A] Prelude
Many U.S. Expats in The Netherlands do not have an Occupational Pension Claim. If they would not act, they would not get the substantial long term tax benefits related to investing in a Dutch pension plan.
The younger you are the more substantial the negative aspect thereof would be. Therefore it seems advisable to at least check out what the benefits would be for you in your particular situation to get a Dutch Private Pension Plan (DPPP).
Feel free to contact us if you have any questions as we gladly explain. In order to give a first general indication, two age related projections are mentioned in the following links on our site:
Projection Age30:
https://dutchprivatepensionplan.nl/sites/default/files/DPPP%20Example%20Case%20A%20%20%20%2029-3-24.pdf
Projections Age 45:
https://dutchprivatepensionplan.nl/sites/default/files/DPPP%20Example%20Case%20B%20%20%20%2029-3-24.pdf
B] Pay-Out Limitations
For the details of the DPPP we gladly refer to our site which mentions them all in this link: https://dutchprivatepensionplan.nl/dutch-private-pension-plan
One aspect we would like to highlight especially for U.S. Expats are the limitations regarding the pay-out as that is very different from the standard U.S. pay-out of a TraditionaI/Roth IRA or 401(K) or 403(B).
Pay-Out Restriction 1: The invested premiums create a final capital at retirement age. The pay-out of that capital is only possible as of retirement age. Not sooner as that would lead to a very high tax exposure.
Pay-Out Restriction 2: The pay-out as of retirement age has a minimum period of 5 years. A one-time Lump Sum or a Flexi Draw Down like in the USA is therefore not allowed.
If these restrictions are not a problem for you, then getting a DPPP can be a good option.
C] Dutch Private Pension Plan Provider
Due to the far reaching U.S. Fatca legislation, most financial institutions in The Netherlands do not accept U.S. Persons as client for any financial product as it would create too much compliance issues. Which makes it impossible for U.S. Persons to escape the still rather low interest rate and invest in a normal manner in The Netherlands with a Dutch provider with vast tax benefits.
However a DPPP with the wide range of investment options is still possible for them.
D] U.S. Tax Exposure
Regarding U.S. taxation of a DPPP in the build-up phase and thus way before the pay-out as of retirement age, we have never seen that any foreign tax authority taxed anybody before retirement age. Neither regarding the amount of capital in the plan nor about the annual capital increase. (Which is not a guarantee that this will never happen in the future.)
E] U.S. Tax Filing
Due to Fatca U.S. Persons in The Netherlands often have to file their tax return also with the IRS. Regarding the DPPP this creates the question if there is the obligation to file and if taxation can be expected. Which are two separate aspects.
If there is the obligation to include the DPPP in your U.S. tax filing can depend on your specific situation. Check with your U.S. tax advisor as (s)he knows the details of your personal situation which matters.
Sometimes we get the question: How about the PFIC ‘Passive Foreign Investment Company’? A PFIC is a non-U.S. corporation where at least 75% of its gross income is passive income or at least 50% of the corporation's assets produce or are held to produce passive income. Formal retirement plans like an IRA/DPPP logically seem to have a different regime than the PFIC. (Which is not a guarantee. Check with your U.S. tax advisor.)
Sometimes we get the question: How about IRS Form 3520 and a possible filing obligation? The IRS published a list of exemptions. If the plan is intended for retirement, tax-free in the hosting country, contributions are limited and it’s funded by employment related income only, then there is in general no filing obligation. (Which is not a guarantee. Check with your U.S. tax advisor.)
Following now is a mere indicative and not guaranteed oversight of the current practice as summarized after contact with several U.S. tax advisers:
The treatment of these foreign personal pension plans like the DPPP is very much a grey area. Although the pension is absolutely not a trust in The Netherlands, the IRS for whatever reason has a different interpretation. The IRS does not tax these foreign pensions but in certain situations they require the filing of complex forms to report their existence. Unfortunately, ordinary people have been automatically handed huge fines by some sort of IRS algorithm if they file these forms late or incorrectly.
However, the IRS is not evil, it does not intend to pursue ordinary people for contributing to pension funds, so they published a list of exemptions for filing this 3520 form. If the plan is intended for retirement, it is free from tax in the hosting country, contributions are limited to a certain amount and it is funded with money sourced from employment only, then it is free from these filing requirements.
The DPPP can fit all of these conditions but often doesn't quite fully fit the last one, despite if all of the income being sourced from employment. Strictly speaking the DPPP can be funded with whatever money available. Therefore, in some very strict interpretations it requires the filing of form 3520.
Several tax experts mentioned that it is very much your own choice whether to file this form or not, but they told that the likelihood of facing negative consequences for not filing it are very small. It would require an IRS employee to notice that you have a pension plan, call up the Dutch provider and ask them about the nature of the plan and then decide that in their opinion the conditions for exemption are not totally met and that this means that they need to hand out a $10000 fine to an average U.S. Expat who is fully compliant with his taxes. This is of course not expected to happen.
Therefore, many U.S. Expats do not file this form and stay well away from it. The most dangerous thing to do would be to file it incorrectly when it is not necessary.
inally it is advisable to be sure about your personal situation and seek advice from your own U.S. tax advisor as (s)he knows all the relevant details of your personal situation.
F] Finally
Feel free to contact us in order to see if getting a DPPP is a good option for you.
We will gladly focus on all aspects of your personal situation!