If you previously worked in the United States, it is not unlikely that you or your employer invested funds into your retirement savings through an Individual Retirement Account (IRA) or a 401(k) account. Furthermore, if you are considered a tax resident in Norway—such as by residing in the country for more than 183 days within a 12-month period—income from a U.S. retirement account will be taxed in Norway under the general rules for pension income.
In this article, we take a closer look at how Norwegian taxes are calculated on your iRA until you start receiving payouts from your saved pension. How these accounts are taxed in the U.S. is not covered in this article.
Unfortunately, IRA do not align well with the Norwegian tax system. Our experience shows that this mismatch can result in unfavorable outcomes, including effective double taxation for individuals saving in an IRA or 401(k).
In Norway, there are clear requirements for what constitutes pension savings. For instance, payouts from the account must occur in intervals over a period, and the recipient must be above a certain age. A U.S. IRA account typically does not meet these criteria and is therefore not considered a pension savings account.
In 2017, the Norwegian Tax Appeals Board addressed whether a U.S. retirement account could benefit from the same tax rules as a Norwegian pension account. The board concluded negatively, stating that an IRA account does not qualify for the same tax deferral as a Norwegian pension account.
Firstly, the value of your accumulated pension savings in the U.S. must be reported as wealth in your Norwegian tax return, which may lead to an increase in potential wealth tax.
Second, dividends and capital gains earned on your IRA are often reinvested by the account administrator at the end of the year. Note that such reinvestment is not always guaranteed, but we find it to be the general rule.
Furthermore, reinvested gains and dividends from the administrator of your IRA or 401(k) are not subject to taxation in the U.S., as pension funds are only taxed in the U.S. when withdrawn from the account. However, this is not the case under the Norwegian tax system.
The reinvestment of earned gains and dividends from the underlying stocks or funds at year-end in an IRA has several implications for Norwegian taxation.
If you have an individual retirement account, you will typically receive an annual statement from the account administrator. The statement will show the amount of gains and dividends earned during the year, which are usually reinvested without your input into the same underlying stocks and funds held in the retirement account.
Since IRAs and 401(k)s are not considered pension accounts from a Norwegian perspective, these reinvestments are taxable as gains and dividends.
It is important to note that annual reinvested returns on an IRA are taxed based on the underlying investment object. For example if the portfolio consists of more than 80% equities, annual returns are taxed as dividend income at 37.84%.
A portfolio with less than 20% equities is taxed as interest income at 22%. Portfolios with a mix of equities and bonds between 80% and 20% are taxed proportionally based on the allocation of equities and bonds, with bonds taxed at 22%.
The tax treaty between the United States and Norway includes specific provisions regarding private pensions and annuities, but due to the aforementioned decision by the Tax Appeals Board, these provisions do not apply in this case.
Since the treaty article on private pensions does not apply, interest income from bonds is taxed in Norway under the treaty's provisions on interest. Annual returns on equities in an IRA portfolio can technically be taxed both in the United States and Norway under the treaty's provisions on dividends.
The United States, as the source state, may impose a 15% withholding tax, which should be credited against taxes payable in Norway. The challenge is that the United States does not impose tax on the reinvested gains in your IRA or 401(k) account. This means there is no U.S. tax that can be credited in Norway to reduce Norwegian taxation. The result is effective double taxation, as you first pay annual Norwegian tax on reinvested gains and dividends and later pay U.S. tax when the funds are withdrawn upon reaching retirement age.
At Magnus Legal, we have extensive experience ensuring your U.S. retirement accounts are reported correctly to the Norwegian Tax Administration. If you would like our assistance, please contact us.