U.S. Tax Treatment of New Zealand KiwiSaver
Frequently Asked Questions
What is KiwiSaver?
KiwiSaver is New Zealand’s main private superannuation scheme. It was first introduced in July 2007.
KiwiSaver is a voluntary, opt-out, portable retirement savings scheme designed to help individuals save for their retirement. It’s a type of subsidized, defined contribution retirement savings scheme offered by private-sector providers. KiwiSaver members are generally free to move their savings from one KiwiSaver scheme provider to another at any time but may only be a member of one scheme at a time.
It operates mainly through contributions the employer deducts directly from salary and wages and sends to Inland Revenue. The government tax authority, Inland Revenue, collects the contributions from employers and distributes them to the employee’s KiwiSaver Plan. The government provides no guarantees for the funds in KiwiSaver accounts.
Individuals are automatically enrolled into the scheme when they enter the workforce or change jobs. Individuals can opt out of KiwiSaver schemes if they prefer.
Is KiwiSaver an employer-sponsored retirement scheme?
No. KiwiSaver is a Tier 3 benefit, a voluntary scheme that aims to raise the individual income replacement rate in retirement.
Is there a mandatory workplace retirement scheme in New Zealand?
There is no Tier 2 scheme in Aotearoa New Zealand – these are mandatory workplace schemes.
Who can join a KiwiSaver scheme?
You must be a New Zealand Citizen or entitled to live in New Zealand to join KiwiSaver.
Can a non-salary or wage earner join KiwiSaver?
Non-salary and wage earners can also enroll directly with a scheme.
Anyone younger than age 65, including the self-employed and anyone not in the labor force, may choose to set up a KiwiSaver account with any provider and decide how much they want to contribute and make payments directly to their chosen KiwiSaver scheme provider.
Those 65 or older may continue to contribute to their KiwiSaver account if they joined a plan before age 65.
KiwiSaver members who are not employees do not have any fixed level of required contribution.
What are the contribution limits to a KiwiSaver scheme?
Individuals and employers must contribute to the scheme if the individuals do not opt out.
Employers must contribute at least 3% of the individuals’ pay into their scheme.
Employees can contribute 3%, 4%, 6%, 8% & 10% of their pay before tax to a KiwiSaver Scheme. Employees can also make lump sum payments or set up additional direct payments.
You can suspend your KiwiSaver contributions if you need to for a maximum of 12 months. And your employer will in most cases stop contributing to your KiwiSaver fund when you do. You will also miss out on the Government contribution.
Are KiwiSaver schemes eligible for government contributions?
Yes. The New Zealand government will also contribute an extra 5 cents for every dollar the individual puts in, up to a maximum payment of $521.43 each year. To get the full Government contribution, an individual must contribute at least $1,042.86 by June 30 each year.
When can a participant withdraw money from a KiwiSaver scheme?
Once you’ve joined KiwiSaver, your money will be locked in until you qualify for NZ Super (currently 65), with a few exceptions, including first home withdrawals.
Participants may withdraw all of their contributions and any vested employer contributions if they:
- face significant financial hardship such as the member's or dependent's medical care, a dependent's education, or the member's inability to meet minimum living expenses according to normal community standards determined by law;
- leave the country permanently; or,
- make a down payment on the purchase of a first home after at least 3 years of saving in a KiwiSaver account.
How does your contributions to KiwiSaver grow?
KiwiSaver is a managed fund. This means that your money is pooled with other investors and spread across different kinds of investments.
Unlike a bank term deposit, the return you get from your KiwiSaver Scheme will go up and down over time, depending on what it’s investing in.
How is KiwiSaver income taxed in New Zealand?
Contributions and investment returns are taxed, but retirement income is not taxed.
Are KiwiSaver schemes considered foreign trusts for U.S. tax purposes?
Yes, they are considered foreign trusts for U.S. tax purposes, and they need to be reported on Form 3520 and 3520-A.
Are KiwiSaver accounts considered tax-favored foreign retirement trusts and exempt from trust reporting requirements under Rev. Proc. 2020-17?
No. KiwiSaver accounts are not tax-favored foreign retirement trusts under Rev. Proc. 2020-17. KiwiSaver accounts do not satisfy all the conditions specified in the Rev. Proc. 2020-17 that a foreign retirement trust should satisfy to be considered a tax-favored foreign retirement trust. Tax-favored foreign retirement trusts are exempt from trust reporting requirements such as Form 3520 and 3520-A.
A tax-favored retirement trust is a foreign trust for U.S. tax purposes that operates exclusively or almost exclusively to provide, or to earn income for the provision of, pension or retirement benefits and that meets the following requirements established by the laws of the foreign jurisdiction:
1. Exempt from income tax or is otherwise tax-favored in the trust’s jurisdiction,
2. Annual information reporting is provided or available in the trust’s jurisdiction,
3. Only contributions with respect to income earned from the performance of personal services are permitted,
4. Contributions to the trust are limited by a percentage of earned income of the participant, are subject to an annual limit of $50,000 or less to the trust or are subject to a lifetime limit of $1,000,000 or less to the trust.
5. Withdrawals, distributions, or payments from the trust are conditioned upon reaching a specified retirement age, disability, or death, or penalties are applicable,
6. Employer-maintained trusts must be non-discriminatory and provide significant benefits for a substantial majority of eligible employees.
KiwiSaver Schemes are not considered tax-favored retirement trust because of the following two reasons.
1. The domestic law of New Zealand allows contributions over the limits set in Rev. Proc. 2020-17 even if the eligible individual does not exceed the contribution limits.
