Spain and Roth IRAs

For residents of Spain.
Wishful Thinking
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Joined: Tue Feb 22, 2022 6:32 pm

Re: Spain and Roth IRAs

Post by Wishful Thinking »

Thanks for the response. Could you please elaborate a bit on "registration issues"? All of our retirement funds (IRA/401k/403b) are currently held in either Vanguard or Fidelity mutual funds. Sure, they could be moved to ETFs without US tax consequences but it's still not clear to me why that may be necessary.

Dumb question: how do we "get rid of" our 529s? The children, by the way, will be attending university in the US. Thanks again.
international001
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Joined: Thu Feb 15, 2018 6:31 pm

Re: Spain and Roth IRAs

Post by international001 »

Don't quote me on that, but from what I gather the structure of a mutual fund is that the mutual fund needs to know who are the owners. So it may be a legal problem if the owner is an expat.

If your kids are in a US college, perhaps you can use in advance your 529? Not sure, but that would be a pure US question, so I would open another thread on that. You can always ask a Spanish tax advisor if there are really any consequences for holding/distributing the 529, but I wouldn't hold my hopes you'll find somebody knowledgeable. Most likely the will make a 'consulta vinculante' with Hacienda. You can give also Hacienda a call. You never know.
wineandplaya
Posts: 306
Joined: Fri Sep 14, 2018 9:42 am

Re: Spain and Roth IRAs

Post by wineandplaya »

Wishful Thinking,
For 529, can you not change ownership to your kids before you move to Spain? I don't know if there are any tax consequences of keeping them as a Spanish resident. Personally, I'd like to simplify things as much as possible before moving. If you're living in New Zealand now, you should make sure that you understand any New Zealand tax consequences of doing anything before moving however.
Wishful Thinking
Posts: 3
Joined: Tue Feb 22, 2022 6:32 pm

Re: Spain and Roth IRAs

Post by Wishful Thinking »

wineandplaya wrote: Fri Feb 25, 2022 8:44 am If you're living in New Zealand now, you should make sure that you understand any New Zealand tax consequences of doing anything before moving however.
That is gold. It is very easy to jump from the fire into the frying pan...
WhiteMaxima
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Joined: Thu May 19, 2016 5:04 pm

Re: Spain and Roth IRAs

Post by WhiteMaxima »

Barcelonasteve wrote: Tue Mar 09, 2021 6:37 pm
wishin&hopin wrote: Wed Feb 10, 2021 6:01 pm In the same boat, more or less. (I sent you a PM, octorindo.)

If I understand all this correctly, Spain's tax framework entirely negates the benefits of my U.S. retirement accounts: The Roth gains are taxed and original investments are double taxed when withdrawn, and the traditional 401k/IRA withdrawals are taxed at a much higher rate than when I did my pre-tax contributions.

My current strategy is this. Let me know if you see anything I'm missing:

--Move to Spain late in the year, thus not becoming a tax resident until 2022.
--Sell my U.S. house before moving to avoid having the gains taxed by Spain.
--Empty out my Roth IRA (as much as it pains me) before moving and put the funds into taxable brokerage account and/or a savings account.
--Live off my cash savings without withdrawing from my traditional 401k/IRA or taxable brokerage account (since Spain's capital gains tax is also much higher).
--Reevaluate my situation in about 10 years before SS (at 70) and RMDs (at 72) kick in. SS and RMDs will push me into Spain's 45% tax bracket (versus 24% in the U.S.).

I'll be living in Madrid, so the wealth tax won't apply -- that's one good thing. The exit tax shouldn't affect me either, unless Spain doesn't adjust the taxation thresholds at all in the next 10 years.

As much as I want to move to Spain permanently and understand that involves paying more in taxes, I'm still taken aback when I look at the numbers and wonder if I'm making the right decision. The only way I can somewhat rationalize it is by factoring in quality of life improvements and the few areas where I'll be saving money (e.g., by no longer having a car).

