Spain and Roth IRAs

For residents of Spain.
miguel_alm
Posts: 13
Joined: Sat Feb 27, 2021 10:05 am

Re: Spain and Roth IRAs

Post by miguel_alm »

international001 wrote: Mon Mar 08, 2021 6:52 pm
inves76 wrote: Mon Mar 08, 2021 5:23 pm Spanish tax code has a after tax pension plan called Plan Individual de Ahorro Sistematico (PIAS). It is not exactly a Roth IRA/401K, but an annuity. But at least, we can see that the spanish tax code is not limited to Plan de Pensiones pre-tax money.

https://www.rankia.com/blog/planes-de-p ... atico-pias

https://www.bbva.com/es/los-planes-indi ... 20producto.
IT looks its contributions are taxable and distributions tax only the earnings, at a discounted rate. How is that better than an accumulation fund/ETF?
In Spain, contributions and earnings of a pension plan are taxable as "rendimientos del trabajo" at the time you retrieve it
Last edited by miguel_alm on Sat Mar 13, 2021 10:43 am, edited 1 time in total.
miguel_alm
Posts: 13
Joined: Sat Feb 27, 2021 10:05 am

Re: Spain and Roth IRAs

Post by miguel_alm »

international001 wrote: Mon Mar 08, 2021 5:05 pm
miguel_alm wrote: Sat Mar 06, 2021 4:40 am
When you invest to a Spanish plan, you don't decide the specific investments inside. So, you can't change the component investments, and even you can't choose the % of the investments they select in the investments they have chosen. Therefore, you aren't the owner of the components, you are only the owner of some shares of a plan, although that shares represent a bunch of investments, decided by the managers of the plan. And, one plan is linked to some investments because they commit some type of inversions in that type of pension plan, but having shares of the plan don't represent you are owning that specific components.

But, as i have seen, usually in USA you decide the specific components, the %, and actually, you are the owner of that component investments that are inside the IRA. Further, they apply to you the legal limits of selling and re-purchasing the same stock with loss, altough it is linked to an IRA, so, it consolidates the idea that you are direct owner of the specific components behind an IRA

And my conclusion is, you don't have to declare the IRA itself, but you have to declare the specific investments made through the IRA. Something like this happens with UNIT-LINKED insurances.

(question nº 40 https://www.agenciatributaria.es/static ... uentes.pdf )

https://www.eleconomista.es/legislacion ... njero.html

13. Un residente fiscal en España es titular de un Unit-Linked gestionado en una entidad no residente. ¿Cómo se debe declarar, como un seguro o en función de los productos incluidos en cesta?

Los Unit- Linked deberán ser declarados atendiendo a la verdadera naturaleza del producto subyacente. Por tanto en caso de que el producto esté materializado en una cartera de valores deberán declararse identificando cada uno de los mismos que lo integran.


So, it's not that absurd. As unit-linked represent an ensure with specific investment components too, you have to declare the components separately instead of the unit linked, in that case

Pension plans are declared in 714, but exempt from paying the tax. But now, we can discuss if the specific investments must be declared as themselves (probably, the exemption of plans approach them too).

But, as it not a clear answer, you can defend your position and inspectors cant assure the other option, but the best position is to declare, to protect our backs. Of course, this is my opinion, and my clients are going to declare all the specific components
You can move money between different PP as I understand it. So I don't see the real difference other than the practical aspects of it.

What makes you think a Roth IRA has to be treated like a UNIT-LINKED insurance?
And what would be your guess about a traditional IRA, 401k, roth 401k, after-tax 401k?
So how would it work if I change my investments 100 times during one year?

