For those who have moved between the US and Australia, access to and tax treatment of retirement accounts is a common issue. We’ve covered the US taxation of superannuation in several posts, but the tax treatment by both countries of 401k and IRA accounts held in the US is also important. Today’s post will cover the Australian side of this equation. My next post will discuss what happens to your US retirement accounts when you renounce US citizenship (or for Australian expats returning from the US).
Is an IRA or 401k a “Foreign Superannuation fund”?
Australian tax law has special rules for taxing the transfer of “foreign super” into your Australian superannuation account. To qualify, you must be able to make non-concessional contributions into your Australian super account and you cannot exceed the contribution caps. For amounts transferred from a foreign superannuation fund, s305.70 and s305.80 of ITAA1997 give you the option in some circumstances of having the lump sum taxed inside your Australian superannuation account (at 15%) rather than being taxed at your personal tax rate. Additionally, the taxable amount under these provisions is essentially the increase in the value of the fund since the date you became an Australian tax resident. BUT these rules only apply if the transfer is from an account that is deemed to be “foreign superannuation” under Australian law. Unfortunately, several private rulings have held that IRA, 401k, and other US retirement accounts are NOT considered “foreign superannuation funds”, and therefore are NOT taxed under these rules.
Let’s examine the logic in one of the more recent rulings, which goes into great detail on what is required for a fund to be a foreign superannuation fund. What it boils down to is that the sole purpose of the fund must be the provision of retirement benefits; provisions for the payment of benefits for any reason other than retirement will mean that a foreign fund does not meet the definition of foreign superannuation fund, and the provisions for transfer of foreign super will not apply. In the case of US retirement accounts, Congress has legislated the ability of funds to distribute benefits in the case of hardship. It is these provisions that the ATO points to in determining that US plans are not solely for retirement – whether you have accessed such withdrawals or not. US funds are not required to offer hardship distributions, so classification of foreign superannuation funds requires a close reading of the trust deed.
If not foreign super, then what?
Private rulings covering 401k, traditional IRA, and Roth IRA  distributions have all concluded that withdrawals from these accounts are taxed as trust distributions. The general rule for trust distributions is that the corpus of the trust (that is, the original contributions) and income previously taxed in Australia are distributed tax free, but any distribution of previously untaxed (by Australia) trust earnings is included in assessable income. Prior to 2010, Australia had provisions taxing foreign investment fund income that may have included US retirement accounts (only accounts exceeding a given threshold were taxed), so any income taxed under these provisions will not be taxed again.
What do these trust rules mean? Say you contributed $5000 to your IRA twenty years ago (while living in the US) and the account is now worth $20,000. The $5,000 is considered the trust corpus, so, when you withdraw $20,000, that $5,000 will not be taxed, but the remaining $15,000 will be included in your assessable income. Wait a minute – what if most of that $15,000 of appreciation occurred before you became an Australian resident? In Interpretative Decision 2011/93, the ATO has ruled that this is irrelevant.
So, what’s included in corpus? Generally, it is personal and employer contributions to the account, whether or not those contributions were made with pre-tax or after-tax money. If you rollover or consolidate accounts prior to becoming an Australian resident, this does not convert appreciation prior to the rollover into corpus. Thus, one of the consequences of the ruling that US retirement accounts are generally not foreign superannuation funds is that the fund earnings accrued prior to becoming an Australian resident are included in your Australian taxable income. Any withdrawal from a US retirement account by an Australian resident will result in currently assessable income in Australia.
This is one area where competent professional advice is essential. Any tax planning must consider both the US and Australian tax consequences. For those still in the workforce, Australian tax rates are generally higher than US tax rates, so including 401k/IRA withdrawals in current income can be expensive. For those with accounts containing a large amount of appreciation or those with Roth variants, it may actually be worthwhile to take the US tax hit from early withdrawal prior to becoming an Australian tax resident. And, record-keeping is essential to establish the amount of corpus – do you know how much the original contributions were? Can you find out?
What about the treaty?
As noted many times on this site, the current treaty does not adequately address retirement savings. Article 18(1) provides that pensions are taxed by the country of residence. For Australian residents who are not US citizens, this may provide relief from US tax – more on that in my next post – but it will not provide any relief from Australian tax.
