German pension plan and US taxes

18 posts in this topic

Dear collective knowledge,

 

I am a US American (31 years old) who has been living in Germany for several years. I have a Niederlassungserlaubnis, I am getting married this year, and it looks like this is all permanent:) After having researched my possibilities for supplementing state pension, I have narrowed things down to HDI TwoTrust Riester Rente. My company offers a betriebliche Altersvorsorge, but I have decided against this for several reasons, not least of all because it is far from certain that I will remain with the same company, and I have heard nothing but horrible reports from colleagues who have accepted the offer. I initially wanted to go for DWS TopRente (one of the only plans out there without 'Zillmerung'), but I learned here (thanks to Starshallow!) that this is unfortunately not possible for a US American. HDI TwoTrust like a lot of other plans has its costs, but I am all but convinced that this is a good option for me as one 'pot' in combination with state pension and perhaps later on realty or some other form of investment.

 

Question 1: Have any of you had experience with HDI? Or with this particular plan?

 

Question 2: to all of you out there with a bit of knowledge about international tax law, is there anything that I need to watch out for in terms of the IRS? As far as I can tell, according to the Convention, FATCA, and all of the other arrangements that the US and Germany have made in the past several years in order to minimalize the chances of double-taxation (while of course weeding out US citizens living abroad who are trying to hide large funds from the IRS) this kind of pension plan would not be reportable / not subject to taxation in the US. Is this true?

 

Thanks in advance for your feedback!

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there is soome good information in another thread here on Toytown about the taxation issue of tax subsidized pension plans for US nationals. Unfortunately I have to leave the office right now and don't have time to digg it out for you - but hopefully some of the other regulars can chip in with a link (or you use the search field above, too).

 

Just one question: who advised you on the HDI plan? is it an insurance agent (tied or multi-tied) or an insurance broker? Are you aware of the differences between them with regards to their role in advising you on such issues?

 

I am not saying that HDI is a bad plan, but I personally would normally not recommend it - there are other providers I find more attractive for our clients, depending on whether they choose the classical variation (whole life insurance plan) or a fund-based pension investment plan.

 

Just saying, get yourself some second opinion in any case and make sure you understand if you are being advised or sold on this (from the status of the intermediary).

 

Cheerio

I am a professional independent insurance broker, financial adviser, and authorised advertiser. Contact me.
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Thanks very much for the reply!

 

I did find one other thread, mostly about betriebliche Altersvorsorge and see that someone posted a question similar to mine about a week ago (still no answer though), i.e. whether the same applies to Riester Rente: http://www.toytowngermany.com/forum/index.php?showtopic=249506

 

Thanks, too, for the word of caution regarding the advice. I received the offer from a Versicherungsfachmann with compexx Finanz AG. I have a good feeling about this particular representative, and he has already taken a lot of time to answer my questions / show me alternatives when I ask. So I guess the answer is, I know that someone is trying to sell me something, but as I understand things, it doesn't matter in the end to him whether he sells me HDI or a different insurance - he gets a commission either way. I really have absolutely nothing to do with the field otherwise, but I am intent on doing my homework and questioning the offers that come on the table. Is there something I am missing? May I ask which providers you personally recommend if not HDI?

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Frankly speaking, Kathydid: your advisor should get you this information. That is what you have him for, right? Unless you do not trust him. Which then would raise the questions: why have him in the first place. Just saying.... :D because if you do a "normal" Riester and you'll do it with full monthly premiums (something I would not advise to do, but 90+% of other advisors in Germany do so ) he'll earn somewhere between 1500 and 2500 EUR worth of commission (if you let me know how old you are and how much you plan/have been advised to pay into the RIESTER plan each months, I can tell you exactly the amount if you like to know). For so much money a little extra leg-work should be priced in, I would say. ;)

 

Cheerio

I am a professional independent insurance broker, financial adviser, and authorised advertiser. Contact me.
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May I ask which providers you personally recommend if not HDI?

@Kathydid: since you are an US citizen, you can right now only have "classic" pension plans which are set up as a whole-life-insurance in Germany. I.e. you'll be getting a fixed/guaranteed interest plus an estimated/promised bonus. This gives you two different numbers for the end-results of the plan. One is guaranteed, the other is not.

In a low-interest environment, the estimated/promised values are far away from being reliable in any way or form (there is currently a lot of discussion as the Bundestag is passing a new law because of this problem, so called Lebensversicherungsrettungsgesetz or LVRG - and when you have read this long word you'll also know why Germans do not play scrabble :lol: )

 

Therefore in my professional opinion there are two main determinants/paramteres in order to find the right RIESTER plan:

a) highest guaranteed capital at the end

plus

b ) highest guaranteed monthly pension payout at the end

 

Both of which are not necessarily connected, because an insurance with a higher guaranteed end-capital can apply a lower guaranteed pension factor (which is usually computed as XY EUR guaranteed pension for life for ever 10.000 EUR capital in the plan when reaching pension age.

