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QROPS Tax Consequences For Americans Living Overseas

QROPS Tax Consequences For Americans Living Overseas

Putting some earnings away to save for retirement is common throughout the world. But for US citizens, as well as permanent residents, who live abroad, the world of retirement accounts and pensions is hard to navigate because of complicated Internal Revenue Service regulations. Any type of foreign account, including pensions and retirement accounts, can be either a significant benefit, or a tax nightmare.

QROPS Basics

The Qualified Recognized Overseas Pension Scheme (QROPS) is a very popular plan among UK expats. This pension plan gives UK citizens flexible options for investments and for transferring funds to their beneficiaries. United States taxpayers who live in the United Kingdom, and have a pension plan in the UK, might think about transferring their money into one of these QROPS plans since they are advertised widely to residents of the UK. Unfortunately for US citizens, the tax consequences might negate the benefits of investing in one of these QROPS plans.

Tax Implications for US Expats Investing in QROPS

The tax rules in the UK and the US are different. Each defines the term “tax qualified” as it applies to retirement plans differently under their regulations.

The Internal Revenue Service does not recognize QROPS as being “qualified” pension accounts.

What does this mean? Any transfers into or out of these accounts are taxable events that are required to be reported. The benefit of tax deferral in pension accounts, which allows both the employee and employer to contribute pre-tax money, does not apply when funds are withdrawn from a qualified UK employer pension. If there are gains in the account, they are taxed using your highest United States tax rate, even if the funds are not withdrawn.

The IRS classifies almost all QROPS accounts as Private Foreign Investment Companies (PFIC). These require extensive tax filings and recordkeeping to comply with IRS regulations. The filings are complicated, even for professional tax preparers with years of experience, and usually require taxpayers to spend many hours of their time researching the information required to fill out the forms. Often the high cost for preparing these forms negates all of the tax benefits that may have been received by making the QROPS investment. Contributing to the risks is the fact that penalties for failing to file these forms correctly can easily exceed ten

UK and US Tax Laws

For the United Kingdom, pension plans that are created by the employer are included in the tax treaty between the UK and the US. Tax treaties can be difficult to understand, so it is advisable to discuss this with TFX to confirm that it applies to your situation. This is the case for both US citizens who are residing in the United Kingdom, as well as UK citizens residing in the United States. The similarities don’t go any further, though. UK tax laws are quite different than US tax laws, so be sure you understand any tax implications before investing in foreign retirement accounts. The incorrect plan might result in higher taxes than the amount you are saving for retirement.


It is important for US citizens to also be knowledgeable of Foreign Account Tax Compliance Act (FATCA) requirements as it relates to their foreign accounts. A department of the United States Treasury, FinCEN, regulates FATCA compliance. FATCA was intended to prevent United States citizens from avoiding taxes by ‘hiding’ their money in banks overseas. Most foreign banks must submit reports, including QROPS transactions.

It is difficult to ignore the chance to get more money faster and easier. But, taking the time to research the applicable laws and regulations is vital to saving money, time, and stress. Make sure to explore all the possible angles concerning your money - the IRS is harsh and unforgiving of mistakes made with foreign accounts!

Have Questions About US Expatriate Taxes and Foreign Accounts?

Contact us! We have an expert team to provide tax advice to expats, and give you all the information you need to know to file your United States expat tax return while living outside the country.

Ines Zemelman, EA
Founder of TFX