Spain and Roth IRAs

For residents of Spain.
Topic Author
michaelotal
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Spain and Roth IRAs

Post by michaelotal »

Hi

My wife and I are residing in Spain, and were wondering if there is any way that contributions to pension acccounts (specifically Fidelity Roth IRAs in the US) can be tax deductible. (The Spanish Pension Plan seem to be limited and have high commissions).

Also, are there any legitimate grounds for excluding Roth IRA accounts from the Patrimonio (wealth) tax declaration as the money is not really available until we are 59.5 years plus?

If anyone has direct knowledge of these topics that can be shared, I would be grateful.

Thanks
Matt48Ritchie
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Re: Spain and Roth IRAs

Post by Matt48Ritchie »

Are you both US citizens? I'm not exactly sure what you're asking but Roth IRA contributions are not tax deductible.
Spirit Rider
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Re: Spain and Roth IRAs

Post by Spirit Rider »

I am assuming that you are U.S. citizens subject to U.S. taxation on worldwide income.

Roth IRA contributions are after-tax and are not tax deductible. Traditional IRA contributions are pre-tax and are therefore tax deductible. However, if you are using the Foreign Earned Income Exclusion, the IRA contribution is only deductible to the extent you have taxable compensation left over after the exclusion.

I know nothing about you second issue or any Spanish or tax treaty issues.
Topic Author
michaelotal
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Re: Spain and Roth IRAs

Post by michaelotal »

Thanks for the replies, and apologies for missing out key information.

I am a US citizen with a Roth, and my non-US citizen wife also has a Roth.

I am interested in whether there is any way to deduct the Roth contributions against the Spanish income tax (la Renta).

And also whether the balances of the Roth accounts can be excluded from the Spanish / Catalan wealth tax (Patrimonio).
Matt48Ritchie
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Re: Spain and Roth IRAs

Post by Matt48Ritchie »

Maybe you could ask a coworker? That's pretty specific so unless someone has been through the exact same thing I'm not sure that anyone will be able to give you a great answer. But living in Barcelona is so worth it! I loved being there for a study abroad program. [OT comment removed by admin LadyGeek]
brianmccln
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Re: Spain and Roth IRAs

Post by brianmccln »

I just moved to Spain a year and a half ago and am asking the same question you asked 4 years ago now that i am filing "la renta" for the first time. Is a US Roth IRA protected from Spanish tax under the the US/Spain tax treaty? Does it need to be reported on the Modelo 720?
Topic Author
michaelotal
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Re: Spain and Roth IRAs

Post by michaelotal »

This seems to remain something of a grey area. My understanding based on the webpage below of a Spanish tax lawyer and also from consulting with a American financial adviser is as follows for Roth IRAs and Roth 401ks
1) they need to be included on the modelo 720 declaration of ass
2) they do not need to be included in modelo 714 wealth tax declaration.
3) dividends and interest earned within the Roth IRA /and Roth 401k do not need to be reported on modelo 100 income tax declaration; however,
4) if you are taking distributions from them while resident in Spain then this would be considered taxable here.

The webpage with comments can be found at: http://jullastres.es/wordpress/?p=764&cpage=1
investtherest
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Re: Spain and Roth IRAs

Post by investtherest »

It's very useful to know about this. I'm a Spaniard currently working in the US and my company offers traditional 401K and Roth 401K to invest into (with matching). I have been postponing enrolling into either due to not knowing how those would be treated back in Spain when I go back and retire. Looks like since they will both be taxed when taking distributions, it's fiscally more efficient to subscribe a traditional 401K, right?
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LadyGeek
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Re: Spain and Roth IRAs

Post by LadyGeek »

Welcome! I have PM'd someone who may be able to answer your question.
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Topic Author
michaelotal
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Re: Spain and Roth IRAs

Post by michaelotal »

investtherest wrote: Mon Feb 25, 2019 10:50 pm It's very useful to know about this. I'm a Spaniard currently working in the US and my company offers traditional 401K and Roth 401K to invest into (with matching). I have been postponing enrolling into either due to not knowing how those would be treated back in Spain when I go back and retire. Looks like since they will both be taxed when taking distributions, it's fiscally more efficient to subscribe a traditional 401K, right?
At this level, the logic is that the Traditional 401k distributions would be taxed by the USA and taxed by Spain after being credited for any taxes you paid in the USA. In contrast, the Roth 401k distirbutions wouldn't be taxed by the USA but would be by Spain. In both cases, the assumuption is that you have returned to reside in Spain before taking the distributions.
Elena
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Re: Spain and Roth IRAs

Post by Elena »

Just my 2 cents:

If you will not be a US citizen when you retire, and you will be a fiscal resident in Spain, then your taxes will be liquidated in Spain. My understanding is that the double taxation treaty will apply.

At the risk of adding confusion and misinformation:

If the IRA (or any other investment, for that matter) "spits" dividends from US companies or funds, you will see an instant double witholding in your Span. documents, since they do it that way (in the US, you are paid all the divs. upfront, then either make periodic payments to the US tax authority, or liquidate at the end of the fiscal year). So, since the double taxation treaty applies, you will have to claim that withholding reimbursement for half of that specific dividend money (not the distribution). My understanding is that this is done automatically for all foreign stockholders because the co. does not know the fiscal and residential status of everyone.