The more I explore this area, the clearer it becomes that the treaty must be re-negotiated. Retirement savings is an important area of public policy in both countries. If our free trade agreement is to allow free movement of labour as well as capital, then there must be retirement account portability. The pension and retirement account articles in the current US model tax treaty are certainly a step forward from the current treaty, but they do not go far enough.
 Note that Roth variants of these accounts are taxed by Australia exactly the same as the traditional variants – so it might be worthwhile cashing out those Roth accounts prior to becoming an Australian resident.
45 thoughts on “How does Australia tax your US retirement account?”
An excellent post – thank you for this. In the 21st Century people are more and more likely to experience tax residency in more than one country. Those who plan to acquire a new tax residency must always consider how their existing assets/pension plans will be treated under the laws of both countries. Here is a recent article explaining how damaging a lack of planning can be:
John Richardson. I thought that the US was the only country with Taxation on World Wide Income?……Reading this article states that Canada does exactly this also. Am I wrong to assume Canada and US Taxation are ‘the same’ terms and conditions.
Most countries tax their residents on worldwide income. The difference with the US is that it taxes citizens on worldwide income regardless of whether those citizens are actually resident in the US.
Karen, thanks for your article. Very informative and apropos to my circumstances. I am indebted to you for opening my eyes to some of the financial legalities of my dual citizenship. Can you recommend any of the US/Australia tax services to give me good advice? I know this is not your business, but I don’t know where to go to get advice on my particular circumstances. Thank you.
Quinn, I second Karen’s answer. Let’s look at it this way.
There is a difference between “who” a country treats as its tax residents and “what” income the country imposes tax on.
Who: The United States treats all US citizens as US tax residents regardless of where they live in the world. Canada treats only Canadian residents at tax residents. In other words, if an individual does not live in Canada he would not be a Canadian tax resident.
What: Canada, the United States, Australia and the vast majority of countries in the world impose taxation on worldwide income – meaning that (assuming you are a tax resident) you are subject to tax on income regardless of where it has been earned.
If I am a US nonresident alien, and Australian tax resident, is the accumulation (growth) in my 401k or IRA taxable by the ATO?
My reading of this suggests no, ATO will only tax that income upon withdrawal – is that correct?
Under current Australian tax laws only withdrawals are taxed. Pre 2010 there were rules that could have resulted in Australian tax on accumulation.
I am an Australian citizen, I have a 457 (b) account in New York State from where I used to work there.
I haven’t made any withdrawals yet but I was also worried about tax on accumulation. Thank you for clarifying this. Could you please point or link to the Australian tax legislation that precludes tax on accumulation?
There are two relevant ATO private rulings that should point you in the right direction:
one regarding the 2017 tax year and one regarding the 2015 tax year. Both are private rulings, so they can’t be used as precedent. However they do outline how the ATO thinks about the Australian taxation of US retirement accounts.
Thank you, Karen, much appreciated
Does anyone know what happens to an IRA if and when you leave Australia? Suppose you opened an IRA while in the U.S.; the corpus is $5,000, the accumulation before arriving in Australia is $15,000; the accumulation while resident in Australia is $5,000. No withdrawals or contributions are made while resident in Australia. You leave Australia with an IRA worth $25,000. Australia taxes you on your assets when you leave; would that include the IRA? It seems odd that it wouldn’t but not sure it’d be captured by the rules.
My understanding is that Australian departure taxes are only on property that generates capital gains, and therefore there should be no Australian tax on an IRA when you leave Australia. What matters is your tax residence when you withdraw from the IRA. You should consult an Australian tax agent to confirm this.
Thanks. The definition of capital is quite broad, so I am not so sure. I’ll have to ask an expert. Thanks for coming back to me.
So given that the Australian Government has now allowed withdrawals from superannuation due to Hardship in this post Covid world, can the ATO ruling about 401k/403bs now be challenged??
The recent provision for hardship withdrawals from super (as well as the first time homebuyers super scheme) highlight the hypocrisy of the ATO position on 401k/403b accounts. However, the only way I can think of to find out whether the ATO has changed its position on this would be to apply for a private ruling based on your own specific circumstances.
