How Are U.S. Annuities Taxed in Sweden? A Guide for American Expats

Each country has its own set of tax rules that apply to different account types and capital investments. In the United States, in addition to standard brokerage accounts, there are tax advantaged options such as 401(k)s, IRAs, and annuities. Annuities are insurance contracts designed to provide steady income during retirement.

While annuities are a common component of United States retirement planning, they can have unexpected tax implications in Sweden. Their classification under Swedish tax law, together with the provisions of the Swedish American tax treaty, can significantly affect taxation. It is therefore crucial to understand the applicable tax rules before moving to Sweden and when preparing the Swedish annual income tax return.

What Is an Annuity?

An annuity is a contract under which an individual pays a lump sum to an insurance company. The insurance company then either invests the funds in stocks or bonds or guarantees a fixed return over time. The latter option is particularly popular among United States retirees who seek predictable monthly, quarterly, or annual income. In cases where the annuity funds are invested in bonds or securities, periodic payments are still received from the annuity.

Immediate and Deferred Annuities

Annuities can be structured as immediate annuities, where payments begin shortly after the purchase, or deferred annuities, where payments commence at a later point in time, often upon retirement.

Funding of an Annuity

An annuity can be purchased using after tax funds or through a tax advantaged account, such as an IRA or a 401(k).

How Are Annuities Taxed in the United States?

In the United States, deferred annuities are generally not taxed until funds are withdrawn. The gains are taxed as ordinary income, while any after tax contributions are withdrawn tax free, as those amounts have already been subject to tax.

If the annuity is purchased using pre tax funds through an IRA or a 401(k), withdrawals are fully taxable as ordinary income.

How Are Annuities Treated for Swedish Tax Purposes?

To understand the Swedish tax implications of holding an annuity, it is necessary to classify the annuity under Swedish tax law. This classification process can be complex and time consuming, as it often requires a detailed review of the annuity’s contractual terms and conditions.

Comparison to Swedish Endowment Insurance

In Sweden, there is a savings vehicle that bears similarities to an American annuity, namely an endowment insurance, also referred to as a Kapitalförsäkring. This form of life insurance is structured to function as a securities account for saving, investing, or trading purposes.

An endowment insurance is not taxed on dividends, interest income, or capital gains. Instead, an annual standardized tax is levied based on the market value of the account and the state interest rate. For 2025, the annual standardized tax applicable to endowment insurances amounts to 0.888 percent of the capital exceeding SEK 150,000. Due to this relatively low tax burden, endowment insurances are a popular investment vehicle in Sweden.

In addition, withdrawals from an endowment insurance are tax free, which provides a significant advantage for policyholders when accessing funds.

Classification Requirements Under Swedish Tax Law

For an insurance policy to qualify as an endowment insurance under Swedish tax law, it must meet certain criteria. These criteria, which are derived from case law of the Swedish Supreme Administrative Court, include the requirement that the insurance contract involves an adequate level of insurance risk.

Accordingly, it is necessary to assess whether a United States annuity meets these requirements. If it does not, the annuity may instead be treated as an ordinary brokerage account for Swedish tax purposes.

Can the Swedish American Tax Treaty Affect the Taxation of an Annuity?

The Swedish American tax treaty is primarily intended to prevent double taxation by limiting the taxing rights of both Sweden and the United States. Its provisions aim to ensure that income is taxed only once, either in the country of residence or in the country of source, depending on the applicable treaty rules.

To determine how the tax treaty affects an annuity, it is first necessary to establish the individual’s treaty residency status and then identify the relevant provisions governing the allocation of taxing rights.

Applying the treaty may, in certain situations, result in Sweden being prevented from imposing the annual standardized tax on the annuity. However, depending on how the annuity is classified under Swedish domestic tax law, Sweden may still retain the right to tax income sourced from Sweden, such as dividends paid by Swedish companies.

American Expats in Sweden Holding a United States Annuity

If you are an American expat living in Sweden and hold a United States annuity, it is advisable to ensure that the annuity is correctly classified under Swedish tax law and that the applicable treaty provisions are properly applied, in order to remain compliant and reduce the risk of double taxation. If you are an American expat in Sweden holding a United States annuity, we can assist with classification, treaty analysis, and Swedish tax reporting. Feel free to contact us to discuss your situation and ensure correct treatment under Swedish tax law.