Swedish Tax Treatment of U.S. IRAs

Among Americans, having an IRA is very common. In fact, IRAs often make up a considerable portion of a person’s total net assets. While IRAs are an excellent retirement-saving tool in the United States due to their tax-deferred nature, Americans moving to Sweden quickly realize that the Swedish tax treatment of IRAs is entirely different.

Sweden applies its own domestic tax law, which means that a U.S. IRA must be classified for Swedish tax purposes. This creates a significant compliance risk, including exposure to tax penalties and surcharges in cases of non-compliance.

What is an IRA?

An IRA, or Individual Retirement Account, is a U.S. tax-advantaged vehicle used for individual retirement savings. Unlike employer-sponsored plans such as 401(k)s, an IRA is established and owned directly by the individual, typically through a U.S. bank or brokerage firm, and remains fully under the individual’s control.

From a U.S. legal and tax perspective, the core purpose of an IRA is to allow long-term capital accumulation with preferential tax treatment. Depending on the type of IRA, contributions may be deductible for U.S. income tax purposes, investment returns may grow on a tax-deferred basis, and distributions may be taxed either upon withdrawal or not at all.

In practice, IRAs are commonly invested in publicly traded securities such as stocks, ETFs, mutual funds, and bonds. Depending on the custodian, they may also hold more complex assets. Over time, many individuals accumulate substantial wealth inside their IRAs, and it is not uncommon for an IRA to represent a significant share of a person’s total net assets.

Common types of IRAs

The two most common forms of IRAs are:

• Traditional IRA Contributions are often tax-deductible, while distributions are generally taxed as ordinary income when withdrawn.

• Roth IRA Contributions are made with after-tax funds, but qualified distributions, including investment gains, are tax-free under U.S. tax law.
  

In real life, IRAs are typically used as long-term, buy-and-hold investment accounts, with withdrawals planned around retirement age. Early distributions may trigger U.S. income tax and penalty exposure, reinforcing the role of the IRA as a retirement-focused savings vehicle rather than a short-term investment account.

How does Sweden see an IRA, for Swedish tax purposes?

From a Swedish tax perspective, a U.S. IRA is not assessed based on its classification under U.S. law. Instead, Sweden applies its own domestic tax rules, meaning that an IRA must be classified independently under Swedish tax law.

For a long time, the Swedish tax treatment of U.S. retirement accounts such as 401(k)s and IRAs was unclear. In 2012, an analysis published in the Swedish tax journal Skattenytt concluded that such accounts are unlikely to qualify as Swedish pension insurance (pensionsförsäkring), as they must be assessed according to Swedish domestic classification rules.

A central reason is Swedish case law from the Supreme Administrative Court (HFD), which requires that an arrangement must constitute life insurance in order to be treated as pension insurance. This presupposes sufficient insurance risk, meaning that the payout of pension capital must differ depending on whether an insured event, such as death, occurs. In practice, standard 401(k) and IRA structures do not meet this requirement.

In 2019, the Supreme Administrative Court issued a landmark ruling concerning the Swedish tax treatment of a rollover from a U.S. 401(k) to an IRA. The Court held that the Swedish point of taxation must be determined without regard to U.S. tax law. While funds held within a 401(k) were not considered available to the individual due to withdrawal restrictions, the same did not apply once the funds were transferred to an IRA. Since an IRA is owned directly by the individual and allows disposal of the funds, the funds were considered available for Swedish tax purposes at the time of the rollover.

Although the ruling concerned a rollover from a traditional 401(k) to a traditional IRA, it is generally interpreted to mean that IRAs are treated as ordinary investment accounts under Swedish tax law. As a result, Sweden does not recognize the tax-deferred nature of an IRA. In practice, an IRA is therefore treated similarly to a regular brokerage account for Swedish tax purposes.

This implies that ongoing returns within an IRA, such as dividends, interest, and capital gains, are taxable as capital income once the Swedish taxation point has occurred.

How do I report my IRA in my Swedish tax return?

Any person who is a Swedish tax resident and holds a U.S. IRA is required to report the account in their Swedish tax return.

This can be challenging, as Sweden does not recognize the tax-deferred nature of IRAs. Instead, the account must be translated manually into Swedish tax principles and reported in SEK, based on Swedish tax rules rather than U.S. concepts.

In practice, this often means:

• Translating U.S. IRA account statements into Swedish tax reporting standards

• Calculating taxable capital income and capital gains under Swedish law

• Preparing and filing Swedish K4 forms where required
  

We at nomadtax regularly assist clients with this type of compliance work and can help ensure that the reporting is handled correctly.

Is there a risk of double taxation of an IRA?

Yes. Unfortunately, there is a considerable risk of double taxation when a Swedish tax resident holds a U.S. IRA.

The reason is that Sweden and the United States tax IRAs at different points in time due to their fundamentally different views of the account. Sweden seeks to tax ongoing capital income, such as dividends and interest, as well as capital gains on the underlying securities. The United States, by contrast, generally taxes IRAs only upon withdrawal.

This mismatch in timing significantly increases the risk of double taxation.

Can tax treaties help avoid double taxation?

Yes, in certain cases. The application of the U.S.–Sweden tax treaty may, in some situations, limit or even prevent Sweden’s right to tax an IRA. This is generally the best-case scenario, but it depends entirely on the individual’s treaty position. Typically, this requires that the individual has a home available to them in the United States.

In the more common scenario where both Sweden and the United States are entitled to tax the IRA, the United States is usually responsible for granting a foreign tax credit for Swedish taxes paid. However, in practice, this can be difficult. The reason is that Sweden taxes what it considers capital income, while the United States taxes withdrawals as pension income.

Rather than relying on this uncertain mechanism, we have developed strategies to align the timing of taxation in Sweden and the United States. This significantly reduces the risk of double taxation. If you would like assistance with this, feel free to contact us.

Summary

Holding a U.S. IRA while being tax resident in Sweden requires careful planning and proper compliance. In short:

• IRAs are common and often represent a significant part of an American’s net assets

• Sweden does not recognize the tax-deferred nature of an IRA

• For Swedish tax purposes, an IRA is generally treated like an ordinary brokerage account

• Ongoing income and capital gains may therefore be taxable in Sweden

• Differences in U.S. and Swedish tax timing create a high risk of double taxation

• Correct reporting in the Swedish tax return is mandatory and often complex
  

Given the potential tax exposure, professional advice is strongly recommended when holding an IRA while living in Sweden.