It would be interesting to see how the ATO responded to such a challenge. I suspect that they would stress that the COVID access was a temporary emergency provision (which ended on 31.12.20) and therefore not akin to the US IRA/401k provisions which are permanent.
How true!! Time to apply for a private ruling!
Completely agree. The foundation for the ruling has now gone completely out the window. Hoping somebody challenges this, and would be happy.l to participate in any ruling
Waiting for comments on Maia’s question. Especially now some Australians have accessed their superannuation early during Covid. It will be interesting if there is a change in the ATO’s ruling.
Great article, thank you! Any recommendations for tax experts that could advise on this issue? I reside in the USA but am an Australian citizen that hasn’t resided there for over 10 years – I am wondering if it’s better to seek out a tax expert in the US or in Australia? As you mention, they need to know both sides as we’re currently working out where to stock up our superannuation
Do you have any insights into how Sec 409a deferred compensation plans work if you become an OZ resident for tax purposes but a non-resident/ non-citizen of the US when the plans distribute? Are they treated the same way as a 401k from the US and Australian perspective or totally different?
How does Australia tax ROTH conversions made while in Australia?
My understanding is that your withdrawals are taxed.
Is a ROTH conversion considered a withdrawal?
Thanks for this. I’m a US citizen, my wife is Australian, but we have never lived in Australia. We met and live overseas. We are considering retiring in Australia. If the issue with taxing all of my previous years growth in my retirement accounts is true, that is a 100% non-starter for me and we will be crossing Australia off this list of places to retire to. I wish I would have researched this earlier as I’ve already spent a lot of money applying for residency. I guess I’ll have to consider that a donation. I’m actually quite disappointed by this as is it completely unreasonable.
Don’t forget that Australia will give you a credit for any US tax paid on withdrawals. As long as your account isn’t a ROTH variant, the extra tax paid to Australia may not be as much as you fear.
Anyone planning to move to a new country should be contacting a tax professional who understands the rules in their destination and doing a pre-immigration tax check. There may be some simple pre-immigration strategies that will avoid future double taxation.
How will Australian law settle the previous understanding that a 401K can also be used for hardship, therefore, not a true retirement account like the Australian Superannuation. But as a result of COVID Australians were able take funds out of their Superannuation under hardship situations? Could this change how 401K withdraws are taxed in retirement for the Australian resident?
Excellent point I was wondering the same!
I have New Zealand and UK citizenship, and USA residency (Green Card). I presently live in UK.
I grew up in NZ and left there at 23 years of age. I lived in Australia and paid taxes there 40 years and have a small retirement fund in Australia.
On my retirement at 65 I married a USA citizen and lived in USA for 3 years until my wife died.
I inherited her Traditional and Roth IRAs which have doubled in size in the last 20 years.
I have paid USA tax on the Required Minimum Distributions (RMD), rollovers from my Trad to Roth IRAs, and other small amounts withdrawn, as required by US law.
I moved to UK in 2004, I do not pay income tax in UK.
I own a home in Australia (mortgage free, bought while I lived there) but no property anywhere else.
I now want to return to live in Australia in 2021. I am now 85 years. I wish to simplify my affairs for family in Australia before I die.
What are the tax implications if I withdraw all my IRAs in the USA and invest them for retirement in Australia?
Hello Karen… Your site is a wealth of information. I have 401(k) account but am residing in Australia for the past 20 years. I had my Green card and have NOT surrendered via ANY means. Will I subjected
IRS Tax slabs as per https://www.bankrate.com/finance/taxes/tax-brackets.aspx by IRS
taxed by Australia Tax office as per slabs and tax % as listed in https://www.ato.gov.au/rates/individual-income-tax-rates/#Residents?
Will I not get any relief due to US-Australia tax treaty. I became resident of Australia in 1987. My last tax filing in US was in 1999.
Look forward to your reply.
You will receive a credit against US tax for tax paid to Australia – most problems arise when income is taxed only in one jurisdiction, or in different years.
Does being a dual citizen affect the disbursement rule? Would I be taxed according to US law on IRA/ 401k disbursement (after “preservation” age) I would be considered Aus tax resident.