2. KiwiSaver schemes allow eligible individuals to make contributions to the trust that are not with respect to income earned for the performance of personal services.
Are KiwiSaver schemes considered treaty-qualified retirement plans? If so, does this exempt U.S. persons from foreign trust reporting requirements?
Yes, KiwiSaver schemes are treaty-qualified retirement plans. Therefore, they do not need to register with the IRS and do not have any FATCA due diligence or reporting obligations. However, this exemption applies only at the entity level. Individual taxpayers are still subject to FATCA obligations and need to report their interests in KiwiSaver schemes on forms such as FBAR, 8938, 8621, 3520, and 3520-A.
A “Treaty Qualified Retirement Fund” is defined as being any pension fund established in New Zealand and described in Article 3(1)(l) (General Definitions) of the U.S./New Zealand Convention, provided that the pension fund is entitled to benefits under the Convention on income that it derives from sources within the U.S. (or would be entitled to such benefits if it derived any such income) as a resident of New Zealand that satisfies any applicable limitation on benefits requirement.
U.S. Taxation of KiwiSaver
Here are some key points:
Employee / Personal Contributions
Contributions made by you as an employee, self-employed or non-income earner are not deductible for U.S. tax purposes.
Employer Contributions
Contributions made by your employer to your KiwiSaver are taxable income for U.S. tax purposes.
Government Contributions
Contributions made by New Zealand Government to your KiwiSaver are taxable income for U.S. tax purposes.
Investment Growth
Invesment growth within the scheme is currently taxable in the U.S.
Investment Loss
Investment loss is not deductible for U.S. tax purposes, but they will be considered for calculating your tax basis in the scheme at the time of calculating the investment gain.
Membership Fees / Annual Fees
They are not deductible for U.S. tax purposes.
PIE Income
PIE income is disregarded for U.S. tax purposes.
PIE Tax / ESCT (Employer Superannuation Contribution Tax)
PIE tax and ESCT can be applied against the U.S. tax lability for credit purposes.
U.S. Tax Filing Requirements for KiwiSaver
FBAR - FinCEN Form 114
KiwiSaver accounts are considered foreign financial assets for U.S. tax purposes, and they need to be reported on the FBAR (Foreign Bank Account Report) if a U.S. citizen or resident alien meets the filing threshold.
A U.S. person must file an FBAR if they have a financial interest in or signature or other authority over any financial account(s) outside the U.S., and the aggregate amount of the highest balances in all the accounts exceeds $10,000 at any time during the calendar year.
Form 8938
KiwiSaver accounts need to be reported on Form 8938 if you are a U.S. citizen or resident alien and meet the reporting threshold.
Form 8938, also known as the Statement of Specified Foreign Financial Assets, is used to report foreign financial assets, including foreign retirement accounts like KiwiSaver accounts, if the total value of those assets exceeds the applicable reporting threshold.
Form 3520 & 3520-A
New Zealand KiwiSaver schemes are considered foreign trusts for U.S. tax purposes. Therefore, if you own an interest in KiwiSaver schemes, you generally need to file trust forms (Form 3520 and 3520-A).
These forms are used to:
- Report Your Transactions with the Trust: This includes any contributions to or distributions from the KiwiSaver account.
- Report the Trust's Income and Expenses: Provide details on the income earned by the trust and the expenses it incurs.
- Report the Trust's Assets and Liabilities: Detail the trust's assets and liabilities to provide a complete financial picture.
Filing these forms ensures compliance with U.S. tax regulations and keeps the IRS informed about your involvement with the foreign trust and its financial activities.
Form 8621
According to U.S. tax law, a shareholder who is a member or beneficiary of a plan, trust, scheme, or other arrangement treated as a foreign pension fund (or equivalent) under an income tax treaty to which the United States is a party, and that owns an interest in a PFIC, is not required to file Form 8621 if, according to the applicable income tax treaty, the income earned by the foreign pension fund is taxed as the shareholder's income only when and to the extent that it is paid to, or for the benefit of, the shareholder. This means that if the income from the foreign pension fund is only taxed when it is distributed to the shareholder, and not before, the requirement to file Form 8621 for the PFIC interest does not apply.
But this is not the case with NZ KiwiSaver schemes. There is no tax treaty between the U.S. and New Zealand regarding the treatment of NZ retirement income. Therefore, NZ KiwiSaver schemes are considered non-qualified foreign retirement plans for U.S. tax purposes, and their income is currently taxable to U.S. taxpayers and cannot be tax-deferred.
However, there is another provision in the US tax law that states that a United States person who is considered to own an interest in a PFIC because they are a beneficiary of a trust that owns, directly or indirectly, stock in a PFIC, and who has not made an election under section 1295 or 1296 with respect to the PFIC, is not required to file Form 8621 if, during the beneficiary's taxable year, the beneficiary does not receive an excess distribution or recognize gain that is treated as an excess distribution with respect to the stock. This means that if the beneficiary doesn't receive an excess distribution or recognize gain treated as such during the taxable year, the filing requirement for Form 8621 does not apply.
Based on the above, in most cases, you will not need to file Form 8621 for the underlying investments in a KiwiSaver scheme. KiwiSaver providers generally do not make distributions to your account. The only occasions where you might realize a gain are when your KiwiSaver provider deducts membership fees or when you switch your funds. However, you need to determine if you generate a gain from these transactions to assess your Form 8621 filing requirement. If you do not recognize a gain, there will be no 8621 filing requirement in most cases. Therefore, it is essential to consult with your tax professional to determine your filing obligations.