Toxic Investment For Americans In Mexico

They’re called AFORE

Many of my readers live in Mexico, enjoying retirement funded by US-based pension plans. US persons who work in Mexico, however, may have been offered a local financial vehicle known as an AFORE account.  AFOREs are Mexico’s versions of what you and I may visualize as 401(k) accounts.

There are big differences as well. Because these are foreign retirement plans, established according to non-US rules, they are not recognized as “qualified plans” from the IRS’s perspective. Because of that, very different IRS rules apply to them. In a nutshell, they have virtually none of the tax benefits of US-qualified plans. Read on.

Monies put into IRAs and 401(k) plans are generally deductible, and investments inside those plans grow on a tax-free basis. Why? Because US tax law says they are. Guess what US tax law says about AFOREs, the Mexican retirement accounts? Nada.

They don’t have the tax benefits granted to US plans. The IRS treats them very differently. In fact, the gains in your AFORE may be taxable in the US the very year they are earned and may even be taxable as ordinary income and not as a capital gain. Ouch.

Bottom line: foreign pension plans and deferred compensation arrangements are virtually toxic to US citizens (and green card holders).They require reporting on special IRS forms. Penalties for not reporting them are incredibly steep. Ready for more? Tax years in which you were required to report those accounts and didn’t, remain “open” for audit until you file the required forms. It really is that bad.

You may be tempted to run to the AFORE people and say “why didn’t you tell me this?” is, it’s not their job to warn Americans as to the US tax consequences of a Mexican financial product. To them, it’s an innocuous thing, because they see it from the normal, Mexican perspective.  To them, it is a great tax-deferred vehicle. To Americans, AFOREs and their ilk may be the financial equivalent of Ebola.

You say you don’t have an AFORE account? What about your Mexican spouse? I don’t mean to scaremonger, at all, just to open my reader’s eyes as to the many tax issues that arise from being a US person who lives, works and plays outside the United States. More to follow.

Orlando Gotay is a California licensed tax attorney (with a Master of Laws in Taxation) admitted to practice before the IRS, the U.S. Tax Court and other taxing agencies.  His love of things Mexican has led him to devote part of his practice to the tax matters of U.S. expats in Mexico.  He can be reached at, online radio at or Facebook: GotayTaxLawyer.