This happened to my dad (Span. citizen and resident, no other citizenships) in a taxable acct., who had US div. paying stocks from a US co., and received quarterly divs. They were double-taxed when disbursed quarterly, then he had to claim a quarterly reimbursement. He ended up selling the stocks because it all added a lot of paperwork.

So, all your income will be taxed in Spain, and you will not have to fill US taxes unless you are a US citizen as well, but once you get into the nooks and crannies I expect some degree of complication. I am definitely not looking forward to this situation. I am reluctant to retire in Spain just because of all this hassle. I am sure that many other "retired abroad" members of this forum will be able to better help you.
investtherest
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Re: Spain and Roth IRAs

Post by investtherest »

Thank everyone for the answers. This seems like a complicated topic. The double taxation agreement is something that I don't know would work in this situation for a Roth 401K:

1. During the years I work in the US I put after-tax money in the Roth 401K (i.e. I already paid taxes for this money). The idea is that distributions will be tax free.
2. When I go back to Spain and retire, the distributions I take will count as income in Spain. The Spanish government will want to tax that income, and I'm not sure if it will be possible to prove to them that I should not be taxed since this kind of pension plan does not exist in Spain (i.e. a tax-free distribution plan)

With a traditional 401K, things seem to be clearer:

1. During the years in the US I put before-tax money into the traditional 401K (i.e. no taxes paid). Distributions will be taxed.
2. When I go back to Spain and retire, the distributions I take will count as income in Spain as before. The Spanish government will want to tax that income. The US government may want to as well (not sure), but even if they did this is a clear case for the double taxation agreement.

Whatever the outcome in the traditional 401K I should pay taxes just once, at distribution time. With the Roth 401K it seems like there is a risk I will pay taxes both when contributing to the plan and when taking distributions. Did I miss anything here?

Thanks again!
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LadyGeek
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Re: Spain and Roth IRAs

Post by LadyGeek »

Perhaps you can ask this question in our brother Spanish forum? Bogleheads® España (en español)

Disclaimer: I am a member of both forums.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
wineandplaya
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Re: Spain and Roth IRAs

Post by wineandplaya »

Does anyone have thoughts about health savings accounts (HSA), used as a retirement account, if you retire in Spain? You can't really withdraw the money without steep penalties unless you are older than 65. Will you have to pay taxes on the capital gains in an HSA? Can it be considered equivalent with a Roth IRA?
Topic Author
michaelotal
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Re: Spain and Roth IRAs

Post by michaelotal »

wineandplaya wrote: Sat Mar 02, 2019 10:09 am Does anyone have thoughts about health savings accounts (HSA), used as a retirement account, if you retire in Spain? You can't really withdraw the money without steep penalties unless you are older than 65. Will you have to pay taxes on the capital gains in an HSA? Can it be considered equivalent with a Roth IRA?
We may be speaking at cross-purposes, however I started to look into HSAs but quickly concluded that my Sanitas mutua policy here could not be considered as a qualifying High Deductible Health Plan, so I dropped the enquiry then.
international001
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Re: Spain and Roth IRAs

Post by international001 »

michaelotal wrote: Sat Mar 02, 2019 10:19 am
wineandplaya wrote: Sat Mar 02, 2019 10:09 am Does anyone have thoughts about health savings accounts (HSA), used as a retirement account, if you retire in Spain? You can't really withdraw the money without steep penalties unless you are older than 65. Will you have to pay taxes on the capital gains in an HSA? Can it be considered equivalent with a Roth IRA?
We may be speaking at cross-purposes, however I started to look into HSAs but quickly concluded that my Sanitas mutua policy here could not be considered as a qualifying High Deductible Health Plan, so I dropped the enquiry then.
What do you mean by ' qualifying High Deductible Health Plan'

HSA do not cover premiums. But it would cover any other health expense (co-pay, drugs, etc)
international001
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Re: Spain and Roth IRAs

Post by international001 »

LadyGeek wrote: Thu Feb 28, 2019 2:53 pm Perhaps you can ask this question in our brother Spanish forum? Bogleheads® España (en español)

Disclaimer: I am a member of both forums.
Great news! Was it just open this year?

