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 U.S., in addition to standard brokerage accounts, there are tax-advantaged options like 401(k)s, IRAs, and annuities—insurance contracts designed to provide steady income during retirement.

While annuities are a common component of U.S. retirement planning, they can have unexpected tax implications in Sweden. Their classification under Swedish tax law, along with the provisions of the Swedish-American tax treaty, can significantly affect taxation. It’s crucial to understand the tax rules before moving to Sweden and when preparing your Swedish annual income tax return.

What is an Annuity?

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

Annuities can be either immediate, where payments start shortly after the purchase, or deferred, where payments begin in the future—often upon retirement.

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

How Are Annuities Taxed in the U.S.?

In the U.S., deferred annuities are not taxed until funds are withdrawn. The gains are taxed as ordinary income, while any after-tax contributions are withdrawn tax-free, as they have already been taxed.

If the annuity is purchased with pre-tax money through an IRA or 401(k), withdrawals are fully taxed as ordinary income.

How Are Annuities Treated for Swedish Tax Purposes?

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

In Sweden, there is a savings vehicle similar to an American annuity: the "Endowment Insurance" (or "Kapitalförsäkring"). This type 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’s interest rate. For 2025, the annual standardized tax for endowment insurances is 0.888% of the capital that exceeds SEK 150,000, making it a popular investment vehicle due to the relatively low tax burden.

Additionally, withdrawals from an Endowment Insurance are tax-free, providing a significant advantage to policyholders when accessing funds.

However, for an insurance policy to be classified as an "Endowment Insurance" under Swedish tax law, it must meet certain criteria. These criteria, established by the Swedish Supreme Administrative Court’s case law, include the requirement that the insurance contract must involve adequate insurance risk. Therefore, it is necessary to determine whether the American annuity meets these requirements. If it does not, the annuity may 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, primarily designed to prevent double taxation, can limit the tax claims of both Sweden and the U.S. Its provisions aim to ensure that income is taxed only once, either in the country of residence or the country of source, depending on the specific rules in the treaty. However, to understand the impact of the tax treaty on an annuity, it’s necessary to first determine the individual’s residency status under the treaty and identify the relevant tax allocation provisions.

Applying the treaty could potentially result in Sweden not being allowed to impose the annual standardized tax on the annuity. Depending on the classification of the annuity under Swedish domestic tax law, Sweden may retain the right to tax income sourced from Sweden, such as dividends from Swedish companies.

Are You an American Expat Living in Sweden and Holding a U.S. Annuity?

If you’re an American expat in Sweden and hold a U.S. annuity, reach out to us to ensure compliance with Swedish tax law and avoid the risk of double taxation.