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AMERICANS IN FRANCE

Ask the expert: What Americans in France need to know about 401(k) and other pensions

Whether you are looking to retire to France or are working here, here's what you need to know about US private pension plans such as the 401(k) and IRA for French residents.

Ask the expert: What Americans in France need to know about 401(k) and other pensions
People walk past Champagne vineyards on an autumn day in, northeastern France (Photo by FRANCOIS NASCIMBENI / AFP)

For many Americans, retiring to France is a dream. The idea of a calm life in the French countryside is understandably alluring, and thanks bilateral tax agreements between the US and France – France is an attainable and attractive destination for pensioners looking to live off their private American pension plans in the land of cheese and wine.

“France is the bees’ knees for American retirees”, summarised tax expert, Jonathan Hadida in an interview with The Local. Thanks to the US-France tax treaty, US-sourced pension income is only taxed in the United States. 

Hadida explained exactly what Americans in France – both of retirement age and pre-retirement – should know about their American private pension plans. 

For those of pre-retirement age (below 59 and a half years old)

One of the most common questions Americans in France have regarding their pension contribution plans is whether they can continue contributing from France.

For 401(K)s, the answer depends on whether you are working in France as a posted worker or whether you are working on a French contract. Posted workers can continue to contribute to their 401(K)s, but those on French contracts cannot.

The reason for this is quite simple – 401(K)s are employer-pension plans. Posted workers can continue to report their 401(K) contributions in the way that they normally would while based in the United States – on the W2 tax form in Box 1. 

As for Americans working in France on local (French) contracts, “Generally what happens is that you have to roll it into an IRA with a US-investment broker to manage your funds”, Hadida explained for those looking to continue contributing. 

As for IRAs (Individual Retirement Accounts), it is possible to continue contributing from France. However, you must have earned taxable income in the United States. 

“There are two ways Americans in France are able to avoid double taxation – via foreign income exclusion or the foreign tax credit,” Hadida told The Local.

“Basically, you wind up in the same position, but these are two different ways of getting to the same place.

“If you go with the foreign income exclusion option, then this is great because it goes straight off the top and writes off the first $120,000 of income in 2023. But the problem is that this means you have zero taxable income in the United States, so you cannot contribute to an IRA.

“On the other hand, with the foreign tax credit you still have taxable income in the United States so you can still contribute to an IRA.

“The foreign tax credit tends to be a good option well for those living in France because taxes are generally higher in France than they would be in the United States.”

READ MORE: Ask the experts: What do Americans in France need to know about investments and pensions?

The next step would be to determine whether it is advantageous to continue contributing to a traditional IRA or a Roth IRA. 

“I generally recommend that it is best to make it a contribution to a Roth IRA as you will get the benefit of tax free growth for as long as you hold the money in the Roth and no tax upon distribution. Americans in France generally don’t need the ‘deductible’ contribution which is a benefit of the traditional IRA”, Hadida explained.

However, the decision to stick with a traditional or Roth IRA depends on your income and tax bracket, as well as how much you would like to contribute. 

If the Roth IRA is not possible for you, Hadida offered an alternative solution: the backdoor Roth contribution. In order to do this, “you contribute to a non-deductible IRA contribution and then roll the money over to a Roth IRA.  There is currently no threshold for this”, the tax expert explained.

Keep in mind that such a step would likely require the assistance of a tax or financial adviser. 

What about Americans in France who have had their IRAs closed down?

Hadida warned: “There has been an ongoing issue with people having their traditional IRA accounts closed by US-based banks when they realise you are not living in the United States”.

This issue of having Americans abroad having their IRAs closed is also linked to challenges some Americans have experienced with trying to open new IRAs while resident in France.

International Financial Advisor, Bryan Dunhill with Dunhill Financial, an American-expat advisory company, told The Local that whether IRA closures depend on the US-based bank, and for the most part occur because “banks are concerned about the possibility of misadvising clients”. 

Luckily, according to Dunhill, there is a solution for Americans in France who find themselves in this situation. “Basically, you need to go to an American expat advisory company who will be able to open a new IRA for you.

“For example, with Dunhill Financial, we are able to open up the same account with our provider, and we transfer all the securities in kind”, Dunhill explained. 

The financial adviser added that “you have to transfer the money within 60 days from the date that the original IRA is closed. Otherwise, there will be tax consequences”. 

As for your IRA, “everything that is earned within the plan until you take it out grows tax-free”, Hadida explained. That being said, it is advisable to report your IRA or Roth IRA to French authorities as a foreign-based bank account. “It’s safer to say yes – report them all. There is no real downside to reporting it. You can do this on the 39-16”.

Essentially, this means that those of working-age (pre-retirement) do not have to worry about reporting to any capital gains French authorities. The reporting aspect comes once you begin drawing your pension in your later years.

For those of retirement age (over 59 and a half), looking to withdraw from pension funds

The picture for retirees is a bit different than for those still in the workforce. 

“The reason we call France the bees’ knees for American retirees is because US-sourced pension income is only taxed in America. That means when you take money out of your 401(K) or IRA, those are taxable at your tax bracket in the United States. 