Just out of curiosity? Is it possible to have the same format than bogleheads.org? When I go to bogleheadrs.org, I just see a list of threads, for all topics. Cannot see the same for https://bogleheads.es/
Spirit Rider
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Re: Spain and Roth IRAs

Post by Spirit Rider »

international001 wrote: Wed Apr 03, 2019 12:26 pm
michaelotal wrote: Sat Mar 02, 2019 10:19 am
wineandplaya wrote: Sat Mar 02, 2019 10:09 am Does anyone have thoughts about health savings accounts (HSA), used as a retirement account, if you retire in Spain? You can't really withdraw the money without steep penalties unless you are older than 65. Will you have to pay taxes on the capital gains in an HSA? Can it be considered equivalent with a Roth IRA?
We may be speaking at cross-purposes, however I started to look into HSAs but quickly concluded that my Sanitas mutua policy here could not be considered as a qualifying High Deductible Health Plan, so I dropped the enquiry then.
What do you mean by ' qualifying High Deductible Health Plan'

HSA do not cover premiums. But it would cover any other health expense (co-pay, drugs, etc)
A health insurance plan that includes co-pays even if the deductible is high enough is not a qualifying plan. To qualify a health plan can not provide benefits other than preventive care before the minimum deductible is met.
international001
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Re: Spain and Roth IRAs

Post by international001 »

investtherest wrote: Wed Feb 27, 2019 10:22 pm Thank everyone for the answers. This seems like a complicated topic. The double taxation agreement is something that I don't know would work in this situation for a Roth 401K:

1. During the years I work in the US I put after-tax money in the Roth 401K (i.e. I already paid taxes for this money). The idea is that distributions will be tax free.
2. When I go back to Spain and retire, the distributions I take will count as income in Spain. The Spanish government will want to tax that income, and I'm not sure if it will be possible to prove to them that I should not be taxed since this kind of pension plan does not exist in Spain (i.e. a tax-free distribution plan)

With a traditional 401K, things seem to be clearer:

1. During the years in the US I put before-tax money into the traditional 401K (i.e. no taxes paid). Distributions will be taxed.
2. When I go back to Spain and retire, the distributions I take will count as income in Spain as before. The Spanish government will want to tax that income. The US government may want to as well (not sure), but even if they did this is a clear case for the double taxation agreement.

Whatever the outcome in the traditional 401K I should pay taxes just once, at distribution time. With the Roth 401K it seems like there is a risk I will pay taxes both when contributing to the plan and when taking distributions. Did I miss anything here?

Thanks again!

Look here: http://jullastres.es/wordpress/?p=764&cpage=1

'In general before tax contributions, will be taxed for the total amount withdrawn at your marginal rate.
And after tax contributions, will be taxed for the implied gain from withdrawn at savings rate.'

It would seem that for a Roth you have to pay taxes on the earnings, not the contributions, kind of like an after-tax 401k
But is this information kept at all by the US broker?
Topic Author
michaelotal
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Re: Spain and Roth IRAs

Post by michaelotal »

I am not sure whether the brokerage firms keep a record after 7 years of contributions to Roth 401k, however the following link relates:

https://ttlc.intuit.com/questions/42376 ... tributions
international001
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Re: Spain and Roth IRAs

Post by international001 »

Yes.. that's one issue.
Also, conversion to a roth IRA can be taken out w/o penalty after 5 years.
So perhaps there is some tracking you need to do anyway, if the broker is not doing it.
wineandplaya
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Re: Spain and Roth IRAs

Post by wineandplaya »

What happens if you take a "break" in your Spanish retirement to live in the US for some time? And cash out your ROTH while there? Is one year enough to avoid Spanish taxation? I can imagine us wanting to spend some time in the US anyway, because of family ties.
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michaelotal
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Re: Spain and Roth IRAs

Post by michaelotal »

I understand the narrower threshold is that if you move away from spain for more than 183 days of your tax year then the tax residency here ceases. However, there is a broader requirement that the locus of your socio-economic life has to move. So, for example, if one's partner and dependent children remain in spain and the family home is kept here, then in theory the Hacienda could challenge that the individual has not genuinely moved, but is only pretending to in order to avoid tax.
international001
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Re: Spain and Roth IRAs

Post by international001 »

Hopefully when you retire you don't have more dependent children.
You can also work for one week in a fast food joint and claim you had your ties in US.
It's unfortunate that law is not clear about it. You can always ask to 'Hacienda' what it's called a 'binding consultation' to make sure you would qualify for foreign residence. Last I heard is that it takes 1 to 2 years to receive an answer, so plan in advance.

But I'm still curious is how if Spain does not recognize Roths, it can actually tax them? What is the actual mechanism?
Topic Author
michaelotal
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Re: Spain and Roth IRAs

Post by michaelotal »

Re "But I'm still curious is how if Spain does not recognize Roths, it can actually tax them? What is the actual mechanism?" -- I don't have RentaWeb open in front of me, however from recollection there is a casilla on that in which pension income is declared during retirement. I suspect that Hacienda would expect Roth 401k / IRA distributions would be declared there.
international001
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Re: Spain and Roth IRAs

Post by international001 »

michaelotal wrote: Thu Apr 04, 2019 2:02 am I am not sure whether the brokerage firms keep a record after 7 years of contributions to Roth 401k, however the following link relates:

https://ttlc.intuit.com/questions/42376 ... tributions
Hmm... So are you supposed to keep records just for US purposes. What does this mean? A statement from the brokerage? A number on your personal spreadsheet?
Topic Author
michaelotal
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Re: Spain and Roth IRAs

Post by michaelotal »

Just made some contributions to my and my wife's solo roth 401ks at TD Ameritrade. In the confirmation message, they advise that they are reporting the transaction and the amount to the IRS. These messages can be printed and / or downloaded, and save to file. I also keep a spreadsheet to track eligible versus actual contributions.
international001
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Re: Spain and Roth IRAs

Post by international001 »

solo 401ks are pre-tax, right? So this doesn't come into play

Hmm.. I think never got this notifications when doing contributions to Roth IRAs
For doing backdoors, I get the 1099-R, of course.

