Are ROTH 401k contributions deductible?

[Gidonl]

Hello,

I am a US citizen working full time in the US but living in Germany since November 2018.

I only started making contributions to my plan in 2020 (my employer was making contribution to this account since it was opened) and had decided for ROTH. During 2023 I switched from ROTH to traditional pretax contribution.

According to my accountant, the traditional 401k contributions are deductible and are automatically declared in Germany because they are subtracted from my reported gross income in my W2. However, I have not declared or received any deductions for my earlier ROTH contributions that do not appear on the W2.

Are ROTH contributions tax deductible? Can I declare them in addition to my traditional 401K contributions for 2023? Can I now retroactively declare them for the years 2018-2022?

Thanks in advance,
Gidon

[PandaMunich]

Are ROTH contributions tax deductible?

Roth aren't tax-deductible in the US tax return either.

And you never get to lower your income through contributions made by your employer.
Only your own pre-tax contributions into an eligible US pension plan can lower your taxable income.
Any contributions you made into the Roth were from after-tax money:

• https://www.investopedia.com/terms/r/roth401k.asp

• https://www.fidelity.com/learning-cente ... %20401(k)s.

During 2023 I switched from ROTH to traditional pretax contribution.

Did you do a proper rollover?
Because only then does the new IRA "inherit" the "was paid into before you started working in Germany"-property of the old 401k that you need for the contributions to be tax-deductible in your German income tax return.

[Gidonl]

Hey Panda,thanks for your reply.

Roth aren't tax-deductible in the US tax return either.

I didn't explain my question clearly. What I meant was are ROTH contribution I made in the US deductible in my German return?

Did you do a proper rollover?

I didn't think I had to do a rollover. I have been working for the same employer since 2018 and have a pension account that is managed by fidelity. Through Fidelity's website I can choose what type of contribution I want to make, Pre-Tax or ROTH, but the contribution are going to the same retirement account. In 2023 I just switched from ROTH to Pre-Tax. Is there something I need to do for the German tax authorities in this case?

Unfortunately my German accountant does not seem to be very familiar with these issues so I wasn't able to get a clear answer from her.

Thanks,
Gidon

[PandaMunich]

Roth aren't tax-deductible in the US tax return either.

I didn't explain my question clearly. What I meant was are ROTH contribution I made in the US deductible in my German return?

No.

I didn't think I had to do a rollover. I have been working for the same employer since 2018 and have a pension account that is managed by fidelity. Through Fidelity's website I can choose what type of contribution I want to make, Pre-Tax or ROTH, but the contribution are going to the same retirement account. In 2023 I just switched from ROTH to Pre-Tax. Is there something I need to do for the German tax authorities in this case?

No, if you're paying into a normal, pre-tax 401k, that's ok, you don't need to prove anything to the German side except that it is an "old" pension plan, i.e. one that had been contributed to (either by you or your employer) from before you moved to Germany.

People who change employers and who can therefore no longer pay into their old 401k (since a 401k is bound to an employer) need to do rollovers into a traditional IRA: https://www.investopedia.com/articles/p ... lovers.asp

[Gidonl]

Thanks again for your replies, they've been very helpful.

Could you perhaps point me to the part of the German tax code that explains why after-tax contributions in the US are not deductible in Germany but pre-tax contributions are? I'd like to share this with my accountant.

Also, according to my German accountant there is nothing special that needs to be done in order to deduct my pre-tax contributions in Germany because the contributions are already removed from my gross salary figure in my W2 (the figure that she is reporting to the tax authorities in Germany). I just want to make sure that this is correct.

Thanks again!
Gidon

[PandaMunich]

Could you perhaps point me to the part of the German tax code that explains why after-tax contributions in the US are not deductible in Germany but pre-tax contributions are? I'd like to share this with my accountant.

It's not in the German tax code, it's in article 18A of the double taxation agreement (DTA) between Germany and the USA: http://www.pinkernell.de/dbausa.htm#Art18A
German link: http://www.pinkernell.de/dbausa2.htm#Art18A

• Article 18A
  Pension Plans
  
  1. Where an individual who is a resident of a Contracting State is a member or beneficiary of, or participant in, a pension plan established in the other Contracting State, income earned by the pension plan may be taxed as income of that individual only when, and, to the extent that, it is paid to, or for the benefit of, that individual from the pension plan (and not transferred to another pension plan in that other Contracting State).
  
