If you’re a U.S. citizen or green card holder living in Switzerland, you’ve probably heard that you can use your Pillar 2 pension to help buy or renovate your primary residence. Under Swiss law, this is not only allowed but often encouraged through preferential lump-sum tax rates.

However, here’s what your Swiss advisor might not mention: for U.S. tax purposes, this kind of withdrawal can be fully or partially taxable. There are no special exemptions just because the funds are used for a home.

How does the U.S. tax system treat your Swiss Pillar 2?

The U.S. tax system treats your Swiss Pillar 2 as a foreign pension, meaning it does not receive the same treatment as a U.S. qualified plan. Furthermore, it does not offer a special tax break just because you’re using the money for a home.

So, if you take money out of your Pillar 2, the U.S. may treat it as taxable income, even if:

• You used it for your home
• You paid Swiss tax on the withdrawal
• It was allowed under Swiss rules

If you take money out of your Pillar 2, will the entire amount be taxed?

Not always. In the U.S., you only pay tax on the part of the withdrawal that hasn’t already been taxed before. This is called your U.S. tax basis.

Your U.S. tax basis includes:

• Your own contributions that were already taxed in the U.S.
• Employer contributions that were included in your U.S. income
• Growth or interest on the account that was already reported on your U.S. tax returns

If part of the money has already been taxed in the U.S., you won’t pay tax on that part again. But anything that wasn’t taxed before will be taxed now.

Why does this tax treatment catch people off guard?

Understandably, many Swiss advisors don’t fully comprehend how U.S. tax works. They may tell you that using your Pillar 2 for a home is a great move, and in Switzerland, it is.

But for your U.S. tax return, it could create a large and unexpected tax bill.

If you haven’t kept records of what’s already been taxed in the U.S., you could end up paying tax twice on the same money, once in Switzerland and once in the U.S.

What should you do if you’re interested in using your Pillar 2?

• Talk to a U.S. tax advisor before you do anything with your Pillar 2
• Make sure your U.S. tax basis is being tracked every year (if KLR has prepared your tax returns, we have been doing this for you)

Are there other tax issues to watch out for?

You may also face similar tax issues when changing employers or when moving back to the United States. In all these scenarios, the same rules apply regarding your U.S. tax basis. 

This issue is just one example of the complexities involved in navigating the intersection of the US and Swiss tax rules. Our KLR Swiss office deals with such matters on a daily basis so please do not hesitate to contact us should the need arise. For more information, please click here.

FAQ: U.S. Tax Implications for Swiss Pension Withdrawals

1. Does the U.S. offer tax breaks if I use my Swiss pension to buy a home?

No. Unlike Switzerland, the U.S. tax code does not provide special treatment for pension withdrawals used to buy or renovate a home, even if it’s your primary residence.

2. Will I be taxed on the entire amount I withdraw from my Pillar 2?

Not necessarily. You’ll only be taxed on the portion that hasn’t already been taxed in the U.S. 

3. If I already paid Swiss taxes on the withdrawal, do I still owe U.S. tax?

Possibly. U.S. tax is calculated independently, and prior Swiss taxation doesn’t exempt the income from U.S. tax. In some cases, a foreign tax credit may help reduce double taxation, but not always.