US Pension Guide for Australian Expats (2024)

Welcome to our US Pension guide for Australian expats. Expats are well informed on the virtues of contributing to their Australian superannuation accounts however when theymove overseasto the United States they are confronted with a completely different pension scheme that draws very few similarities to the Australian superannuation schemes.

A common issue with US-based Aussie Expats is the decision to opt into a Individual Retirement Account (IRA) or their employer’s 401K option. This US Pension Guide seeks to provide some clarity on the different types of IRA’s and the options available to Australian expats.

There are various reasons as to why you would elect to proceed with an IRA but your circ*mstances will help guide this decision.

Essentially an IRA offers the following:

• Provides tax advantages for retirement savings
• Give your savings a chance to grow
• Start securing your nest egg

An Individual Retirement Account is like a personal retirement plan provided by many US financial institutions that allows you to save for your retirement in a tax effective manner.

What Is A US IRA?

An IRA, is an Individual Retirement Account which is the US equivalent ofsuperannuation. However the tax treatment and structure is very different and furthermore, there are various types that Australian expats have to learn.

The IRA system is set up in a way whereby your funds sit in a tax-deferred account and are taxed when you withdraw them or not at all depending on the IRA type.

There are two main types of IRA’s:

1. Traditional IRA’s
2. Roth IRA’s

The two categories refer to the tax rules which govern that type of IRA.

The US Pension Guide is not a complete list of all US retirement account options but covers off on the main account types that an Australian expat may consider.

What Is A Traditional IRA?

A traditional IRA is often a 401K option which is provided to you through your employer. It is common that your US employer will offer a contribution matching scheme. A traditional IRA lets your earnings grow in a tax-deferred environment. You pay taxes on your investment gains only when you make withdrawals.

If you are not covered by a traditional IRA plan at work, you can deduct the entire amount of your IRA contribution from your taxable income. There are limits per year so be sure to seek advice on this.

If you are covered by an IRA plan, your income will determine whether you can make tax-deductible contributions.

Depending on the taxable components of a traditional IRA, this will have an impact on the tax you’ll pay on its withdrawal. If withdrawn early, you will incur a 10% penalty tax, not to mention any relevant state taxes that may apply.

A little known fact is that 401k’s were almost created by accident when a piece of legislation passed through Washington DC that allowed employers to establish tax advantaged savings accounts for their employees.

What Is A Roth IRA?

A Roth IRA is an account that offers tax-free growth and tax-free withdrawals in retirement. Roth IRA rules state that as long as the account has been held for 5 years and you’re age 59.5 or older, then there will be no taxes to pay. All withdrawals must be ‘qualified’ and meet the relevant criteria so it is withdrawn tax-free.

Roth IRA’s can be a good option if you intend on retiring in the US and want to be reassured no further tax will be paid when you draw an income stream from it later.

A key consideration for Australian expats that are looking toreturn to Australia is whether to withdraw their IRA’s when they come back or wait until they are retired to withdraw. The ATO does not currently provide any relief for withwithdrawing funds from an IRAwhen you are back in Australia as a normal tax resident.

Want To Learn More?

Whilst we have tried to cover off on the main points that relate to the US Pension schemes, the US Pension Guide would run to hundreds of pages long if we were to include everything. We shall link below key articles that we add to our blog that relate to US pensions and how they affect Australian expats.

• How are US IRA’s (401k’s, Roth IRA’s and TDA’s) taxed on withdrawal–click here
• United States taxing Australian expats on their superannuation accounts–click here

If you would like to know more, please click below to contact us.