If you’re a dual US-Australian citizen living permanently in the United States with money in Australian super funds, you need to understand how these accounts are treated from a US tax perspective. What works beautifully in Australia can become surprisingly complex once you’re a US taxpayer.
How Australian Super Funds Work
For those unfamiliar, Australian superannuation funds operate similarly to US 401(k) plans, but with some notable advantages. Employers in Australia are required to contribute to these funds on behalf of their employees. The current requirement is 12% of wages, which builds a substantial retirement nest egg over time.
The tax treatment in Australia is what makes super funds particularly attractive. Contributions are taxed at only 15%, which is lower than most people’s income tax rates. Then, when you withdraw the money in retirement, those withdrawals are typically tax free. It’s like a better version of a Roth IRA. You get a tax break going in, and you don’t pay taxes coming out.
These are excellent retirement vehicles if you’re staying in Australia. The problem is, the US doesn’t see them the same way.
The US Tax Nightmare
When you live in the United States and have an Australian super fund, everything changes. The withdrawals that would be tax free in Australia become fully taxable in the US. But the tax complications go far beyond that.
Here’s where it gets messy: each individual holding within your super fund is treated as a separate investment by the IRS. It’s not just one tax form for the entire fund. Every stock, bond, or other investment inside that fund requires its own tax reporting. If your super fund holds dozens of different investments, you’ll need tax forms for each one.
On top of that, any distributions made by the fund in Australia are taxable in the US. This creates a ongoing reporting burden and tax liability that can quickly become overwhelming. You’ll also need to find a CPA in the United States who is both comfortable with foreign income forms and experienced with Australian superannuation rules. That’s not always easy to find.
Assessing Your Situation
The first question to answer is how significant this money is relative to your total retirement savings. If you have $1.5 million in Australian super but another $5 million in US accounts, the situation is manageable. You can pull the money out over time and pay the taxes as you repatriate it to the United States.
If the super fund represents a large portion of your total retirement savings, I’d be more concerned. The taxes are going to eat into that value significantly, and you need to plan carefully around the timing and method of withdrawals.
Consolidation Strategies
Regardless of your total asset picture, consolidation should be a priority. If you have multiple super funds, consolidate them into one. This reduces the number of accounts you need to report on and simplifies your overall tax situation.
More importantly, consider consolidating the investments within your super fund. If you have substantial assets in US accounts, you could invest your Australian super into a single holding. That way, you’re only filling out tax forms for one investment instead of an entire portfolio of holdings. You can then use your US accounts to balance out your overall asset allocation.
For example, if you need both stocks and bonds in your total portfolio, you might hold a single equity fund in your Australian super and use your US accounts for bond exposure and diversification. This keeps the Australian reporting simple while still maintaining the asset mix you need.
Investment Selection Matters
The types of investments you hold in your Australian super fund become critical when you’re a US taxpayer. You want to avoid investments that generate high levels of distributions, because those distributions are taxable events in the US regardless of Australia’s tax treatment.
Stay away from funds that do a lot of rebalancing. Every time a fund sells one investment and buys another, that’s a taxable event you’ll need to report. This is why target date funds are particularly problematic. These funds gradually shift from stocks to bonds as you approach retirement, which means constant rebalancing and constant taxable events.
Instead, stick with funds that have a straightforward investment strategy and minimal distributions. Look for holdings that aren’t constantly buying and selling, and that don’t kick off a lot of taxable income along the way.
The Long-Term Plan
If you’re planning to stay in the US permanently, you’re going to have to pay US taxes on this money eventually. The question is whether you do it slowly over time or take the hit all at once and transfer everything to US accounts.
Without knowing your specific tax rates and complete financial picture, it’s hard to say which approach is better. But in most cases, the best path forward involves consolidating your super accounts, simplifying your investments within those accounts, and planning a gradual divestment strategy.
Work with a CPA in the United States who has experience with Australian superannuation funds. They can help you navigate the reporting requirements and plan the most tax efficient way to bring this money into the US system over time.
The beauty of Australian super funds doesn’t translate when you become a US taxpayer. But with the right planning and professional guidance, you can manage these accounts without getting overwhelmed by complexity and tax bills.
This post is adapted from a recent episode of the Scholar Wealth Podcast. For more perspective on managing international retirement accounts, listen to the full podcast episode here.