  2. Where an individual who is a beneficiary of, or participant in, a pension plan established in a Contracting State exercises an employment or self-employment in the other Contracting State:
  
  a) contributions paid by or on behalf of that individual to the pension plan during the period or attributable to the period that he exercises an employment or self-employment in the other State shall be deductible (or excludable) in computing his taxable income in that other State; and
  
  b) any benefits accrued under the pension plan, or contributions made to the pension plan by or on behalf of the individual’s employer, during that period shall not be treated as part of the employee’s taxable income; any such contributions shall be allowed as a deduction in computing the business profits of his employer in that other State.
  
  The relief available under this paragraph shall not exceed the relief that would be allowed by the other State to residents of that State for contributions to, or benefits accrued under, a pension plan or plans established in that State. The competent authorities of the Contracting States shall determine the relief available under this paragraph pursuant to the preceding sentence.
  
  3. The provisions of paragraph 2 shall not apply unless:
  
  a) contributions by or on behalf of the individual, or by or on behalf of the individual’s employer were made before the individual began to exercise an employment or self-employment in the other State; and
  
  b) the pension plan is accepted by the competent authority of that State as generally corresponding to a pension plan recognized as such for tax purposes by that State.
  
  4. The term "pension plan" means an arrangement established in a Contracting State which is operated principally to administer or provide pension or retirement benefits or to earn income for the benefit of one or more such arrangements.
  
  5. a) Where a citizen of the United States who is a resident of the Federal Republic of Germany exercises an employment in the Federal Republic of Germany the income from which is taxable in the Federal Republic of Germany and is borne by an employer who is a resident of the Federal Republic of Germany or by a permanent establishment situated in the Federal Republic of Germany, and the individual is a beneficiary of, or participant in, a pension plan established in the Federal Republic of Germany,
  
  aa) contributions paid by or on behalf of that individual to the pension planduring the period or attributable to the period that he exercises the employment in the Federal Republic of Germany, and that are attributable to the employment, shall be deductible (or excludable) in computing his taxable income in the United States; and
  
  bb) any benefits accrued under the pension plan, or contributions made to the pension plan by or on behalf of the individual’s employer, during that period or attributable to that period, and that are attributable to the employment, shall not be treated as part of the employee’s taxable income in computing his taxable income in the United States. This paragraph shall apply only to the extent that the contributions or benefits qualify for tax relief in the Federal Republic of Germany.
  
  b) The relief available under this paragraph shall not exceed the relief that would be allowed by the United States to its residents for contributions to, or benefits accrued under, a generally corresponding pension planestablished in the United States.
  
  c) For purposes of determining an individual’s eligibility to participate in and receive tax benefits with respect to a pension plan established in the United States, contributions made to, or benefits accrued under, a pension plan established in the Federal Republic of Germany shall be treated as contributions or benefits under a generally corresponding pension planestablished in the United States to the extent relief is available to the individual under this paragraph.
  
  d) This paragraph shall not apply unless the competent authority of the United States has agreed that the pension plan generally corresponds to a pension plan established in the United States.

and in the list of eligible US pension plans in the protocol to the DTA: http://www.pinkernell.de/dbausa.htm#Protocol
German link: http://www.pinkernell.de/dbausa2.htm#Protokoll

• 16. WITH REFERENCE TO PARAGRAPH 4 OF ARTICLE 18A (PENSION PLANS)
  
  a) For purposes of paragraph 4 of Article 18A, the term "pension plan" shall include the following and any identical or substantially similar plans established pursuant to legislation enacted after the date of signature of this Protocol:
  
  aa) In the case of the United States, qualified plans under section 401(a) of the Internal Revenue Code, individual retirement plans (including individual retirement plans that are part of a simplified employee pension plan that satisfies section 408(k), individual retirement accounts, individual retirement annuities, and section 408(p) accounts, and Roth IRAs under Section 408A), section 403(a) qualified annuity plans, section 403(b) plans, and section 457(b) governmental plans.
  
  bb) In the case of the Federal Republic of Germany, arrangements under section 1 of the German law on employment-related pensions (Betriebsrentengesetz).
  
  b) For purposes of subparagraph b) of paragraph 3 and subparagraph d) of paragraph 5 of Article 18A, it is understood that:
  
  aa) The Federal Republic of Germany recognizes qualified plans specifically listed in clause aa) of subparagraph a), other than Roth IRAs, as arrangements that correspond to pension plans referred to under section 1 of the German law on employment-related pensions (Betriebsrentengesetz). The Federal Republic of Germany shall provide the corresponding relief under section 3 No. 63 of the Income Tax Act; and
  
  bb) The United States recognizes arrangements under section 1 of the German law on employment-related pensions (Betriebsrentengesetz) as arrangements that correspond to pension plans referred to in clause aa) of subparagraph a) above.