But there is not a place in my Vanguard account where it says what was a contribution and what was an earning
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michaelotal
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Re: Spain and Roth IRAs

Post by michaelotal »

individual solo 401ks are pre-tax whilst roth solo 401ks are post tax -- I was referring to the latter at TD Ameritrade.

re roth IRAs, looking at my January 2019 consolidated statement from Fidelity, I can see the contribution to my Roth IRA account shown. ditto for the December 31st 2018 report with Year to Date contribution figure.
Spirit Rider
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Re: Spain and Roth IRAs

Post by Spirit Rider »

michaelotal wrote: Thu Jun 06, 2019 2:40 am Just made some contributions to my and my wife's solo roth 401ks at TD Ameritrade. In the confirmation message, they advise that they are reporting the transaction and the amount to the IRS. These messages can be printed and / or downloaded, and save to file. I also keep a spreadsheet to track eligible versus actual contributions.
Are you sure the message didn't say they are NOT reporting. Otherwise, I have no idea why TD Ameritrade would say this. It is not correct.

There is NO 401k reporting of contributions by a 401k record keeper. There is not even a form for such a report. They are not even reported on Form 5500-EZ by the one-participant 401k administrator until the year end balance is > $250K.

However, it is the responsibility of the plan administrator to retain records. You should definitely download and/or keep your own records.

The only reporting by a 401k record keeper is Form 1099-R for distributions and rollovers.
arka
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Re: Spain and Roth IRAs

Post by arka »

investtherest wrote: Wed Feb 27, 2019 10:22 pm Thank everyone for the answers. This seems like a complicated topic. The double taxation agreement is something that I don't know would work in this situation for a Roth 401K:

1. During the years I work in the US I put after-tax money in the Roth 401K (i.e. I already paid taxes for this money). The idea is that distributions will be tax free.
2. When I go back to Spain and retire, the distributions I take will count as income in Spain. The Spanish government will want to tax that income, and I'm not sure if it will be possible to prove to them that I should not be taxed since this kind of pension plan does not exist in Spain (i.e. a tax-free distribution plan)

With a traditional 401K, things seem to be clearer:

1. During the years in the US I put before-tax money into the traditional 401K (i.e. no taxes paid). Distributions will be taxed.
2. When I go back to Spain and retire, the distributions I take will count as income in Spain as before. The Spanish government will want to tax that income. The US government may want to as well (not sure), but even if they did this is a clear case for the double taxation agreement.

Whatever the outcome in the traditional 401K I should pay taxes just once, at distribution time. With the Roth 401K it seems like there is a risk I will pay taxes both when contributing to the plan and when taking distributions. Did I miss anything here?

Thanks again!
This matches my interpretation of the US-Spain tax situation. Traditional 401k would be the better choice in this case.

I'm in a similar situation. My current thinking after retirement is to establish residence in the US for a fiscal year where I'd take all the distributions needed for the next few years and move them to a taxable account. That year I'd only have tax liability in the US. Then, while I'm in Spain for the next few years just live off this taxable account. The capital gains should be small enough as to minimize the taxes paid in Spain. I'm currently contributing to both Traditional and Roth to have options come retirement time.

Please update the thread if you find a better answer. I'd be interested in hearing what others think.
wineandplaya
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Re: Spain and Roth IRAs

Post by wineandplaya »

arka wrote: Thu Jun 06, 2019 8:55 am I'm in a similar situation. My current thinking after retirement is to establish residence in the US for a fiscal year where I'd take all the distributions needed for the next few years and move them to a taxable account.
If the money is in a ROTH 401k, would it not make sense to roll over all the money to a ROTH IRA while still in the US? That way, you won't pay Spanish taxes on earnings happening from now until you move, only after the move. My understanding is that earning dollars in a ROTH 401k will rollover to conversion dollars in a ROTH IRA. I suspect that Hacienda would want to tax the ROTH IRA earning dollars, but you should be able to make a case that they shouldn't tax dollars that originated from a ROTH 401k-to-ROTH IRA rollover. Thoughts?
Topic Author
michaelotal
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Re: Spain and Roth IRAs

Post by michaelotal »

Spirit Rider wrote: Thu Jun 06, 2019 8:21 am
michaelotal wrote: Thu Jun 06, 2019 2:40 am Just made some contributions to my and my wife's solo roth 401ks at TD Ameritrade. In the confirmation message, they advise that they are reporting the transaction and the amount to the IRS. These messages can be printed and / or downloaded, and save to file. I also keep a spreadsheet to track eligible versus actual contributions.
Are you sure the message didn't say they are NOT reporting. Otherwise, I have no idea why TD Ameritrade would say this. It is not correct.