I'm on the hunt for a tax attorney who will provide me with some strategies for optimizing my situation before and after becoming a tax resident of Spain. My sense, though, is that it's a vain hope and the above strategy is as good as it gets. I'd love to be proven wrong.
Wishin&hopin:

I read this and wanted to say good for you for deciding to tough it out to live your dream. DW and I had Spain in our sights, but abandoned the plan because (a) it looked liked taxes on our modest retirement income would be substantial and we didn't want to make that sacrifice, so we changed our destination to France (no tax on U.S. retirement income); and (b) even making good faith efforts at complying with Spain's tax system ran the risk of getting things wrong and triggering what I've read could be heavy penalties (and if there are years of errors, the result might be ruinous).

Just for giggles, I'll share a couple of "solutions" I came across on an expat forum:

One U.S. expat who retired in Spain had a tax professional in his Spanish town where he lives year round tell him to obtain a certification of tax residency from the U.S. each year, which is then used to avoid Spanish taxes on his U.S. retirement income because he's a U.S. tax resident. :shock: The expat seemed like a real nice person who was trusting professional advice and I hope it works out for him.

Another U.S. expat was advised by U.S. bankers to create a U.S. trust that would be a U.S. tax resident. His U.S. retirement income is then deposited into a bank account that is in the trust's name. Because the trust doesn't reside in Spain, it isn't subject to Spanish taxes. He then transfers the money from the account in the trust's name to an account in his name and uses it to live in Spain where he resides. Because it's not retirement income at that point, he doesn't pay Spanish taxes on it. :shock: The expat also seemed like a good guy and he mentioned they had run the scheme by a Spanish government official, who gave his approval.

Finally, a would-be U.S. expat to Spain gave up on finding the mythical "qualified tax advisor" everybody tells you to consult and, like me, was too concerned about getting hammered with penalties if he got things wrong. Ok, so maybe not mythical because such experts exist, but they are not providing services to people at average income levels.
Did you look at Portugal NRH tax scheme? How does Frecnch treat US 401k and Roth withdraw?
Barcelonasteve
Posts: 65
Joined: Tue Oct 22, 2019 10:50 am

Re: Spain and Roth IRAs

Post by Barcelonasteve »

WhiteMaxima wrote: Mon May 23, 2022 2:34 pm Did you look at Portugal NRH tax scheme? How does Frecnch treat US 401k and Roth withdraw?
Yes, I did. France imposes no tax on US retirement income (more accurately, it provides a credit equal to 100% of the tax, so retirement income can still push up your tax bracket on other income), so it beats the 10% NHR scheme, which lasts for ten years only, hands down. In France, you won’t pay a dime if you withdraw your entire 401k in a day (Uncle Sam might have his hand out, though). Same for US social security benefits. But, Portugal generally has a substantially lower cost of living, except that Lisbon prices are pretty high these days from what I can see. So, there’s that.

I ended up moving to Spain. France was too cold for my wife’s liking. As it turns out, I was reading the US-Spain tax treaty wrong. Since the bulk of our income is from government employment pensions, there’s no tax to pay on it in Spain. (Private retirement income would be taxed.) Also, in the last few months, the frightening, punitive fines for misreporting foreign assets to the Spanish tax authority were struck down by an EU court, so that’s less of a worry. Now, I just have to fret about inflation in Spain and the dollar-euro exchange rate.
international001
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Joined: Thu Feb 15, 2018 6:31 pm

Re: Spain and Roth IRAs

Post by international001 »

Glad it worked out for you!. I didn't realize this was such and old post.
At the end, not everything is taxes. Spain has better climate and you'll also find your money can buy you more.
Please, keep posting if you get any other insights.

Some Qs I have:
- Do you also have pre-tax 401k income? IF it's taxed in Spain and it's small, I would expect it to be fully refunded by US
- Do you also get SS? How is it taxed?
- And did you figure out about the opening question? ROth IRA?
Barcelonasteve
Posts: 65
Joined: Tue Oct 22, 2019 10:50 am

Re: Spain and Roth IRAs

Post by Barcelonasteve »

international001 wrote: Fri May 27, 2022 6:27 pm Glad it worked out for you!. I didn't realize this was such and old post.
At the end, not everything is taxes. Spain has better climate and you'll also find your money can buy you more.
Please, keep posting if you get any other insights.

