Tax treatment in Switzerland of US retirement plans (in particular IRAs and 401(k) plans)

1. Introduction

People moving to Switzerland from the United States often have to deal with the question of the tax treatment in Switzerland of their US retirement plans, whether it be their Individual Retirement Account (IRA), their 401(k) plan or other forms of US retirement plans. Swiss tax law does not contain any specific rules on the taxation of foreign pension plans. The tax treatment of US retirement plans in Switzerland is based on the application of general tax rules and the largely standardized practice of the different cantonal tax authorities.

2. Rules of the US-Swiss double tax treaty

According to Article 18 of the Convention between the United States of America and the Swiss Confederation for the avoidance of double taxation with respect to taxes on income (hereafter: the US-Swiss DTT), pensions and annuities paid by a US entity to a resident of Switzerland in consideration of past employment shall be taxable only in Switzerland. Article 19 of the US-Swiss DTT provides for an exception to this rule. Under this article, pensions and annuities paid by a US entity to a resident of Switzerland in respect of services rendered to the United States (or one of its political subdivisions) are taxable only in the United States, unless the Swiss tax resident holds Swiss nationality. In the latter case, the pensions are taxable in Switzerland.

In other words, pensions and annuities paid by a US entity to a Swiss tax resident are taxable in Switzerland if they derive from contributions linked to an activity carried out in the private sector, whereas such pensions and annuities are not taxable in Switzerland if they derive from contributions linked to a government service, unless the insured person who receives them holds Swiss nationality.

3. Tax treatment of US qualified pension plans’ assets

To qualify as a qualified plan under US law, the plan must be partially sponsored by the employer and must also meet certain requirements set out in the Internal Revenue Code (IRC). Qualified plans may take the form of a 401(k) plan, a 403(b) plan, a 457(b) plan, a SEP plan, a SARSEP plan or a SIMPLE IRA plan.

To determine the tax treatment of withdrawals from US pension plans, the Swiss tax authorities examine whether the pension plan is comparable to a Swiss occupational pension plan (2nd pillar). The following 6 criteria are used in this determination:

1. the tied nature of the contributions (withdrawals cannot occur at any time but only when an insured event occurs),
2. the compulsory nature of the contributions (the contributions to the pension plan must be compulsory by law or by the plan’s regulations),
3. the collectivity of the pension scheme and the equal treatment (the pension plan must establish a collective and not an individual pension scheme and must treat insured persons equally),
4. recognition as social insurance in the United States (the pension plan must be recognized as part of the US social insurance system, which is in principle the case for qualified plans),
5. tax privileges of the US plan in the United States (is the US pension plan tax privileged in the United States, i.e. is it itself tax-exempt, are the employee’s or employer’s contributions deductible, are the withdrawals tax privileged?),
6. coverage of biometric risks (does the US pension plan cover biometric risks, i.e. the risks of old age, death and disability?).

The US pension plan does not have to meet all the above criteria in order to be recognized as equivalent to a Swiss 2nd pillar pension plan. The Swiss tax authorities examine all the circumstances. The greater the number of criteria met, the greater is the likelihood that the US pension plan will be recognized by the Swiss tax authorities as equivalent to a domestic pension scheme.

In principle, 401(k), 403(b), 457(b), SEP, SARSEP and SIMPLE IRA plans are recognized as equivalent to Swiss 2nd pillar pension plans. If this recognition is given, insured persons who are Swiss tax residents are taxed as follows on their US pension assets in Switzerland:

4. Tax treatment of Individual Retirement Accounts’ (IRAs) assets

To determine the tax treatment of withdrawals from US IRAs, the Swiss tax authorities examine whether the retirement account is comparable to a Swiss individual pension plan (pillar 3a account). The following 6 criteria are used in this determination:

1. the pension assets are tied until retirement age under US law or until the occurrence of an event of disability or death,
2. the IRA in question is recognized in the United States as a retirement plan,
3. the United States grants tax privileges to the IRA in question, whether in relation to the deductibility of contributions, privileged tax treatment during the term of the plan or favorable taxation of withdrawals,
4. the contributions paid into the IRA are linked to the exercise of a gainful activity,
5. the contributions are limited to a maximum amount which is no higher than the maximum amount deductible under a Swiss pillar 3a,
6. the pension assets are financed solely by the employee and not by the employer, or only by the self-employed person.

Traditional Individual Retirement Accounts (IRAs) are considered by the Swiss tax authorities to be broadly equivalent to Swiss individual pension plans (pillar 3a accounts). Their tax treatment in Switzerland is therefore the same as that of US pension plans recognized as equivalent to a Swiss occupational pension plan (see table above).

Unlike traditional IRAs, Roth IRAs cannot be recognized as equivalent to Swiss individual pension plans. Roth IRAs are therefore treated as insurance or financial products in Switzerland, i.e. their returns are taxed as ordinary income and the assets are in principle subject to wealth tax even if no withdrawal has been made. It should be noted that traditional IRAs are treated in Switzerland in the same way as Roth IRAs if the holder chooses to withdraw assets before the age limit (which is 59.5 under US law) and pays a penalty tax in the United States. 

Other types of plans, such as Rollover IRAs and Conduit IRAs, are generally treated as traditional IRAs by the Swiss tax authorities.

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Legal Note: This article expresses general views of our law firm, without considering any particular fact pattern or circumstances. It does not constitute legal advice. Any liability for the accuracy, correctness, completeness or fairness of the contents of this article is explicitly excluded.