Mexico

Tax-deferred employer plans

Mexico's AFORE (Administradora de Fondos para el Retiro) system manages mandatory retirement savings. Each worker has an individual account managed by an AFORE company, with funds invested in a SIEFORE (Sociedad de Inversión Especializada de Fondos para el Retiro) based on the worker's age. The exemption is available only to an ‘eligible individual’ under §5.02: someone who is compliant (or comes into compliance) with U.S. income-tax filing and has reported the plan’s contributions, earnings, and distributions as income to the extent U.S. law requires; a participant who never reported plan earnings cannot rely on it until they do.

§301.7701-7 classification: Unsettled. The individual account is an account administered by an AFORE (a licensed financial institution) and invested in shares of SIEFOREs, which are investment funds, not trusts; there is no fideicomiso. Whether the arrangement is a trust for U.S. purposes has not been addressed by the IRS; many practitioners treat it as a foreign trust and file protectively, and PFIC rules may apply to the SIEFOREs themselves (we do not determine PFIC status).

Rev. Proc. 2020-17 analysis: The AFORE system is a national mandatory individual-account system, not an employer-maintained plan, so the nondiscrimination condition in §5.03(6) does not apply and the account must meet conditions (1)–(5). It is tax-favored, reported to CONSAR and the SAT, and mandatory contributions are a percentage of wages. Two conditions are open: voluntary contributions may be made by anyone and withdrawn two to six months after deposit, which is neither earned-income-limited (condition 3) nor a restricted withdrawal (condition 5); and the once-in-a-lifetime marriage withdrawal is not among the listed reasons. The unemployment withdrawal is akin to the hardship exception. No IRS guidance addresses AFOREs.

Treaty provisions: The U.S.–Mexico treaty does not contain a pension deferral article for AFORE earnings. Article 19(1)(a) makes private pensions taxable only in the residence State, but the saving clause (Art. 1(4), as replaced by the 2002 Protocol) preserves for U.S. citizens (Art. 1(5)(a)) only Art. 19(1)(b) social security and 19(3) alimony/child support. This does not affect the separate Rev. Proc. 2020-17 reporting exemption, which does not require a treaty.

3520/3520-A treatment: If the plan qualifies under Rev. Proc. 2020-17, no forms are required. Otherwise, file Form 3520-A and Form 3520 Part II annually for the part your own contributions fund, once your own contributions exceed the employer’s, counted as the note at the end of this section explains (Treas. Reg. §1.402(b)-1(b)(6)), or for any part you otherwise own. Distributions go on Part III unless reported as compensation income (see the note at the end of this section).

For a plan an employer contributes to, a trust holding it is generally a nonexempt employees’ trust described in §402(b). §6048(a)(3)(B)(ii) excepts transfers to §402(b), §404(a)(4), and §404A trusts from Part I, the participant’s own contributions included, and §679 does not make the participant the owner (see the Reporting Guide’s employer-plan section). Payouts the participant reports as compensation income are excepted from Part III. If the participant’s own contributions ever exceed the employer’s, the participant is treated as the owner of the part those contributions fund (Treas. Reg. §1.402(b)-1(b)(6)), reports it on Part II and Form 3520-A each year it is owned, and is taxed on its income each year. In that count, what the participant chose to put in, salary sacrifice included, is the participant’s, and anything the plan’s rules required taken from pay is the employer’s, as the IRS chief counsel read a national retirement fund in 1997. The rest is taxed when it vests and, after that, when paid out (§402(b)(1), (2)).

Fideicomisos (trust-form arrangements)

Mexico uses fideicomisos (trust-form arrangements) extensively. The most common one for U.S. persons is the bank fideicomiso that holds residential real property in the restricted zone (within 50 km of the coast or 100 km of the border), where foreign nationals cannot hold title directly under the Foreign Investment Law.

U.S. classification: Rev. Rul. 2013-14 holds that a Mexican Land Trust of this kind is not a trust for U.S. tax purposes where the bank's only duties are to hold legal title and transfer it at the owner's direction, and the owner keeps the right to manage the property, collect rent, and pay the taxes. The U.S. person is treated as owning the real estate directly: no Form 3520 or 3520-A is required for the transfer, the ownership, or the eventual sale. Rental income and gains are reported as the owner's own.

When it is a trust: a fideicomiso whose trustee has genuine duties beyond holding title (investment, development, administration, or business fideicomisos, or a property fideicomiso where the bank manages the property or holds other assets) falls outside the ruling and is analyzed as a foreign trust under Reg. §301.7701-4 and §301.7701-7. For those, the U.S. person's role determines the filing: transferor (Part I), owner under §§671–679 (Part II and Form 3520-A), or beneficiary receiving distributions (Part III).

Rev. Proc. 2020-17 does not apply to any fideicomiso; it covers retirement and savings trusts only.

Gifts and inheritances

Mexico is one of the most common source countries for gifts and inheritances received by U.S. persons, particularly among the large Mexican-American community with cross-border family ties.

If a U.S. person receives more than $100,000 in gifts or bequests in a year from one nonresident alien individual or foreign estate (adding together gifts from donors related to each other), Form 3520 Part IV reporting is required. Gifts from foreign corporations or foreign partnerships exceeding $20,573 (for 2026, indexed for inflation) are also reportable.

Common scenarios: inheritance of real property in Mexico, cash gifts from parents or grandparents, gifts of land or a family home, and bequests from deceased relatives. Property must be reported at fair market value in U.S. dollars: a certified appraisal (avalúo) may be needed. The IRS expects fair market value, which may differ from the Mexican tax assessment (valor catastral).

Penalties and practical notes

AFORE statements are available through the AFORE provider or CONSAR portal and show contributions, returns, and balances. The Mexican fiscal year is the calendar year: no conversion needed.

For fideicomisos that are trusts (investment, development, or administration fideicomisos, not title-holding residential fideicomisos under Rev. Rul. 2013-14), the fiduciaria (bank trustee) provides annual statements. The 3520-A income statement reports income, expenses, and gains, while the balance sheet reports the trust asset value.

Convert Mexican pesos at the rate prevailing when each amount is received, paid, or accrued; the IRS has no official exchange rate and generally accepts any posted rate used consistently, so its published yearly average rate is a common choice for amounts arising evenly across the year.