 

I did just one quick sample computation to prove my point (see below). Different results can come out with different duration of the plans and different input/premium payments

- thus please take it as a general sample.

 

As you can see, HDI is way behind the currently best offers in the market for both guaranteed capital and guaranteed pension. Therefore it would not be my choice/recommendation for a client. In this particular example, HDI is on top even behind in the estimated results - but that is only cherry-on-top and has little bearing for me.

post-8763-14044776323283_thumb.jpg

 

Cheerio

I am a professional independent insurance broker, financial adviser, and authorised advertiser. Contact me.
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@ Starshollow, Thanks for the advice! Beyond reading through the offer and trying to make sense of things for myself, the arguments that I have heard from both my advisor and test results for HDI have to do with the 'mitwachsende Garantie' and the use of 'Wertsicherungsfonds' instead of the classic concept. As for HDI vs. other classic pension plans in terms of the guaranteed capital in the end, I suppose it doesn't hurt anything to make a direct comparison with Allianz - I will definitely do so.

 

My dilemma remains that I am still not certain that such a plan would not be subject to US taxes. And on that point, it would be correct to say I don't trust my advisor, simply because he's not an international tax expert, after all :D But maybe this is the answer in the end, I just need to go directly to a tax advisor for this one. I thought it might be a question that could be answered in general, i.e. are German state subsidized pension plans subject to US tax?

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I apologize profusely if this question has been conclusively answered here somewhere, but if it has, my several hours of reading through lots of other extremely useful posted information hasn't turned up exactly what I need.  I see that Starshollow and PandaMunich seem to be active on the Riester topic, so maybe one of them can help me.  The kind expat tax advisor who did my US return for me last year (after almost 30 years of having always done my own return here in Germany, where I live, work and have raised a family as a US citizen – we had sold a house and I was out of my depth, I thought, on filling out more forms), assured me that my R+V Riester is considered a trust fund for US tax purposes (this thought had never occurred to me in the 7 years that I have been "riestering"), requiring the filing of not only Form 3520, but also the re-filing my last 3 years of (therefore faulty) tax returns, which she would take care of for me (streamlined process) to the tune of several thousand $$$.  In my shock, I thanked her for the info and said that I would do it myself – and have been losing sleep over it ever since, trying to figure out what to do.  After giving it much thought, I have pretty much decided (after several conversations with the horrified Riester provider rep as well as with my horrified German tax guy) to dissolve my Riester, taking the hit (paying back the government payments and the tax benefits) just to get out of this ridiculous mess and not have it hanging over me anymore. Unless someone can tell me that my Riester is actually not considered a trust fund in the States?  Anybody, anybody?  Please?

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It is my understanding - also based on some comments from the notorious expert on US-taxation and the German-US-double-taxation agreement @Straightpoop that German tax-subsidized pension plans like company pension (bAV-Direktversicherung), RÜRUP pension and RIESTER pension are exempted from reporting to the IRS.  I need to check later for the actual quotes from the DTA to this regards but I am reasonably certain that @Straightpoop  quoted those already here on several occasions on Toytown in the Finance Forum. Therefore you might want to do a bit more research into his contributions, too. 

Therefore I see no reasons to disband your existing RIESTER pension plan to this regards.

 

Cheerio

 

I am a professional independent insurance broker, financial adviser, and authorised advertiser. Contact me.
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Just re-read some of the old threats and I think that the Article 18A of the double taxation agreement can and should be applied to RIESTER and RÜRUP pension plans accordingly and therefore the assumption that they need to be considered as "trusts" and reported accordingly to the IRS seems to be far from the factual truth. 

 

Cheerio

 

I am a professional independent insurance broker, financial adviser, and authorised advertiser. Contact me.
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1 hour ago, Daylily said:

The kind expat tax advisor who did my US return for me last year assured me that my R+V Riester is considered a trust fund for US tax purposes (this thought had never occurred to me in the 7 years that I have been "riestering"), requiring the filing of not only Form 3520, but also the re-filing my last 3 years of (therefore faulty) tax returns, which she would take care of for me (streamlined process) to the tune of several thousand $$$.  In my shock, I thanked her for the info and said that I would do it myself – and have been losing sleep over it ever since, trying to figure out what to do. Unless someone can tell me that my Riester is actually not considered a trust fund in the States?  Anybody, anybody?  Please?

 

 

Incredible as it may seem, neither the Internal Revenue Code nor any regulations promulgated thereunder actually define "trust".

