Introduction
401k taxation in Germany. With increasing globalization and international mobility of workers, the taxation of foreign retirement benefits is becoming more significant. This is especially true for payments from US retirement plans like 401(k) plans and Roth IRAs. New tax regulations for such benefits will come into effect on January 1, 2025. This article examines these new regulations and their implications for understanding 401k taxation important for expats in Germany.
Background and Previous Regulation
Previously, benefits from foreign occupational retirement schemes were not subject to full deferred taxation under § 22 Nr. 5 Satz 1 EStG, even if the contributions were tax-favored or tax-exempt abroad. The Federal Fiscal Court (BFH) ruled in 2020 that in such cases, only the income portion is taxed in Germany. This led to a tax advantage compared to domestic retirement benefits and an understanding of 401k taxation in Germany.
New Legal Clarification
From January 1, 2025, it will be clarified by law that not only tax exemptions of contributions in Germany but also comparable tax exemptions or benefits of contributions abroad will lead to full deferred taxation under § 22 Nr. 5 Satz 1 EStG. This change also affects benefits from US 401(k) plans and similar retirement schemes, adding a new layer to 401k taxation regulations in Germany.
Implications for US 401(k) Plans
401k taxation in Germany. A 401(k) plan is an occupational retirement instrument where contributions are made from pre-tax income, and earnings and gains are tax-free during the accumulation phase. Previously, in Germany, only the income portion was taxed upon distribution. From 2025, the previously tax-exempt or tax-favored contributions abroad will also be considered in the German tax calculation, changing the dynamics of 401k taxation in Germany.
Taxation of Roth IRAs
Roth IRAs are individual retirement accounts where contributions are made from after-tax income, and earnings and gains are tax-free in the US upon distribution. In Germany, however, the difference between the distribution amount and the contributions made is taxed. From 2025, the tax exemptions or benefits of contributions abroad will also impact German taxation similar to 401k taxation principles in Germany.
Rollovers and Transfers
A rollover refers to transferring assets from one retirement plan to another. In the US, such transfers are tax-neutral if they occur between qualified plans. The new regulation clarifies that such tax-neutral transfers abroad will affect German taxation if they resulted in tax benefits, impacting 401k taxation rules in Germany.
Special Rules for US Citizens
US citizens who are subject to unlimited tax liability in Germany and receive benefits from US retirement plans are also taxed in the US due to the saving clause of Article 1(4)(a) of the Germany-US Tax Treaty. The new regulation ensures that this group does not receive tax benefits from the different treatment of retirement benefits in Germany and the US, aligning with 401k taxation standards in Germany.
Conclusion
The changes to the taxation of benefits from foreign retirement plans will take effect on January 1, 2025. They ensure that tax benefits abroad are considered in German taxation. Taxpayers with US retirement plans should prepare for these changes and seek tax advice to optimize their tax burden, especially regarding 401k taxation implications in Germany.
