I am switching my TSP to a regular retirement plan. Does this come with tax consequences in Germany?

While it does likely sound a bit uncommon switching your TSP retirement plan to a regular retirement plan (Roth or not) can at times make sense. It can be useful for people who would be in a higher tax bracket later in life.  It may also be considered beneficial for people who want to leave their children tax free money.

When being an American retiree in Germany the question presents itself what this switch can do to your tax position in Germany. The tax position can be affected by the following two:

  1. the switch itself as a one-off effect
  2. the ongoing plan distributions as an ongoing effect.

As if this was not difficult enough, there is absolutely no legal precedence under German law out there, covering TSP benefits in general or their change to a regular retirement plan.

However, when applying common sense the following solution appears logical:

  1. Since a TSP is modelled after a regular retirement plan the switch itself should not be considered a taxable act. However, the US-German tax treaty dictates lack of taxation for a rollover only in art. 18A, which covers retirement plans. A TSP however falls under art. 19 of the treaty, which does not know a rollover of any kind.
  2. Also, regardless of how you might view 1., you are changing a government benefit (TSP) to a regular retirement plan benefit. This means that the taxation rights switches fully to Germany. A TSP benefit should have only effected your German tax rate. Now your retirement plan distribution becomes subject to full German taxation.
  3. The German taxation of your former TSP benefits by way of a retirement plan distribution should come with credit of the contributions made over lifetime.
  4. The need to consider contributions against distributions brings the taxability of the switch back into play again. If the switch is considered taxable, then essentially the market value should become the base for your distributions as the assets under the TSP will be considered “sold” at this price. If the initial switch is not taxable, the history of all TSP lifetime contributions becomes relevant in order to avoid overpayment.

As you can see while executing the switch might not be too challenging of a thing, the proper tax treatment under German tax law is a completely different story.

Please reach out to us if you have any specific questions on this aspect.

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