 

If you read the instructions to Form 3520 (for US individual foreign trust grantor or beneficiaries) or Form 3520A (for foreign trust fiduciaries, i.e. trustees) you will find in both the following "definition":

 

Foreign Trust and Domestic Trust
A foreign trust is any trust other than a domestic trust.
A domestic trust is any trust if:
1. A court within the United States is able to exercise primary supervision over the administration of the trust, and
2. One or more U.S. persons have the authority to control all substantial decisions of the trust.

 

But what, exactly, is a "trust"?

 

Elsewhere on the IRS website https://www.irs.gov/businesses/small-businesses-self-employed/abusive-trust-tax-evasion-schemes-questions-and-answers you will find the following discussion of what constitutes a trust in the eyes of the IRS:

Basic Trust Law

Q: What is a trust?

A: A trust is an entity created and governed under the state law in which it was formed. A trust involves the creation of a fiduciary relationship between a grantor, a trustee, and a beneficiary for a stated purpose. A trust may be created by any of the following methods:

  • A declaration by the owner of property that the owner holds the property as trustee;
  • A transfer of property by the owner during the owner's lifetime to another person as trustee;
  • A transfer of property by the owner, by will or by other instrument taking effect upon the death of the owner, in trust, to another person as trustee or
  • An exercise of a power of appointment to another person as trustee or an enforceable promise to create a trust.

 

 

Since a foreign trust - by definition - is not created under the law of any US state one must look to the governing law of the foreign state with jurisdiction over the entity in question (here:  Germany) to determine if your Riester Rente involves a "trust".

 

Incontrovertible fact:

 

German law does not recognize trusts. Period. Full stop.

 

Not only does German law not recognize them it regards their foreign manifestations (especially the Swiss and Lichtenstein variety) much as the Devil regards holy water.

 

In light of this, you may want to inquire of your "kind expat tax advisor" how he or she came to the conclusion that your Riester Rente is a foreign "trust".

 

In my view, your Riester Rente may meet the definition of a "foreign financial asset" under FATCA (Form 8938) or a "foreign account" under the Bank Secrecy Act (FINCEN Form 114) - or maybe even both - but it ain´t a trust.

 

No such animal in Germany.

 

 

 

 

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Thanks so much to @Starshollow and @Straightpoop for the unbelievably fast and incredibly helpful information.  You have no idea how relieved I am! What an insane situation this is, when law-abiding, semi-intelligent people can get themselves in a complete tizzy over a system that isn't at all thought through.  I can understand people who are conscientious objectors and have simply never filed returns, although I just wouldn't have the nerves for it.  I'm convinced anyway that at some point that the immigration computers at US airports will begin connecting to the IRS database - but I'm probably just paranoid. Thanks again for your very thorough exposé ;-)

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On 8.10.2018, 09:33:43, Starshollow said:

German tax-subsidized pension plans like company pension (bAV-Direktversicherung), RÜRUP pension and RIESTER pension are exempted from reporting to the IRS. 

 

@Starshollow

 

Not so.

 

Reporting obligations as opposed to income tax obligations are NOT the subject of the Tax Treaty.

 

While the income earned in a pension plan enjoying the benefits of Art. 18A (most likely including Rürup & Riester plans) may not be taxable during the accrual phase (the main purpose for Art 18A), there is NOTHING in the treaty that even addresses much less exempts the existence, initiation, accrued value or eventual disposition of such plans from whatever information reporting requirements Germany or the US impose might impose under their respective laws.

 

It is very important to keep this distinction in mind.

 

Americans abroad have (relatively) little to fear from the income tax consequences of their economic intercourse with GF's (Godless Furriners) but a great deal to fear (at least theoretically) from the insanely and grotesquely disproportionate consequences of failing to comply with the reporting obligations found in US tax and other laws.

 

In @Daylily's case, she has - in my opinion  - no obligation to report her Riester Rente AS A TRUST under IRC §6048 even though in the United States the legal institution of a trust is used to hold 401(k) and 408 contributions until distribution.  Even though the protocol to Art 18A says the US recogonizes Germany's Betriebsrente (in its various forms?) as functionally equivalent for tax treaty purposes to the US 401(k) and 408 plans, Germany does not use trusts to achieve those purposes, hence no Form 3520 filing requirement.

 

The obligation to report a Riester plan as a "foreign account" under Title 31 (FBAR = FINCEN Form 114) will depend upon whether the plan has any cash surrender value.  I don't understand the details of Riester plans well enough to say for sure whether or under what circumstances such a plan ever accrues any cash surrender value comparable to that of a life insurance policy. If it doesn't, then no FBAR reporting will be required.

 

The obligation to report the Riester plan as a "specified foreign financial asset" under Title 26 (FATCA) using IRS Form 8938 will depend in the first instance on whether DayLily's total specified foreign financial assets are large enough to meet the relatively high threshold for triggering any filing obligation. Unlike the vague and uncertain FBAR rules, the IRC's rules on FATCA reporting obligations clearly include foreign pension plans but, also unlike the FBAR rules, the threshold filing requirements are much, much higher.