If you’re a US citizen AND Australian resident when withdrawing then both jurisdictions will tax you. While I haven’t looked at this problem in detail, I would assume that first taxing rights would actually go to Australia (as income re-sourced by treaty) and the US would allow a tax credit for any tax paid to Australia.
I have been a tax paying permanent resident of Australia for over 35 years, for a brief 5-year period before coming to Australia I was a green-card holder and worked in the USA where I contributed to my employers 401(k) plan. I have been receiving the Minimum Required Distribution from my 401(k) account for the last few years, incurring zero US tax withholding. I do pay Australian income tax on the MRD. At 76 years of age I would now like to withdraw the balance of my 401(k) account. However, my 401(k) account holder tells me that they must withhold 30% of the account balance for US federal tax on lump-sum withdrawals. They also tell me that I can retain zero US tax withholding if I change my MRD payments to a periodic payment plan extending for at least 10 years. I would like to know if the US/Australian tax treaty actually states a minimum period of 10 years periodic payments is required to qualify for zero federal tax withholdings, or is this an arbitrary decision made by the US company holding my 401(k) account?
My mother passed away and I inherited her IRA. It has a tax obligation to the USA for her. But I am now the owner of the funds by inheritance. When I do usa taxes on the RMD’s. For the next six years. Is this accessible to me the inheritor in Australia as the proceeds of her years of tax were hers to the USA.
Eg I inherit the cash after payment less any growth. From her DOD.
I have been in the US for 25 years and have accumulated a sizeable employer retirement account. Looking at the current IRS tax rates, I can have an income of $414,700 and pay $94,735 (22.8%) tax.
It seems to be one of the more attractive tax rates, if the ATO will view that money as not being retirement money.
If I withdraw my US retirement as a lump sum and put it into an investment account before becoming an Australian resident, how would the ATO view that lump sum?
You should get professional tax advice before moving back to Australia. Any change in tax residence must be planned carefully.
My understanding is that anything you do before becoming an Australian resident will not be taxed in Australia. Assets that you own when you move to Australia are not taxed – only the income from those assets are taxed. For CGT assets (investments, but not retirement accounts), I believe that only the gain after becoming an Australian resident is taxable in Australia.
Thanks for this wealth of knowledge. I am a US Citizen and now a resident of Australia for the past 4 years. I am considering to renounce my US Citizenship and become an Australian Citizen. When I retire and start taking distributions from my 401k, how will the IRS and the ATO tax the distributions under the treaty if I renounce my US Citizenship?
Today the government announced a ‘Super Home Buyer Scheme’ which would enable first-time homebuyers to use up to 40 per cent of their super, up to $50,000, to put towards buying a home. The fact that parliament can consider this option is further evidence against the sole purpose of superannuation being the provision of retirement benefits. It seems hypocritical that foreign superannuation funds should be held to a higher standard than Australian superannuation funds.
This was only an election promise, but I agree that this type of policy muddies the waters as to what should be allowed in a foreign scheme to qualify as equivalent to super.
I am a retired US Citizen currently resident in the US considering migrating to Australia where all my extend family live. Most of my income is distributions from a Traditional IRA.
I am unable to determine from what I am reading here how this will be taxed.
How would I find a tax lawyer in Australia?
Great information – thanks Karen & Co.
But there have been two questions in the thread that remain unanswered.
John and Rob have asked about the Australian tax on IRAs that have been INHERITED. That is, where an Australian-citizen & resident has inherited a parent’s IRA, will the ATO tax the IRA (e.g. tax the income distribution, including capital gains and income accumulations)?
I am curious because my father diead and left me his IRA. He was American, I am not. I am Australian citizen and resident.
Generally inheritances are not taxed in Australia. I do not know whether the fact that the inheritance might be considered taxable by the US will affect how the ATO treats it. Sorry, but I can’t really help you with this issue.
I am a dual citizen with the USA.
I do not have anything in retirement funds in the USA other than my Social Security.
Will my Social Security payments affect my eligibility for the Pension here in Australia?
I have been here for 12.5 years and am nearly 59.
I been a full-time employee here in Australia for 11 of the 12 years and have been a citizen since 2018.
My understanding is that whilst your US Social Security receipts will not be taxed in Australia ( per the Treaty ) they would be included as ‘untaxed foreign income’ in the Age Pension Income Test.