Dutch tax & United States pensions
Various pensions, various tax consequences.
If you live in the Netherlands and hold or receive US pension, it is important to pay close attention to the type of pension and where it is taxable. In this article we look at the different types of American pensions (also: retirement plan) and the country where the benefits are taxable. We also take a look at the impact of US pension arrangements on Dutch wealth tax.
Where is your US pension subject to taxation?
There are different types of retirement plans in the United States. The plan type determines whether the benefits are taxable in the Netherlands or in the United States. The type of retirement plan is also important for possible taxation on the value of the entitlement, both during build-up and after: is it considered a pension or assets? In this blog we list the most common pensions plans.
- 401k pension
A 401k pension is a popular retirement plan in the US, set up by the employer. Employees can invest amount(s), which should generally accrue value during time. The popularity of 401k pension plans is based on the fact that the investment is taken from the gross salary, and that taxation is deferred until pay-out. What if the pay-out occurs when you live in the Netherlands? According to the bilateral tax treaty between the USA and The Netherlands, the latter are allowed to tax these payments and will do so at the progressive rates of Box 1. For Dutch wealth tax, the total value of the 401k entitlement is not seen as a taxable asset and therefore no Box 3 income tax is due.
- IRA Pension
A good alternative for a 401k can be an IRA (Individual Retirement Account), which is a personal retirement account not connected to an employer. It’s an investment account in which people can deposit funds from their gross salary. Taxation on an IRA does work the same as with a 401k: The payments from an IRA are taxed in the Netherlands as a pension (box 1). The total value in the IRA entitlements is not taxed in Box 3. The difference between an IRA and 401k? With an IRA you can invest the money yourself, within 401k this is less common.
- Roth IRA Pension
A Roth IRA is also a personal retirement investment account comparable to a regular IRA. However, in a Roth IRA you pay taxes upfront and not upon pay-out (during retirement phase). As a result, a Roth IRA is not qualified as taxable (pension) income in the Netherlands and no Dutch income tax is due on the pay-out. At the same time – since it is qualified as an asset – the value of the account will be taxable with Dutch wealth tax in Box 3.
- US State pension
The US state pension payments are taxable in the United States: this derives from the aforementioned tax treaty. As said, as a resident of The Netherlands, you’ll still have to include this pension income in your Dutch personal income tax return in Box 1. Under the treaty you can claim a full exemption in The Netherlands for these US pension payments, so there will be no double taxation. Sidenote: even though this pension is not taxed in The Netherlands, it will be included in the calculation of your social security contribution.
Box 3 regime change
In the course of 2022, a new regime for Box 3 taxation will be shaped and implemented. Until now, the Box 3 taxation is based on the net value of your taxable assets (excluding amongst others your primary NL residence and most of foreign real estate). This net value would then be taxed at progressive rate (between 0,56% and 1,71%) depending on the volume of the assets.
Under the new regime, taxation will be based on actual income made with the assets, such as interest, dividends and capital gains. This will change the taxation on a Roth IRA. It is yet unclear if the new regime will also include taxation on unrealized capital gains, such as value increase of a stock portfolio.