When it comes to retirement accounts, many are familiar with the traditional Individual Retirement Account (IRA) and the Roth IRA. These two accounts allow for before- and after-tax dollars respectively to be contributed and withdrawn penalty free after age 59 ½. Less commonly known though is the Malta Pension Plan, which can serve as a desirable alternative to the traditional Roth IRA for high-income taxpayers.
Many high-income taxpayers are unable to contribute as much as they’d wish to a Roth IRA due to income caps, and contributions are limited to cash only. With limitations on permissible investments, the Roth IRA is unable to invest in non-traditional assets such as private placements, foreign investments, artwork or life insurance. Withdrawals cannot be made penalty-free until age 59 ½, and the Unrelated Business Taxable Income (UBTI) does apply. With these limitations, it is advisable that high-income taxpayers do their due diligence and explore alternative options like the Malta Pension Plan in order to capitalize on their after-tax benefits.
Since 2011, the Malta Pension Plan (MPP) has been a viable option for investors due to the United States (U.S.) -Malta Income Treaty, which allows for a pension established in either the U.S. or Malta to be considered “resident”, and allows for part or all of the income and gains to be exempt from tax in the respective country. This means that all income is deferred, to include U.S. real estate, or income connected to a U.S. business or trade, and there are limitations on the ability of the U.S. to tax distributions from the MPP. The provisions of the treaty also prevent the U.S. from imposing tax on a foreign pension until a distribution is made to the U.S. taxpayer. This ultimately results in an offshore pension fund wherein all income earned (to include capital gains), is not taxed until a distribution is received, and some of the distribution may still be tax free.
Contrary to the Roth IRA, the MPP does not have contribution limits and users enjoy more flexibility in the types of allowable contributions. This can include in kind contributions made through assets, or an interest in an entity holding the assets.
Appreciated assets also do not trigger any tax consequences, and contributions are not deductible. Since the MPP is treated as a grantor trust, the Foreign Investment in Real Property Tax Act (FIRTPA) does not apply, and importantly helps the MPP to avoid UBTI for business income or debt financed real estate. This can present as a significant advantage for the MPP.
Earlier distributions are also a distinct advantage to the MPP, with distributions from the plan allowed as early as age 50. The treaty allows for distributions to be non-taxable to U.S. tax-payers, if the distribution is also non-taxable to Maltese tax-payers. This means that an initial lump sum distribution up to 30% of the value of the MPP can be distributed as early as age 50 with tax free treatment. A second lump sum distribution cannot be distributed tax-free until year three. On year three and every year after a lump sum distribution can be distributed with tax free treatment on the second and subsequent lump sum distributions up to 50% of the value of the MPP. Other distributions can be made prior to age 50 but these distributions are taxable under IRC Sec 72 for U.S. tax-payers, which treats part of each distribution as a return of principal and part as capital gains or ordinary income dependent upon the type of asset.
The MPP is required to comply with the Financial Crimes Enforcement Network (FinCen) reporting requirements, which necessitates the completion of Form 114 (Report of Foreign Bank and Financial Accounts) to be completed annually, as well as IRS Form 8938 when assets exceed $50,000 or higher specified thresholds are met. Since the MPP is a foreign grantor trust, IRS Form 3520 and 3520-A, reporting for Passive Foreign Investment Companies (PFICs), will likely also be required.
In summary, the MPP is an important investment tool to consider with substantial tax deferral benefits and tax-fee tax treatment beginning at age 50. While similar to the Roth IRA, the MPP provides increased flexibility and is particularly advantageous for U.S. residents (or foreign investors with U.S taxable source income such as real estate), who have either highly appreciated investments or income producing assets. The ability to contribute assets or business interests in kind, not be subject to UBTI or FIRTPA tax rules and receive distributions earlier than traditional U.S. IRA’s are distinct advantages of the MPP. High income tax payers looking for a long-term tax favored retirement account without contribution limitations and complicated tax hurdles should consider the MPP in their planning and investment efforts.