“You have to report it on the US-side and pay US taxes at your marginal rate”, Hadida said.

The tax expert continued: “On the French side, US-sourced pension income is reportable in France for rate-purposes but benefits from a deemed credit.

“This means you put it on your French tax form, and you calculate the tax and you get a deemed credit equal to that. Ultimately, you wind up paying no French taxes on your US-sourced pension thanks to Article 18 of the US-France tax treaty”.

READ MORE: Pensions: What should I expect if I worked in both France and a non-EU country?

How do I signal my US-sourced pension income on my French taxes?

Although you probably won’t end up paying French taxes on your US pension, you do need to tell the French taxman about it. This is the same for all non-French income.

Dunhill explained: “You fill it in within box 1AL or 1BL on form 20-42 on the French tax return, then you claim it in on the 8TK of the 20-47 to say it is US-based pension income, and then you will get a tax credit from the French.

“It goes in and it goes out on the French side. Being a US-retiree in France is fantastic”. 

For both 401(K)s and IRAs, Americans in France should still keep in mind that early withdrawal (prior to the age of 59 and a half) can still lead to a 10 percent early distribution penalty. There are certain exemptions, such as first time homebuyers and higher education, but you should meet with a tax adviser to determine if you qualify.

This article is intended as an overview of pension and tax rules and does not constitute financial advice. If you have specific questions about your personal situation, we advise you to seek independent financial advice from a specialist in US-French rules.

Jonathan Hadida is a lawyer specialising in international taxation and advising expats – find more on Hadida Tax Advisors here. Bryan Dunhill is an international tax advisor with Dunhill Financial, an American-expat advisory company.

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AMERICANS IN FRANCE

Americans in France: Changes for motorists and French tax breaks

From changes to French driving laws to tax guides and how the French celebrate Easter, here's our latest newsletter for Americans who either live in France, visit frequently or plan to move here some day.

Americans in France: Changes for motorists and French tax breaks

Welcome to The Local’s “Americans in France” monthly newsletter for members, featuring all the news and practical information you need as an American resident, visitor or second-home owner in France. You can sign up to receive it directly to your inbox before we publish it online via the link below.

Hello Americans in France,

As March draws to a close and we get ready to set our clocks one hour forward, workers across France are looking forward to a nice, long weekend over the Easter holiday.

If you are visiting or travelling during the Easter weekend, beware of possible store closures and altered hours on Sunday and Monday. Unlike some of its European neighbours, Good Friday is not a holiday in most of France, with the exception of the historic Alsace-Lorraine region.

There are a few changes that motorists in France should be aware of in the next month.

The first is that you will no longer have to display the insurance green card (not to be confused with the American permanent resident card) in your windshield. Displaying the carte verte had been a requirement for over 40 years in France, but starting in April it will no longer be necessary, as law enforcement can simply look up your insurance information using an online system

The second is related to the long-postponed contrôle technique for motorbikes, tricycles and quadricycles. This has been pushed back several times over the last nine years, but it will finally be phased in starting mid-April.

The third is that France has given the licence exchange and driving documentation website – previously ANTS – a new name. It’s now called ‘France Titres’ and we have a guide with all the different admin-related procedures you can do on it.

And for the last road-related topic for this edition of the newsletter: there’s another common question Americans tend to ask after moving to France; do I need a special certification to drive a stick shift?

While automatics are becoming more popular in France, manual transmission cars are also quite common on the roads and at rental agencies. As for the answer to that question, it depends a bit whether you are here as a tourist, as well as whether or not you come from a state with a licence-swap agreement.

Next up: tax season.

Luckily, Americans living in abroad automatically qualify for a two-month extension in reporting for US taxes (meaning you have until June 17th to file your US tax return).

As explained by tax expert, Jonathan Hadida: “There are two ways Americans in France are able to avoid double taxation – via foreign income exclusion or the foreign tax credit”. When choosing between the two, you will want to weigh whether or not you need taxable income in the US (in order to contribute to an IRA, for example).

You should also keep in mind that the FBAR (Foreign Bank Account Report) deadline is April 15th – though if you miss the April deadline you can qualify for an automatic extension to October 15th.

As the IRS reminds us – if you have any foreign bank accounts “whose aggregate value exceeded $10,000 at any time during 2023” then don’t forget to file your FBAR.

When it comes to your French taxes, the online portal will open on April 11th, and then you will have between 6-8 weeks to file.

From misunderstanding your tax residency to forgetting to report your US bank accounts, there are a few common mistakes Americans make when it comes to taxes in France – we’ve put together a list of the most common ones.

Aside from possible errors, there are some tax breaks and advantages you may be able to qualify for as an American resident in France, such as setting up an electric car charging station at your home or hiring a cleaner or professional nanny.

As always, we have our ongoing ‘Americans in France’ survey open and available for you to fill out to let us know the topics you would like to see covered. You can also give helpful tips (the ones you wish you had known beforehand) for other Americans looking to move to France.

And of course feel free to get in touch or leave a comment. You can reach me at [email protected]

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