Some Qs I have:
- Do you also have pre-tax 401k income? IF it's taxed in Spain and it's small, I would expect it to be fully refunded by US
- Do you also get SS? How is it taxed?
- And did you figure out about the opening question? ROth IRA?
International:

I had to refresh my recollection on what started this thread. I have only a little information to add that might be helpful:

I have no idea whether Spain would allow a deduction from taxes owed for Roth IRA contributions. As far as Roth accounts being included in the wealth tax, the consensus seems to be that they are, but I haven’t spent much time on the issue because it’s unlikely that we’ll be subject to the wealth tax or, if we are, that we’d have to pay much.

While we have pre-tax retirement accounts, but rolled over what there was in 401k accounts before we became tax residents in Spain. We aren’t taking distributions as of yet. I had hoped to put off distributions for somewhere between 5 and 10 years, but we’ll see with high inflation. About half is in a 457 funded with pay from government employment and is pre-tax. It’s unclear whether (a) this account will be deemed a pension under Spanish law because there is no bar to withdrawing from it now that I’ve separated from the employer; if not, it’ll count toward the wealth tax, or (b) whether distributions will be taxed by Spain given the money is from government employment and so, like my government pension, might not be taxed by Spain. I think 457s are lumped in with other retirement accounts in the protocol, so I am hoping that they are deemed pensions despite the fact that there is no age requirement for withdrawals. For distributions from retirement accounts that are subject to taxation in Spain, it’s very clear the US would give a credit up to the amount owed to the US.

We aren’t close to collecting SS, but what I have learned is that SS benefits will be taxed by Spain except for any portion attributable to government employment. I caught onto to this exception while watching a YouTube video by htj.tax when it was briefly mentioned that a retired US federal employee wasn’t subject to Spanish taxes on his pension or SS benefits. I subsequently confirmed this through a consult with a tax professional here, who said they use spreadsheets to work out what portion of SS benefits are taxed by Spain.

A question that has been on my mind is whether Spain would tax a Roth conversion. It’s a distribution, but under the treaty, retirement funds are taxed by Spain on withdrawal, but not movement from one retirement account to another. I’d entertain converting in anticipation of a time when we might move back to the US, but wouldn’t want to if we’d have to pay the heftier Spain tax rate. Like France, Spain factors in income that isn’t taxed in deterring tax brackets for income that is taxed, so while we’re in the clear when it comes to pension income, taxes on other income would be steep compared to the US.

I’m also trying to figure out whether a Roth withdrawal could be resourced as foreign income under the treaty so as to get a foreign tax credit against, say, taxes we pay the US on our pensions. I don’t know if it’s kosher to throw all such income into the same bucket for foreign tax purposes or whether the credit is tied to the specific dollars being taxed by Spain.
international001
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Joined: Thu Feb 15, 2018 6:31 pm

Re: Spain and Roth IRAs

Post by international001 »

I thought resource would try to eliminate just the taxes for *that income* (i.e. the income you were taxed in Spain), so no buckets. But I have never done it.

You mean some income is not taxed in Spain but can increase your brackets? Can you develop on that?

For Roth conversions, follow this thread: viewtopic.php?t=361354

Did you use a Spanish tax advisor you can recommend?
Barcelonasteve
Posts: 65
Joined: Tue Oct 22, 2019 10:50 am

Re: Spain and Roth IRAs

Post by Barcelonasteve »

international001 wrote: Wed Jun 01, 2022 4:52 pm I thought resource would try to eliminate just the taxes for *that income* (i.e. the income you were taxed in Spain), so no buckets. But I have never done it.

You mean some income is not taxed in Spain but can increase your brackets? Can you develop on that?

For Roth conversions, follow this thread: viewtopic.php?t=361354

Did you use a Spanish tax advisor you can recommend?
International,

Thanks for the link to the thread regarding Spain and Roths. I read it before and skimmed it again, but don’t feel there’s a definitive answer to be found there (with respect to tax on conversions or foreign tax credits). Maybe I’ll read through it again and take notes.

