The Toxic Investment Plan For Americans In Mexico

The Mexican version of the 401(k) comes with few tax benefits

Many of my readers live in Mexico, enjoying retirements funded by U.S. based pension plans. U.S. citizens who work in Mexico, however, may have been offered what is known as an AFORE account. AFOREs are Mexico versions of what you and I think of as 401(k) accounts.

There are big differences between the two. Because AFOREs are foreign retirement plans, established according to non-U.S. rules, they are not recognized as “qualified plans” from the IRS perspective. Because of that, very different IRS rules apply to them. In a nutshell, they have virtually none of the tax benefits of U.S. qualified plans.

Money put into IRAs and 401(k) plans are generally tax deductible, and investments inside those plans grow on a tax-free basis. Why? Because U.S. tax law says so. Guess what U.S. tax law says about AFOREs? Nada.

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

Bottom line: many foreign pension plans and deferred compensation arrangements are virtually toxic to U.S. citizens (and green card holders). They require reporting in 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, but 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?” Truth is, it’s not their job to warn Americans about the U.S. 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 could 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, I just want to open my readers’ eyes to the many tax issues that arise from being a U.S. person that lives, works and plays outside the United States. The more you know, the better prepared you are.


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.