Also, according to my German accountant there is nothing special that needs to be done in order to deduct my pre-tax contributions in Germany because the contributions are already removed from my gross salary figure in my W2 (the figure that she is reporting to the tax authorities in Germany). I just want to make sure that this is correct.

If you have a W2, your present employer is still your old US employer from back when you lived in the USA, i.e. you haven't been transferred to a German branch of your US employer.
Well, the end result will be the same and your accountant is saving him/herself some work educating the Finanzamt by doing it this way.

But correct would be to declare your gross salary, either:

• in Anlage N, if as a German resident you did not work any days while present in the USA that calendar year.

or

• in Anlage N-AUS, if as a German resident you did work while physically in the USA that calendar year, in which case the US salary gets split up according to days worked, with Germany only getting to tax the part pertaining to the days worked in Germany and the USA the days pertaining to the days worked in the US. This is laid down in article 15 (1) of the DTA: http://www.pinkernell.de/dbausa.htm#Art15

and the eligible US pension plan contributions (your pre-tax contributions to the 401k) in Anlage Vorsorgeaufwand, in the section where German Rürup contributions are declared.
They would then lower your taxable income, so you would end up with the same taxable income that your accountant gets through only declaring (gross salary - pre-tax 401k contributions) as your gross salary.

But expect the Finanzamt caseworker to query this, in which case your accountant would have to explain to him/her:

1. article 18A of the DTA and the list of eligible pension plans in the protocol
2. that the sentence in Randziffer 38 of the commentary on article 18A of the DTA applies to your case: https://www.soldan.de/media/pdf/e5/a8/5 ... 1WMaPm2ZTt
   "bb) Begrenzung der Entlastung nach nationalem Recht.
   In Deutschland
   richtet sich die Möglichkeit des Abzugs der geleisteten Altersvorsorgebeiträge
   grds. nach § 10 Abs. 1 Nr. 2 Buchst. b EStG („Rürup-Rente“, vgl. BMF
   v. 30. 1. 2008, BStBl. I 2008, 390 Rz. 23; s. auch Heubeck/Seybold DB 2007, 592)."
   
   I recommend also sending the Finanzamt caseworker Randziffer 23 of the BMF-Schreiben cited in the commentary: https://datenbank.nwb.de/Dokument/287155/
   "23
   Zu den nach § 10 Abs. 1 Nr. 2 Buchstabe b EStG begünstigten Beiträgen können auch Beiträge gehören, die im Rahmen der betrieblichen Altersversorgung erbracht werden (rein arbeitgeberfinanzierte und durch Entgeltumwandlung finanzierte Beiträge sowie Eigenbeiträge)."

The question now is whether your "accountant" is actually a Steuerberater or not.
If not, they are in for a steep learning curve.

[Gidonl]

aa) The Federal Republic of Germany recognizes qualified plans specifically listed in clause aa) of subparagraph a), other than Roth IRAs, as arrangements that correspond to pension plans referred to under section 1 of the German law on employment-related pensions (Betriebsrentengesetz). The Federal Republic of Germany shall provide the corresponding relief under section 3 No. 63 of the Income Tax Act; and

If I understand this paragraph correctly, Germany only excludes contributions to Roth IRAs from being eligible deductions. Does this also apply to Roth 401k contributions? My understanding of this is limited, but what I believe I have is a 401k plan to which I have, during the years 2020-2023, made after-tax Roth contributions to. Is this the same as having a Roth IRA and therefore not deductible in Germany?

[PandaMunich]

Stop flogging a dead horse, contributions into a Roth are by their nature after-tax and therefore never tax-deductible.

Explanation what a Roth 401k is: https://en.wikipedia.org/wiki/Roth_401(k)

• "It was authorized by the United States Congress under the Internal Revenue Code, section 402A,[1] and represents a unique combination of features of the Roth IRA and a traditional 401(k) plan."

[Gidonl]

Understood. Thanks again for your help!