In the third and final part of our article series about the Swiss Pension System, we’ll examine Pillar 3: Private Pension.
As a reminder, the first pillar (state pension) and the second pillar (occupational insurance) are intended to provide for retirement. However, those benefits combined are not typically sufficient to fully maintain one’s standard of living.
Investing in a Swiss private pension appears to offer a sustainable solution. But, appearances can be deceiving, so if you’re a US expat, you’ll want to proceed with caution and read the following closely.
Evaluating private pension options in Switzerland
Most similar to the concept of a Traditional IRA, the third pillar of the Swiss Pension System is comprised of two parts, which we’ll outline below. (1)
Pillar 3a (Restricted Pension)
As the name indicates, contributions to Pillar 3a are “restricted” to the retirement account and can only be withdrawn under certain conditions. Contributions to this account have tax advantages in Switzerland.
Pillar 3b (Unrestricted Pension)
Contributions to Pillar 3b can be freely withdrawn. However, they have fewer tax advantages in Switzerland when compared to Pillar 3a.
Contributions
As noted previously, both Pillar 3a and Pillar 3b are private pensions, to which contributions are voluntary. The third pillar incentivizes individuals to save for retirement by offering additional tax savings in the year of contribution, similar to a Traditional IRA in the US.
There are numerous product types, including life insurance, savings accounts, investment accounts, etc., which all have different implications when it comes to your US taxes.
However, the US does not recognize Pillar 3 as a Traditional IRA, but as a regular brokerage account. This is an important distinction with significant implications for US tax filing, so hold onto this thought. We’ll come back to it later on.
Annual Swiss Private Pension Limits in 2024 (2)
Taxation during contribution years
In Switzerland, how your private pension is taxed depends on the type of plan you have.
For Pillar 3a accounts, contributions can be deducted from your taxable income, therefore decreasing your overall tax balance. Any interest or gains on the account are tax-exempt until withdrawn.
For Pillar 3b accounts, there is a limited deduction available if you purchase an insurance product. The surrender value (aka the amount received if the life insurance plan is ended prematurely) is subject to a wealth tax. The wealth tax ranges from 0.13% to 1.1% and is assessed based on the qualifying taxpayers’ assets. (3)
In the US, Pillar 3 is not considered a “qualified retirement plan” for tax purposes, as is the case with a Traditional IRA. Due to this, contributions cannot be deducted from your taxable income, therefore increasing your overall tax balance. Any interest or gains on the account should be reported and are taxable each year. See Pillar 3a example below:
In the above example, you can begin to see the difference in calculating your taxable compensation in Switzerland and the US.
Switzerland reduces your taxable income by your Pillar 3 contributions and defers any account growth until you receive distributions.
The US, on the other hand, does not allow for an income deduction for Pillar 3 contributions and taxes the account growth yearly.
While your initial taxable income is the same, there is a 8,883 difference in taxable income.
Private pension taxation during distribution years
In Switzerland, taxation differs depending on the type of private pension plan.
For Pillar 3a accounts, you can withdraw your benefits under the following conditions:
- Up to five years before the full retirement age
- Relocation outside of Switzerland
- You become self-employed
- Upon purchasing a home
Early withdrawal preferential tax rates may apply, depending on the reason for early withdrawal and your cantonal location.
For Pillar 3b accounts, you can withdraw your benefits at any time
These withdrawals generally do not result in additional taxable income but are still subject to Switzerland’s wealth tax.
In the US, there is no tax benefit for Pillar 3a or 3b
Any distributions in excess of your tax basis (aka total prior contributions) will be fully taxable. Any interest or yearly capital gains should be taxable in the year received, but any excess will be taxable when distributed. See Pillar 3a example below:
In the above example, you can begin to see the difference in calculating your taxable compensation in Switzerland and the US.
Switzerland taxes your full contributions and account growth at the time of distribution.
The US already taxed your contributions and account growth yearly, so there is no additional tax at the time of distribution (unless there is excess growth not previously reported).
So, should US taxpayers open a Swiss private pension?
Due to the lack of tax benefits, Pillar 3 pensions are not recommended for those who are subject to US taxation.
Most of the plans offered under Pillar 3 face punitive taxes in the US and are often actively managed, meaning they have high fees and high-risk regulation (resulting in low returns).
Important US tax reporting points for
If you choose to invest in a Pillar 3 pension, keep in mind it will lead to additional US tax reporting requirements. Among others, these can include:
- PFIC - Form 8621: Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund
- Foreign Trust - Form 3520: Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts
- FBAR - Report of Foreign Bank and Financial Accounts
- Net Investment Income Tax (NIIT)
Conclusion
As the US does not treat Pillar 3 as a “qualified retirement plan,” contributing to a Swiss private pension account will lead to greater challenges streamlining and optimizing your US and Swiss tax reporting.
Holding a private pension account will also trigger additional yearly taxable income and filing requirements on your US tax return. This effectively means you will pay a specialized CPA more money to properly file accounts that will be punitively taxed by the US.
If you currently have a Pillar 3 account, don’t despair! By collaborating with a Swiss-specialized cross-border financial expert and tax advisor, you can work to sustainably correct and legally optimize your situation.
References
- 3rd pillar - ch.ch
- Maximum Pillar 3a amount in 2024
- Wealth Tax - Taxolution Advisory LLC Taxolution Advisory LLC
Additional resources
Meet the Author
Arielle Tucker is a Certified Financial Planner™ and IRS Enrolled Agent with Connected Financial Planning. She’s spent over a decade working with US expats on US tax and financial planning issues. She is passionate about working with US expats and their families to help secure their financial future reflective of their core values. Arielle grew up in New York and has lived throughout the US, Germany, and Switzerland.