There is NO 401k reporting of contributions by a 401k record keeper. There is not even a form for such a report. They are not even reported on Form 5500-EZ by the one-participant 401k administrator until the year end balance is > $250K.

However, it is the responsibility of the plan administrator to retain records. You should definitely download and/or keep your own records.

The only reporting by a 401k record keeper is Form 1099-R for distributions and rollovers.
The TD Ameritrade message says:

"Thank you for your recent request to transfer cash to your TD Ameritrade retirement account. We are pleased to let you know that we completed a cash transfer of $nnnn.nn from [BROKERAGE ACCOUNT NAME] & account ending in **** to [SOLO ROTH 401K ACCOUNT NAME] account ending in **** on Jun 05, 2019. We have reported this to the Internal Revenue Service (IRS) as a ." (sic)

I have experiened a number of errors by TD Ameritrade and these claims of reports to the IRS could well ey another one; indeed the absence of any word after the last "a" suggests they may be reusing a template message but with no data item populating the message's last data field.

Either way, with the contribution confirmations being downloaded and saved, there is an audit trail if one is ever needed.
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michaelotal
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Re: Spain and Roth IRAs

Post by michaelotal »

wineandplaya wrote: Thu Jun 06, 2019 5:50 pm
arka wrote: Thu Jun 06, 2019 8:55 am I'm in a similar situation. My current thinking after retirement is to establish residence in the US for a fiscal year where I'd take all the distributions needed for the next few years and move them to a taxable account.
If the money is in a ROTH 401k, would it not make sense to roll over all the money to a ROTH IRA while still in the US? That way, you won't pay Spanish taxes on earnings happening from now until you move, only after the move. My understanding is that earning dollars in a ROTH 401k will rollover to conversion dollars in a ROTH IRA. I suspect that Hacienda would want to tax the ROTH IRA earning dollars, but you should be able to make a case that they shouldn't tax dollars that originated from a ROTH 401k-to-ROTH IRA rollover. Thoughts?
As the Hacienda does not seem to recognise Roth 401k accounts, then they could make the case that the growth / reinvested dividends should have been taxable in contrast to the contributions which were made after taxation where a clearer case can be made that they should not be taxed twice.
wineandplaya
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Re: Spain and Roth IRAs

Post by wineandplaya »

michaelotal wrote: Fri Jun 07, 2019 4:04 am As the Hacienda does not seem to recognise Roth 401k accounts, then they could make the case that the growth / reinvested dividends should have been taxable in contrast to the contributions which were made after taxation where a clearer case can be made that they should not be taxed twice.
OK, so the best bet might be to cash out the ROTH 401k while still tax resident in the US and move the money to a taxable account. It make more sense to do it with a ROTH 401k than a ROTH IRA since (1) age limit is 55, not 59.5 and (2) for a ROTH IRA, the order of withdrawals means that you'll be withdrawing (in Spain tax-free) contributions instead of (in Spain taxable) earnings. Furthermore, it makes even more sense to do it with an "old" ROTH 401k plan - say one that hasn't seen any contributions for 15-20 years - since an older ROTH 401k will consist mostly of earnings. Correctly understood?
Topic Author
michaelotal
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Re: Spain and Roth IRAs

Post by michaelotal »

Sounds like a good plan!
international001
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Re: Spain and Roth IRAs

Post by international001 »

Yes.. that's what I would do if you are still US resident after 59.
Of course, if you may leave some $$ to your heirs it may be better to do it via Roth, so this changes things

Still, for practical matters I'm still not sure how US retirees in Spain are actually doing nowadays. Fortunately or unfortunately, there are many grey areas in international law where tax authorities don't have the means nor the interest to look at.
Guybrush
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Re: Spain and Roth IRAs

Post by Guybrush »

I have just found this thread but for what it is worth, I'd like to contribute with some of my previous research. Two years ago over email, and last year during a conference, I asked about Roth IRAs to the Counselor of Finance of the Embassy of Spain in Washington. Even if the response doesn't make sense from a legal perspective, in both cases she stated that Roth accounts would be taxed on both the principal and the earnings. My recommendation is to withdrawal after-tax contributions from both Roth 401(k) and Roth IRA before leaving the country. This is part of her written response:
En el impuesto sobre la renta de las personas físicas las rentas por pensiones se consideran rendimientos del trabajo y tributan tanto por la parte de ahorro como por la rentabilidad del mismo, es decir capital e intereses.
No importa cuál fue el régimen fiscal de la aportación.
Por lo tanto es desaconsejable un plan de pensiones tipo Roth IRA y son mejores desde el punto de vista de su caso el Traditional IRA o similar.
international001
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Re: Spain and Roth IRAs

Post by international001 »

Thanks,

Did she mention any Law or Hacienda note about this rule?
How are they supposed to be declared (in model 720)? From the link I sent (http://jullastres.es/wordpress/?p=764&cpage=1) somebody says that it should be declared as an insurance.
abooding
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Re: Spain and Roth IRAs

Post by abooding »

I understood that pension plans, i.e. IRAs, are not included on the 720.
international001
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Re: Spain and Roth IRAs

Post by international001 »

Look about this Spanish post about Roths

http://jullastres.es/wordpress/?p=764&cpage=1

Still not clear.