US income that is not taxed in Spain under the treaty pushes up the bracket for income that is taxed in Spain. This is touched on in this article https://htj.tax/2020/10/tax-residents-i ... om-the-us/ in the discussion of US government pensions being untaxed by Spain. This is true of France as well, according to what I’ve read, so it wasn’t surprising to me.

For my tax consult I spoke with Axel Sanz at Expats Adviser here in Barcelona. He was efficient and I had confidence in his answers, which I sought more to confirm my own conclusions than anything else. I also hired his firm to take care of some bureaucratic matters and was happy with the result. When I asked him whether he was very familiar with US retirement accounts, he answered that he was not, so his may not be the best firm for someone looking for advice involving complicated US financial situations. I am guessing he and his partner, who is British, cater more to British expats.

You might give htj.tax a look, read articles on the web site and watch some of the videos, and see whether it’d would be worth contacting them. Derren Joseph, the US tax expert in the outfit, is clearly very sharp. There’s a December 2021 video on US-Spain tax issues that is worth looking at both for information and to see what you think of the Spain tax guy.
Juliomont85
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Location: Madrid
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Re: Spain and Roth IRAs

Post by Juliomont85 »

Regarding the options available for Expats in terms of pension tax benefits you might consider PIAS as a good option. Specially for those looking for an exposure to global indices and tax relief it might be an option to consider. In any case the spanish government limits it to 8000 euros per year so it is a just another plan B
wineandplaya
Posts: 306
Joined: Fri Sep 14, 2018 9:42 am

Re: Spain and Roth IRAs

Post by wineandplaya »

Juliomont85 wrote: Mon Sep 26, 2022 11:18 am Regarding the options available for Expats in terms of pension tax benefits you might consider PIAS as a good option. Specially for those looking for an exposure to global indices and tax relief it might be an option to consider. In any case the spanish government limits it to 8000 euros per year so it is a just another plan B
My understanding is that plans like these are not really alternatives to Roth IRAs. The reason people are interested in Roth is that they move to Spain with significant assets in these type of accounts. If you already live in Spain, contributing to a Roth probably only make sense if you plan to move away from Spain in the future.
If you already live in Spain, and work there, something like PIAS (I don't know the details of how they work) might make sense if (1) the expense ratios are reasonable and (2) they allow US expats to participate.
international001
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Joined: Thu Feb 15, 2018 6:31 pm

Re: Spain and Roth IRAs

Post by international001 »

Juliomont85 wrote: Mon Sep 26, 2022 11:18 am Regarding the options available for Expats in terms of pension tax benefits you might consider PIAS as a good option. Specially for those looking for an exposure to global indices and tax relief it might be an option to consider. In any case the spanish government limits it to 8000 euros per year so it is a just another plan B
I would be helpful with PIAS. It seems you contribute after-tax (Roth), but you withdraw *partially* by paying taxes (trad IRA). So it may be the worst of all worlds depending of the *partially*. It seems they are taxed as capital gains, but stil.

Some numbers here https://valueschool.es/el-pias-y-las-3-mentiras/

Also, I am not sure they are tax protected from being taxed in US . It would not seem so since you can rescue them. So perhaps they are taxed as a PFIC.
international001
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Joined: Thu Feb 15, 2018 6:31 pm

Re: Spain and Roth IRAs

Post by international001 »

Barcelonasteve wrote: Fri Jun 03, 2022 3:12 am

US income that is not taxed in Spain under the treaty pushes up the bracket for income that is taxed in Spain. This is touched on in this article https://htj.tax/2020/10/tax-residents-i ... om-the-us/ in the discussion of US government pensions being untaxed by Spain. This is true of France as well, according to what I’ve read, so it wasn’t surprising to me.

Thx, I read that interesting article. So I guess you meant the use of *progressively* on this paragraph:
• Public pension (article 21.2 CDI): a public pension is understood to be one that is received by reason of a previous public employment; that is, the one received by reason for services rendered to a State, to one of its political subdivisions or to a local entity, for example, the pension received by an official. Its treatment is:

1. In general, public pensions will only be taxed in the United States.
In Spain they would be exempt, although exemption would be applied progressively. This means that if the taxpayer were obliged to file a return for obtaining other income, the amount of the exempt pension would be taken into account to calculate the tax applicable to the remaining income.
2. However, if the beneficiary of the public pension resident in Spain had
Spanish nationality, the aforementioned pensions would only pay tax in Spain.

