US citizens abroad: annuity withholding, bank accounts and the section 3405(e)(13) rule

Written by Hans Goldstein, licensed insurance agent · CA 4273294
Updated October 2026

This rule caught my attention while planning my parents’ move, because the old workaround many expats relied on is gone. For decades a US citizen living abroad could keep an annuity paying into a US bank account and elect no withholding. From 2026 the insurer looks at where you live, not where your bank is. Nothing about the annuity’s tax changes; what changes is the timing of when you pay it. Here is how the rule works, what it costs you (usually nothing in the end), and how to set it up cleanly.

What the law and the 2026 regulation say

Section 3405(e)(13) of the Internal Revenue Code says that for any periodic payment or nonperiodic distribution “to be delivered outside of the United States”, no election out of withholding may be made, unless the recipient certifies that they are not a US citizen or resident alien (or a covered expatriate under section 877).

The question was always what “delivered outside the United States” means. The final regulation, T.D. 10008, published October 21, 2024, answers it in Treas. Reg. §31.3405(e)-1, for payments made on or after January 1, 2026:

The preamble explains the reasoning: money in a US bank can be withdrawn from anywhere, so the Treasury and the IRS concluded the payee’s residence address is the better indicator of where the money ends up. The 2026 Form W-4P says the same in plain English: generally, a US citizen or resident alien may not elect out of withholding on payments delivered outside the United States.

Why this costs you less than it sounds

Withholding is a prepayment of the tax you already owe, not a new tax. Every dollar withheld shows up on the Form 1099-R the insurer sends you and is credited on your Form 1040. If too much was withheld, the excess comes back as a refund.

• Only the taxable part. On a non-qualified annuity bought with after-tax money, the exclusion ratio makes part of each payment a tax-free return of premium. In a $300,000 life-only example at 65 paying $22,500 a year, about $15,000 is untaxed and $7,500 taxable for roughly 20 years, so withholding works on the smaller taxable slice.
• You can still steer the amount. You cannot choose zero, but you can file Form W-4P with your real filing status and deductions so withholding tracks your actual US tax. If you file nothing, the 2026 Form W-4P says the payer withholds as if you were single with no adjustments, which often withholds more than a married couple owes.
• Foreign tax credits can turn it into a refund. Where your new country taxes the annuity first and a treaty lets the US credit that tax, your final US tax on the annuity can drop, and the withholding comes back when you file. Plan your cash flow for that lag.

Should you still keep a US bank account?

Yes, for convenience, not for withholding. A US account receives the payments without international wire fees, gives you a choice of when to convert dollars, and keeps a US relationship that many insurers prefer. What it no longer does, for a US citizen with a foreign home address, is let you skip withholding. Give the insurer your true residence address: the regulation keys on the address you provide, and giving a US address you do not live at is a misstatement to a payer, not a plan.

The foreign bank account: FBAR and Form 8938

The annuity itself is the easy part. An annuity issued by a US insurer is not an account at a foreign financial institution, so it is not reportable on the FBAR (FinCEN Form 114) or on Form 8938. It is also not a PFIC. That is the opposite of a foreign-issued annuity or a foreign mutual fund, which are among the most painful assets an American abroad can own.

The local account you spend from is reportable once you pass the thresholds:

A married couple whose foreign accounts are all jointly owned can file one FBAR if the other spouse signs FinCEN Form 114a. Keeping most of the money in the US and only a few months of spending abroad keeps the paperwork small.

If you are not a US citizen

A spouse who is neither a US citizen nor a US resident is outside section 3405 entirely. Payments to a nonresident alien fall under the nonresident withholding rules, generally 30% of the taxable part unless a tax treaty reduces it, claimed with Form W-8BEN. Many treaties give the country of residence the right to tax private annuities, so the US rate can fall, sometimes to zero; check the treaty for your country. If the annuity is owned by and pays a non-citizen spouse, ask your preparer whether choosing to treat that spouse as a US resident and filing jointly changes the picture, because that choice brings worldwide income into the US return.

Single or married: a worked example

A married couple, both 62 and US citizens, move to Spain. One spouse owns a $300,000 life-only annuity bought with after-tax savings, paying about $1,810 a month at the September 9, 2026 survey average for a man ($603 per $100,000; illustrative, not a quote). With the exclusion ratio (IRS multiple 22.5 at 62), about $13,330 a year is untaxed and roughly $8,380 taxable. They file Form W-4P as married filing jointly so withholding reflects their real bracket, keep the payments flowing into a joint US account, and move a few months of spending to a Spanish account at a time. Spain taxes only 24% of each payment on an annuity set up at 60 to 65; the US credits that tax under the treaty, and any excess withholding comes back with their US return.

Setting it up before you move

• Buy while you still have a US address. US insurers generally issue new contracts only to residents of states where they and the agent are licensed.
• Update your residence address with the insurer when you move, and expect withholding to start.
• File a fresh Form W-4P with your real filing status and deductions instead of accepting the single-with-no-adjustments default.
• Keep a US account for deposits and a modest local account for spending, and calendar the FBAR if the local account can top $10,000.

The trade-off, once: the annuity is irreversible and pays a level amount unless you add a cost-of-living rider, and from 2026 part of each payment is held back as a tax prepayment while you live abroad. In return you have lifetime income from a US contract that stays off the foreign-asset forms and is taxed favorably under the exclusion ratio.

Frequently asked questions

Related reading

• Moving abroad on a fixed income: hub
• Moving to Norway: my parents' story
• FBAR, Form 8938 and double taxation on a US annuity
• Why a US annuity is tax-favored: the exclusion ratio
• How European countries tax a US annuity
• Which retiree visas accept annuity income
• US taxes while living in Norway

Sources

• 26 U.S.C. 3405: withholding on pensions and annuities, (e)(13)
• T.D. 10008: final regulations under section 3405(e)(13), Treas. Reg. 31.3405(e)-1, applicable January 1, 2026
• Federal Register, 89 FR 84079 (October 21, 2024), T.D. 10008 (PDF)
• IRS Form W-4P (2026): withholding certificate for periodic pension or annuity payments
• IRS: Comparison of Form 8938 and FBAR requirements
• IRS: Report of Foreign Bank and Financial Accounts (FBAR), spouses and Form 114a
• IRS Publication 515: withholding of tax on nonresident aliens
• IRS Publication 939: general rule for pensions and annuities, Table V
• ImmediateAnnuities.com: immediate annuity rates by age (survey of September 9, 2026)