If you need to decide, please consult somebody. That guy in the blog is well respected, so he may have recent updates

Post if you figure it out.
Topic Author
michaelotal
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Re: Spain and Roth IRAs

Post by michaelotal »

FWIW, my research indicated that Roth IRAs and solo Roth 401ks need to be declared on the modelo 720 but not included in the modelo 130 wealth tax, though distributions -- when taken in the future -- are to be included in the modelo 100 income tax.
international001
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Re: Spain and Roth IRAs

Post by international001 »

michaelotal wrote: Mon Dec 21, 2020 2:01 am FWIW, my research indicated that Roth IRAs and solo Roth 401ks need to be declared on the modelo 720 but not included in the modelo 130 wealth tax, though distributions -- when taken in the future -- are to be included in the modelo 100 income tax.
Do you have any references?
So you say you have to pay on distributions both for the contributions you made and for the earnings?

Modelo 130 I understand is to declare work income, no? Why could it have been included?
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michaelotal
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Re: Spain and Roth IRAs

Post by michaelotal »

international001 wrote: Mon Dec 21, 2020 11:07 am
michaelotal wrote: Mon Dec 21, 2020 2:01 am FWIW, my research indicated that Roth IRAs and solo Roth 401ks need to be declared on the modelo 720 but not included in the modelo 130 wealth tax, though distributions -- when taken in the future -- are to be included in the modelo 100 income tax.
Do you have any references?
In addition to the http://jullastres.es/wordpress/?p=763 page cited above, another I reviewed a few years back was http://lostinsantcugat.blogspot.com/201 ... 1k-in.html. I queried the positions expressed with my gestor at the time and also a Barcelona-resident US financial advisor, and they were in agreement. I recognise this is opinion and hearsay, however my understanding at that time was that there isn’t a chapter and verse position for this particular point on an official government website, and there wasn’t likely to be one soon without a legal case leading to a judicial decision to clarify la normativa.

There is some official explanation on what should be declared in the modelo 720 on the following FAQs document link, however it relates to foreign “plan de pensiones”, and Roth IRAs and and Roth 401ks are not formally recognised by Spain as such:

https://www.agenciatributaria.es/static ... uentes.pdf
international001 wrote: Mon Dec 21, 2020 11:07 am So you say you have to pay on distributions both for the contributions you made and for the earnings?
This is how it was explained to me, and it follows on from Spain’s lack of formal recognition of Roth IRAs and Roth 401ks. If distributions are being received and they are coming from accounts which hadn’t been included in the Patrimonio declaration, then -- to the Hacienda’s presumed logic -- they must be income. Obviously there is a case that could be argued that the original contributions -- though not any subsequent capital gains and reinvested dividends / interest -- had already been taxed and so shouldn’t be taxed again, however I’m not aware that such a case has been argued and adjudicated.
international001 wrote: Mon Dec 21, 2020 11:07 am Modelo 130 I understand is to declare work income, no? Why could it have been included?
Sorry, I mistyped -- I meant the modelo 714 declaración de patrimonio.
international001
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Re: Spain and Roth IRAs

Post by international001 »

I also had checked that blog.. it seems that since there is so little information everybody tries to read into the same ;-)

You think there is no formal recognition of roth-IRA but there is of a trad-IRA? Any wording someplace that would imply that?
(Article II. Par 1 in https://www.treasury.gov/resource-cente ... 9-2014.pdf ?)


I'm reading the section 34 on the document you send. I don't follow the wording completely and I guess it applies only to tradIRA/pre-tax-401k, but it seems to me that as soon as you get a distribution from the plan, then it should count for declaración de patrimonio (wealth declaration). It seems absurd, but the whole thing is already absurd, so I am not sure.
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michaelotal
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Re: Spain and Roth IRAs

Post by michaelotal »

international001 wrote: Tue Dec 22, 2020 10:10 am I also had checked that blog.. it seems that since there is so little information everybody tries to read into the same ;-)

You think there is no formal recognition of roth-IRA but there is of a trad-IRA? Any wording someplace that would imply that?
(Article II. Par 1 in https://www.treasury.gov/resource-cente ... 9-2014.pdf ?)
Thanks for sharing this Treasury document. I see that in the Article 2 paragraph 1 subparagraph 3a list as well as specific mentions of “a Code section 401(k) plan” and “an individual retirement account”, it also mentions “a Roth individual retirement account”, but not a Roth 401k plan, which I think is covered under Code section 402.

So that is some formal recognition of a Roth entity as ‘plan de pension’ and the subparagraph makes clear that it is a non-exhaustive list, so it may be tempting to believe that a Roth 401k could arguably also be covered.

