiree had both a 401(k) and an IRA, this provides an annual annuity income of just $8,500. There have been countless comments made by the President and Congress over the state of retirement plans for US taxpayers however there has been little other option as even establishing a personal investment account outside of the US is now proving challenging due to the complexities being introduced under FATCA. One option that can be considered is to fund a non US pension plan located in a jurisdiction that holds a formal taxation agreement with the US. One such solution is the Trireme Explorer Pension Plan. TRIREME EXPLORER PENSION PLAN The Explorer Pension Plan is a pension arrangement established in Malta under the articles of the Malta : US taxation agreement. Any non-US resident who would like to save in a US compliant and tax efficient manner for their later retirement aged over 18 can apply to become a member of the Plan. Members are able to contribute as much as they would like from after-tax dollars. Going forward Members are able to save with tax deferral meaning they can benefit from compound interest within the plan. Investments may be made in PFICs with no underlying charges or reporting issues due to the terms settled in the Double Taxation Agreement. Whilst these two points are highly beneficial – they are set up to follow the exact treatment as is offered under 401(k) plans and IRAs. Members can draw benefits from age 50 commencing with an initial lump sum of, up to, 30% of the total value of the plan which remains outside the scope of Maltese or US tax irrespective of where the member resides. From then on the Member can draw income directly from the plan with no requirement purchase an annuity. This income will only be partially taxable to US tax as a proportion of the received income is deemed to be a return of capital, which has already been taxed. COMPOUND INTEREST Within the plan members can benefit from compound interest – or “gross roll up”. Compound interest is one of the most advantageous effects of saving in a US compliant pension plan as it means no tax is deducted from the invested capital on an arising basis. Using a simple equation, over a 10 year period if the investment portfolio achieves roughly 7% the original investment will have doubled in value. For individuals looking at retirement planning compound interest is the strongest savings tool available. KEY POINTS: The key points within this solution are:
- This is a pension scheme and therefore nothing can be taken before age 50.
- Members can contribute as many after tax dollars as they would like.
- The plan can invest in global funds with no PFIC charges.
- Benefits taken at 50 are highly tax efficient – starting with a lump sum of up to 30%.
- On death, the value of the plan is fully included for US estate tax calculations.
For more information please contact: Mark Plummer T │ (852) 9666 0501 E │ firstname.lastname@example.org DISCLAIMER This document has been written in general terms and should be seen as broad guidance only. The document cannot be relied upon to cover specific situations and the reader should not act, or refrain from acting, upon the information contained herein without obtaining specific professional advice. Acuma Hong Kong Limited, Trireme Pension Services (Malta) Limited and its officers, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it. Within the borders of the United States, this document is intended to be solely read by professional advisors for general awareness and to assist them in their provision of advice to their non-resident US taxpayer clients.