 

The FATCA issue has another side to it that I have never explored:  what duty does a Riester or Rürup plan offeror (e.g. insurance co., bank, etc.) to examine its customer lists for "indicia" that a subscriber to one of its plans is a "US person" and, if so, report the activities, values, comings and goings, etc. on such plan to the IRS via the Bundeszentralamt für Steuern?

 

I'll let you know if I ever interrupt my retirement long enough to research the matter.B)

 

 

 

 

 

 

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@Straightpoop - I stand corrected! thank you for pointing out this major and important differentiation! I will phrase my own woriing more carefully in the future accordingly. :-)

 

Cheerio

 

I am a professional independent insurance broker, financial adviser, and authorised advertiser. Contact me.
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@Straightpoop  Regarding RIESTER plans - hope the following info helps

Quote

The obligation to report a Riester plan as a "foreign account" under Title 31 (FBAR = FINCEN Form 114) will depend upon whether the plan has any cash surrender value.  I don't understand the details of Riester plans well enough to say for sure whether or under what circumstances such a plan ever accrues any cash surrender value comparable to that of a life insurance policy. If it doesn't, then no FBAR reporting will be required.

 

A RIESTER plan can at any time be cashed in, i.e. during savings period as well as when reaching retirement. During the savings/investment period, one would loose (i.e. those amounts would be deducted) both the direct subsidy (staatliche Zulage) paid into the plan and the tax-benefits received.  When reaching retirement, 30% can be cashed in without penalty. If more is cashed in, the same applies as if cashing in before retirement (i.e. loss of subsidies and tax-benefits received).

 

Cheerio

 

I am a professional independent insurance broker, financial adviser, and authorised advertiser. Contact me.
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@Starshollow

 

Thanks for that information.  As I understand it qualified Riester plans can apparently take various forms depending upon the financial product offered by the financial institution involved.  But, regardless of the label affixed to that product, if it has a discernable cash value to the US person - even if it's only a refund of the cash you put into it, i.e. stripped of value accruals and any government supplements - then it will have to be reported under Title 31 USC (FBAR).  Here is the language from the Code of Federal Regulations (31 CFR 1010.350 that mandates that conclusion:

 

(c)Types of reportable accounts. For purposes of this section -

(1)Bank account. The term “bank account” means a savings deposit, demand deposit, checking, or any other account maintained with a person engaged in the business of banking.

(2)Securities account. The term “securities account” means an account with a person engaged in the business of buying, selling, holding or trading stock or other securities.

(3)Other financial account. The term “other financial account” means -

(i) An account with a person that is in the business of accepting deposits as a financial agency;

(ii) An account that is an insurance or annuity policy with a cash value;

(iii) An account with a person that acts as a broker or dealer for futures or options transactions in any commodity on or subject to the rules of a commodity exchange or association; or

(iv) An account with -

(A)Mutual fund or similar pooled fund. A mutual fund or similar pooled fund which issues shares available to the general public that have a regular net asset value determination and regular redemptions; or

(B)Other investment fund. [Reserved]

 

https://www.law.cornell.edu/cfr/text/31/1010.350

 

NB:  the link above does not reflect 2017 changes to 31 CFR 1010.350 but those changes - relating primarily to synchronizing FBAR filing deadlines with income tax return filing deadlines - do not affect the subject matter of this discussion.

 

For an insight on how the regulation quoted above came into existence back in 2011 and the rationale for its various provisions see the following link to the Federal Register containing the Treasury Decision announcing its promulgation:

 

http://www.gpo.gov/fdsys/pkg/FR-2011-02-24/html/2011-4048.htm

 

It is important to realize that German government official tax and financial incentives for Riester and Rürup plans and other Betriebsrente notwithstanding, it will be the nature of the actual financial relationslhip between the plan owner and the financial institution involved that will govern FBAR reportability.

 

 

 

 

 

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22 hours ago, Straightpoop said:

As I understand it, qualified Riester plans can apparently take various forms depending upon the financial product offered by the financial institution involved.  But, regardless of the label affixed to that product, if it has a discernable cash value to the US person - even if it's only a refund of the cash you put into it, i.e. stripped of value accruals and any government supplements - then it will have to be reported under Title 31 USC (FBAR). 

 

Thanks again to @Straightpoop and @Starshollow for their further clarification. I have been reporting my Riester on the FBAR (and FATCA isn't relevant for my financial circumstances ;-), but the above bit made me wonder if I've been doing it right.  I've always just (lazily) listed the total value, but I believe now that I should just have been entering my own total (cumulative) contribution amount?  Or, maybe even only what I would get out if I cashed it in on the spot ie. total value minus govt. supplements and tax benefits? If we are really only talking about reporting the actual cash value, that would be much lower than my contributions, of course.  Or am I over-thinking this?

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