Question About Contributions To Swiss Retirement Account

I'm not an expert on international taxation, but I do know there is a tax treaty between the US and Switzerland. The answer should be there.

Ira Smilovitz, EA

I think that what this guy is asking is whether he can _reduce_ his taxable income (for U.S. income tax purposes) by the amount taken out of his paycheck and which goes into the Swiss "401(k)". This would be the same principle applied to most of us who work in the U.S., are paid by a U.S. company, and contribute pre-tax dollars to a U.S. 401(k), thus reducing the taxable income.

But does this principle apply to somebody who contributes to a Swiss "401(k)"?

I got ahold to the CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND THE SWISS CONFEDERATION FOR THE AVOIDANCE OF DOUBLE TAXATION WITH RESPECT TO TAXES ON INCOME. But I'm having problems locating an article that would apply to this situation...

In article you write:

Looking at the tax treaty, I see that Swiss social security is taxed only in Switzerland, but nothing about pension contributions.

On the other hand, he can credit his Swiss tax against his US tax. I'd think that'd be worth a lot more than a deduction, and as far as I can tell he can credit all of his Swiss tax against all of his US tax.

He can not take a deduction on his US return for his contributions to the plan because the plan is not a US trust.

That's what I thought... In order to take a deduction he would have to ask the Swiss employer to offer a plan that is considered a US trust, or he could set up his own IRA/Roth IRA and contribute to it. Am I correct?

I assume he is in New York under a work visa and receives a W-2 to reflect his earnings. As such, he may open an IRA or a Roth IRA and contribute up to the limits. See IRS PUB 590A for the limits. As he is not an active participant in a US qualified plan, he could take a deduction for his contribution to a Traditional IRA. There is no deduction for contributions to Roth IRAs.

AS an aside, if the employer contribution to his foreign pension is vested, then that contribution is treated as taxable US compensation and should be included on his W-2. Additionally, he needs to find out how Switzerland would treat his ownership of a US IRA. The treaty treats an IRA just like a pension. Switzerland (S) taxes based on residency. I conclude that if he returns to S and takes an IRA distribution, then he would only be subject to S tax on that. I am not sure about the Roth IRA. In the US, he would not be subject to tax if he was resident here. He never paid S tax on the income he contributed nor did he pay S tax on any income in the account. He may also be subject to cantonal capital tax on the Roth IRA value. I am not an expert on Swiss income and capital taxes.

I can tell you that about 6 years ago I was married to a woman who worked in Canada. She contributed to an RSP, which is the Canadian equivalent of an IRA. It was the worst of both worlds. The contributions were not deductible for USA tax purposes, but they did reduce her Canadian taxes, which reduced the tax credit available for the USA.

On 1/3/2018 at 6:27:03 PM tb wrote:

On a forum for Swiss citizens living abroad, this lady posted a reply affirming that contributions to a Swiss retirement account could be deducted from a U.S. income tax return for the period of five years. She makes reference to Article 28.4 (a) and (b) of the U.S./Swiss tax treaty.

Article 28.4 (a) and (b) of the tax treaty states:

***begin*** ARTICLE 28 Miscellaneous

1. In determining the taxable income for purposes of taxation in a Contracting State of an individual who renders personal services and who is a resident, but not a national, of that State, contributions paid by, or on behalf of, such individual to a pension or other retirement arrangement that is established and maintained and recognized for tax purposes in the other Contracting State shall be treated in the same way for tax purposes in the first-mentioned State as a contribution paid to a pension or other retirement arrangement that is established and maintained and recognized for tax purposes in that first-mentioned State, provided that: a) the individual was not a resident of that State, and was contributing to that pension or other retirement arrangement immediately before he began to exercise employment in that State; and b) the competent authority of that State agrees that the pension or other retirement arrangement in the other Contracting State generally corresponds to a pension or other retirement arrangement recognized for tax purposes by that first-mentioned State. The benefits of this paragraph shall extend for a period not exceeding five taxable years beginning with the individual's first taxable year during which the individual rendered personal services in the first-mentioned Contracting State. For purposes of this paragraph, a pension or other retirement arrangement is recognized for tax purposes in a Contracting State if the contributions to, or earnings of, the arrangement would qualify for tax relief in that State.

***end***

In reading such article --please keep in mind that I am no tax expert!--, I think that she has a point if whoever is filing a U.S. tax return is not a U.S. citizen.

What do the experts here think?

Yes, it would appear that 28.4 allows a deduction under certain conditions:

1. The plan in Switzerland must be comparable to a US plan such as any defined contribution plan (401, 403, 457).
2. The deduction is only available during any of the first 5 years of physical presence in the US. It is not 5 years of deductions.
3. The deduction is only available if he was contributing to the Swiss plan before he came to the US.
4. The amount he can DEDUCT is limited by US law and not Swiss law. In other words, if a comparable US plan limits his contributions to X% of compensation and limits his deduction to a maximum of $Y, he must conform to those rules and not Swiss rules that may have allowed for a greater exclusion or deduction.

The question now becomes, where does he take this deduction. None of the entries on the 1040 as adjustments fits the bill with the possible exception of a write-in deduction on Line 36. The other place would be a write-in exclusion (negative number) on Line 21 Other Income. I would think that Line 36 would be proper as this is a deduction and not an exclusion.

Either way, I believe that IRS Form 8833 Treaty-Based Return Position Disclosure would need to be filed with the tax return.

The lady on the Swiss expat forum just posted how it was handled for her by:

*****begin***** There is no line for this on form 1040. Your employer has to correct the W-2 (Wage and Tax Statement) and deduct the plan contributions from the gross pay. This means, your "wages, salaries, tips, etc." on line 7 will be lower. That's how our tax lawyer filed for a refund and IRS accepted it. Next year, our employer deducted the payments under "401(k) (D-Box 12)" - whatever D-Box 12 is. *****end*****

Well known to every American in Swiss Land:

Swiss Pillar 2 (The Swiss 401k as you call it)is taxable as normal income both on the employee and employer contributions on the 1040. Pillar 2 is not a qualified plan.

Best to bite the bullet and be happy he can take it all when he leaves Switzerland.

Minimize the Pillar 2 contribution.

Stock up on IRA's and HSA's. It requires more savings but has the tax advantage. Of course this impacts medical plan choices.

Remember Swiss tax has to be filed first, then US tax for the tax credit. The Swiss will tax your income, your wealth, and your religion.

Not sure if the religion tax falls under a Foreign tax credit as I claim atheist.

My strong advice, do not try to do these taxes on your own.