And yet question 33 of the AEAT FAQ document states:

Pregunta: En el caso de que se lleve a cabo el rescate del plan de pensiones ¿debe informarse sobre la renta que se obtenga?
Respuesta: Si, cualquiera que sea la modalidad del rescate si como consecuencia de ser ejercitado se obtiene una renta debe informarse de la misma.

This unequivocal language would seem to relate to any kind of distribution from an IRA / 401k, traditional or Roth.

Having said that, some of the recent Q&A (Jan 7 to Feb 3 2020) on http://jullastres.es/wordpress/?p=764 make the following references:

"...dado que lo que tributará en España es la diferencia entre lo rescatado y lo aportado."
"...corresponde a beneficio del plan de ahorro (beneficio= diferencia entre capital rescatado y capital aportado)"

However, I don't know where specifically in Spanish tax law such a distinction is documented and so haven't been able to try check its applicability to contributions to versus distributions from Roth IRAs/401ks.
international001 wrote: Tue Dec 22, 2020 10:10 am
I'm reading the section 34 on the document you send. I don't follow the wording completely and I guess it applies only to tradIRA/pre-tax-401k, but it seems to me that as soon as you get a distribution from the plan, then it should count for declaración de patrimonio (wealth declaration). It seems absurd, but the whole thing is already absurd, so I am not sure.
As section 34 of the AEAT FAQ document I shared is very short, I’m guessing you meant section 32. Yes, I agree the language isn’t so clear, however it reads to me that, for the entity categorised as a plan de pension (e.g. and IRA or 401ks), once there has been a shift from contributions to distributions, then it should be reported as an overseas asset and be included in one's Patrimonio declaration. To put it another way, whatever (Roth) 401ks and IRAs may be in the eyes of the Hacienda, Articles 12 to 17 of the Ley Impuesto Patrimonio seem to be quite inclusive:

https://www.agenciatributaria.es/AEAT.i ... bruto.html

In this regard, the Barcelona-based US financial advisor suggested it may be useful to change one’s primary residence from Spain to another country at least for a period to put certain things in order after the 59.5 years earliest withdrawal age.
international001
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Re: Spain and Roth IRAs

Post by international001 »

That document also specifies
defines the term “pension fund”. Clause 1(j)(i) provides that in the
case of Spain, the term means any scheme, fund, mutual benefit institution or other entity
established in Spain that satisfies two criteria. (...)
Second, contributions to the pension fund must be deductible from the taxable base of
personal taxes.
So this doesn't seem to apply to Roth, no? So I'm not sure wether there is a contradiction there.

I understand 401k roth is part of 401(a) : https://www.investopedia.com/terms/1/40 ... 20schedule.
A 401(a) plan can have mandatory or voluntary contributions, and the employer decides if contributions are made on an after-tax or pre-tax basis.


I also had seen that blog post, but it doesn't seem related to Roths. IT talks about some Swiss account, but it doesn't consider them pension plans. It talks about RRSP, that seem related to tradIRA. I'm surprised the author says that perhaps you could tax distributions as capital gains (what would be great).


YEs, I meant section 32. So you make one day a $1 distribution and then you have to include $1M in your wealth tax. What about if you did a conversion and you paid taxes? Doesn't make much sense.

Article 12 doesn't mention seems to mention pension plans. Article 17 talks about periodic payments. This would seem to include for your US SS payments or an annuity than a IRA or ROth IRA distribution. Didn't you mention that pension plans were exclueded from wealth tax (impuesto de patrimonio)?


Your FA is right and it seems what makes sense. Just get back to US for one year, withdraw all your Roths and get back. That's why the whole thing is so absurd. Did he mention what people is actually doing? Anybody did a Roth distribution and the AEAT came after them? Do they even have a way of knowing? Taxes expire after 4 years, so it may be worth taking the risk while there is no clear legal clarity.
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michaelotal
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Re: Spain and Roth IRAs

Post by michaelotal »