• Private pension (article 20 CDI): private pension means any other type of pension received by reason of a previous private job, as opposed to that has been identified as public employment, for example, the pension received from the social security by a private sector worker. Its treatment is:

1. In general, private pensions will only be taxed in Spain.
2. However, payments made under the Social Security regime of United States, a resident of Spain or a citizen of the United States, may also be taxed in the United States, in which case the resident taxpayer would have the right to apply in Spain for personal income tax deduction for international double taxation, stating that the income has been subject to tax in the United States based on criteria other than that of citizenship.
So I guess this is not really mentioned in the treaty. But when a the treaty says 'not taxed on that country', that country typically just forces the law and pushes the bracket (e.g. Spain on public pensions, France on all pensions). My Q:

- Is this a strategy done by all countries, even US?
- At what brackets you get the credits? Imagine 2 brackets: 10% till $10k and 20% afterwards If you make $1k of Spanish income and $10k of public US pension, you pay $200 in US taxes?
- For SS, I guess you would pay what you have to pay in US (lower taxes), and take a credit against Spanish taxes, right?
- From the article, I read " apply in Spain for personal income tax deduction". Is this really an income deduction or a tax credit? Deduction would suck, but not sure if naming is different for Spanish taxes
wineandplaya
Posts: 306
Joined: Fri Sep 14, 2018 9:42 am

Re: Spain and Roth IRAs

Post by wineandplaya »

A "Spain Guru" blog post (not sure how authoritative, but does link to some tax professionals) claims that Roth IRAs are treated as follows
  • The yields, interest, dividends, profits, or other comparable income received from the investments within the Roth IRA account will be subject to Spanish income tax (impuesto sobre la renta). often up to 26% on a progressive scale.
  • The informative 720 form would also need a declaration of the account’s investment value. Any changes in value or sales of assets must be recorded annually. The value will be taken as of December 31 of the applicable tax year.
  • The investments will also be subject to Spanish wealth tax based on their value as of December 31. (Impuesto sobre el Patrimonio). Depending on the Spanish autonomous community, the rate of this wealth tax varies considerably.
  • The General Directorate of Foreign Trade (Dirección General de Comercio Exterior) or the Bank of Spain (Banco de España) may require reporting for informative purposes.
Cf. https://spainguru.es/2023/01/13/taxatio ... ira-spain/

In other words, the Roth IRA structure is disregarded completely and you just look at the underlying investments.
international001
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Joined: Thu Feb 15, 2018 6:31 pm

Re: Spain and Roth IRAs

Post by international001 »

Tx.

Pension plans have not to be declared on 720 or on wealth tax according to HAcienda. This would mean the meaning of 'pension plan' is different when referring to it in the US-Spain treaty (???)

So would we have to pay income on interest. Every year w/o making any distribution? Capital gains are included in profits? what is the difference between yield and income?

It's difficult to trust that info
wineandplaya
Posts: 306
Joined: Fri Sep 14, 2018 9:42 am

Re: Spain and Roth IRAs

Post by wineandplaya »

international001 wrote: Mon Jan 23, 2023 7:23 pm Pension plans have not to be declared on 720 or on wealth tax according to HAcienda. This would mean the meaning of 'pension plan' is different when referring to it in the US-Spain treaty (???)
Right, so the claim is that Roth IRAs are not pension plans:
Traditional IRAs or equivalent plans would be treated the same way, but not Roth IRAs, since these are not considered equivalent to a pension plan.
international001 wrote: Mon Jan 23, 2023 7:23 pm So would we have to pay income on interest. Every year w/o making any distribution? Capital gains are included in profits? what is the difference between yield and income?

It's difficult to trust that info
Fwiw, I believe that Norway treats Roth IRAs this way, so it's not completely unheard of.

Might make sense to reach out to whoever wrote that text and ask for clarification, especially if it contradicts the tax treaty.
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