Expats Pay Taxes On Retirement Accounts

18 Sep

This article is being written in response to a “search engine term” that reads as follows, “u.s. retirement accounts for israeli citizens.”

Let me tell you, the subject of how an American expat living in Israel pays taxes on their American retirement account is not a simple issue. The tax treaty between our two countries provides the following guidance in paragraph 1 of Article 20:

“Except as provided in Article 22 (Governmental Functions), pensions and other similar remuneration paid to an individual shall be taxable only in the Contracting State of which he is a resident.” This sounds quite clear. You live in Israel, so you pay taxes on your pension only to Israel. BUT, they further go on to define what they mean by “pensions and other similar remuneration” In paragraph 4 of this same Article 20, they say, “pensions and other similar remuneration”, as used in this Article, means periodic payments other than social security payments covered in Article 21. Are you confused? You ain’t seen nothin’ yet! There happens to be a specific definition of the term, “periodic payments.”

Periodic payments are amounts paid at regular intervals (such as weekly, monthly, or yearly) for a period of time greater than one year (such as for 15 years or for life). These payments are also known as amounts received as an annuity. If you receive an amount from your plan that is not a periodic payment, see Taxation of Nonperiodic Payments , later.

So, if your retirement account from the United States consists of an annuity and you are paid on a regular basis, you do not have to pay taxes to the USA, but pay to Israel. Does Mas Hachnasah tax your retirement account payments? I don’t know. Ask your accountant. But, if, on the other hand, you take your American based pension account payments on anything other than a regular payment basis, it is taxable by the IRS. Note that the IRS says that all IRA’s fall into this “non-periodic payment” retirement account trap. So all IRA’s are taxable by the IRS. This is not a professional opinion, but my personal non-professional conclusion based on my research.

What about any retirement account to which you may have contributed while working in Israel? It seems that when you are old, gray, and enfeebled, you have to pay the IRS when you receive any of these funds. It doesn’t seem fair to me, but if you have an opinion as to the possible veracity of this conclusion of mine, I’d be interested to hear from you.

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