international001 wrote: Wed Dec 23, 2020 11:18 am That document also specifies
defines the term “pension fund”. Clause 1(j)(i) provides that in the
case of Spain, the term means any scheme, fund, mutual benefit institution or other entity
established in Spain that satisfies two criteria. (...)
Second, contributions to the pension fund must be deductible from the taxable base of
personal taxes.
So this doesn't seem to apply to Roth, no? So I'm not sure wether there is a contradiction there.
This section says “any entity … established in Spain”, so I understand then it does not relate to Roth IRAs and 401ks as these are not established in Spain but rather in the US.
international001 wrote: Wed Dec 23, 2020 11:18 am I understand 401k roth is part of 401(a) : https://www.investopedia.com/terms/1/40 ... 20schedule.
A 401(a) plan can have mandatory or voluntary contributions, and the employer decides if contributions are made on an after-tax or pre-tax basis.
The Investopedia page you cite seems to make no reference to Roth and I interpret the text to relate to the possibility of making after-tax contributions to a regular 401k. In contrast, the Investopedia page on Roth 401ks https://www.investopedia.com/terms/r/roth401k.asp explains the section 402 provenance.
international001 wrote: Wed Dec 23, 2020 11:18 am I also had seen that blog post, but it doesn't seem related to Roths. IT talks about some Swiss account, but it doesn't consider them pension plans. It talks about RRSP, that seem related to tradIRA. I'm surprised the author says that perhaps you could tax distributions as capital gains (what would be great).
The instances discussed do relate to Swiss and Canadian products, however the question raised in my mind is whether the references are to a more general principle in Spain that what is taxed is the difference between the contributions and the distributions, so as to avoid double-taxation. I don’t have the answer to this now, but will need to find it sometime in the next 10 years or so.
international001 wrote: Wed Dec 23, 2020 11:18 am YEs, I meant section 32. So you make one day a $1 distribution and then you have to include $1M in your wealth tax. What about if you did a conversion and you paid taxes? Doesn't make much sense.
Unpalatable as it may be, there is a logic at work here. Spain -- and some of its communities more than others -- seeks to have a more progressive, redistributive taxation scheme than the US. Wealth tax is a tool to that end, and if an individual has a $1m asset, then the Hacienda concludes s/he can and should pay wealth tax, whatever distributions s/he is taking. I don’t know about the impact of making a conversion if taxes are paid, particularly paid in Spain. If the principle mentioned above of no double-taxation mentioned above is true, then this may be possible.
international001 wrote: Wed Dec 23, 2020 11:18 am Article 12 doesn't mention seems to mention pension plans. Article 17 talks about periodic payments. This would seem to include for your US SS payments or an annuity than a IRA or ROth IRA distribution. Didn't you mention that pension plans were exclueded from wealth tax (impuesto de patrimonio)?
Just to be clear, I meant Articles 12 to 17 (i.e. including 13,14,15 and 16). And while none of them explicitly reference entities that clearly relate to Roths, taken together the language does seem to indicate that the Hacienda is trying to cover all the bases. I can’t believe that they would be agreeable to the capital gains and dividends / interest in Roth accounts being tax free forever. And as jullastres.es remarks: “Si preguntas a Hacienda, en caso de duda siempre intentará tirar por la interpretación mas rentable para Hacienda.”
international001 wrote: Wed Dec 23, 2020 11:18 am Your FA is right and it seems what makes sense. Just get back to US for one year, withdraw all your Roths and get back. That's why the whole thing is so absurd. Did he mention what people is actually doing? Anybody did a Roth distribution and the AEAT came after them? Do they even have a way of knowing? Taxes expire after 4 years, so it may be worth taking the risk while there is no clear legal clarity.
The FA I spoke with didn’t go into the history of any particular individuals. I am not sure if the AEAT would have any way of knowing currently, particularly if they haven’t been declared in m720s. I don’t have the reference to hand, however I read not so long ago that while the US requires European banks to share information with the US via FACTA, it doesn’t require the US banks to share information with the EU. That could change obviously, and personally I’m rather risk-averse on those types of things. Closer to the time, one possibly relevant factor that I will need to understand better in this context is: https://www.blevinsfranks.com/news/blev ... n-exit-tax
international001
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Re: Spain and Roth IRAs

Post by international001 »

I think you are right. For US entities, a Roth IRA would qualify as a pension plan. I guess by treaty the remuneration is taxed in Spain, but I wonder how
(a) pensions and other similar remuneration derived and beneficially owned by a
resident of a Contracting State in consideration of past employment shall be taxable only in that
State; and
I think those Swiss and Canadian products seem more like a tradIRA, so I would expect them to be taxed at your normal tax rate. Still don't understand
why savings rate was considered in the post

You can (even if you should not) tax whatever you want. But you should make somehow rules not capricious. Starting taxing all your wealth because of some minor triggers probably you were not likely to anticipate (imagine a $1 backdoor conversion 20 years ago when you are still in US) is not well thought of. That's often the case with lawmakers. They don't know what the heck they are regulating and they have to amend the rules on the go.

What I can't believe either is that they try to tax something that can be easily avoided (my moving to US for 184 days on a given year)

TedSwippet mentioned in some banks that there is some level of (imperfect) communication from US banks to Europe, if I understood right. But I cannot imagine being asked that $1 backdoor conversion.

I have heard about the Spanish exit tax, but never thought it would apply to pension funds. So if you go US -> Spain with $2M in Roth/trad IRA, and then you go Spain ->US with $3M Roth/tradIRA, even if you never had a distribution, you could have to pay taxes on $1M. Because there is treaty US-Spain, you can pay them 5 years later after you returned to US. But if you never come back to Spain, how can they enforce it?
international001
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Re: Spain and Roth IRAs

Post by international001 »

michaelotal wrote: Thu Dec 24, 2020 8:48 am

The Investopedia page you cite seems to make no reference to Roth and I interpret the text to relate to the possibility of making after-tax contributions to a regular 401k. In contrast, the Investopedia page on Roth 401ks https://www.investopedia.com/terms/r/roth401k.asp explains the section 402 provenance.
Cannot figure out by myself. Perhaps 401k Roth belongs both to 401a and 402
Regardless, you can always rollover 401k Roth to Roth Ira, no? So why would that be a real problem?
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