I see many different sources of truth in this thread. It would be nice to know what people is actually doing (and Hacienda allowing).
You can change the PP to another company, but you cant decide the specific investments the new company will do. Altough they make the type of investments they announce (for example, this plan is related to IBEX35 shares, or fixed income)

Cause rules in 720 are not exactly patrimonial rules. That rules try to "lift the veil" of the control of the specific investments, because we have had lots of people (specially public autorities) who have not declare to the AEAT high quantities of money, and have brought them to foreing countrys, and the idea is to show the real conexion between residents and foreign goods and rights, not only for the owners, beneficiaries or autorized in to an account (for example) have to declare too. People who done that, sometimes are not the direct owner in the foreign country, they put figureheads or interpose entities between to guard against AEAT. But it affects all the residents, with exorbitant sanctions
It's difficult for me to explain it in english, but the mechanism behind an UNIT-LINKED is similar to your IRA investments in terms of 720 declaration.

What is more, sanctions in 720 are much higher than impuesto de patrimonio, for example, so, as law is not clear and we have no answers from AEAT, the best is to avoid the risk of not declaring something. Is so-much-better to declare when you didnt have to declare, than the opposite.

All of the IRA you have mentioned would treated the same. 720 -> specific investments behind them. IRPF -> totally tributable in Spain when you are spanish resident in the moment you retrieve it, totally or partially. Not in the moment you change your investments, cause you have not closed the IRA. In this point, you treat them like our pension plans, as the double taxation treath admits they are pension plans. Changings general investments is taxable in Spain -with some exceptions between same funds, etc-, but in the "escala del ahorro 19-23%". Consider pension plans are taxable in "escala general" 19-45%.
Last edited by miguel_alm on Sat Mar 13, 2021 10:32 am, edited 1 time in total.
miguel_alm
Posts: 13
Joined: Sat Feb 27, 2021 10:05 am

Re: Spain and Roth IRAs

Post by miguel_alm »

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.
Totally agree with highlighted

The certification is an evidence to proof you live in the EEUU, but they can prove the opposite (they can look for things like your electricity consumption at your home, your passport entrance-exit dates, your bills..... and in some cases they enter in your home "asking for permission" or with a judge order -rich people usually, and in company adresses is more common-)

The trust must be declared in 720, thats why they created the 720, to avoid this strategies.

Your last paragraph is half true. Spanish tax law is very very difficult, so there are not lot of tax advisors who can handle it really well. Thats why experts in large law firms are only dedicated to a very specific area. Think i have wasted various days studying this specific situation of IRA's and 720, for only 1 client till now. If I charge all the hours i have spent, the client probably dont accept the bill. So, many tax advisors dont study the hours they have to, and they are practical (or reckless, sometimes). But consider the other tax advisors that spend so many hours studying and making the BEST decision for the client, sometimes find the AEAT is applying the laws only to gain money, and the rest you will have to do is go and sue them in the courts. Answers to tax doubts like this usually arrive within years, if they arrive. At that point, tax advisors dont have the fault. So, thats the day to day of my work
international001
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Joined: Thu Feb 15, 2018 6:31 pm

Re: Spain and Roth IRAs

Post by international001 »

miguel_alm wrote: Sat Mar 13, 2021 9:40 am The only tax benefit is that, the part you put in the IRA before year 2007, can be reduced in a 40% that wont be taxable (because of normative changes from that time).
So you mean if you contribute $5k before 2007, $10k after 2007, and it grows to double ($30), then your taxable income will be $27.5k? If you have a link to the normative, it would be great.
miguel_alm wrote: Sat Mar 13, 2021 9:40 am It would be better to retrieve roth ira before coming to Spain.
Many in this thread are saying going back to US and spending one year in US as resident (if you can) and withdrawing it then. Do you see an objection to this plan?
miguel_alm wrote: Sat Mar 13, 2021 9:40 am The IRA will pay in Spain and in USA if you live in Spain.
You are talking about trad IRA here? It will be taxed in Spain, and then in US. But everything that you should pay in US should be credited, so that would not matter.
miguel_alm wrote: Sat Mar 13, 2021 9:40 am I'm going to make my first IRPF declaration with USA IRA's and roth IRA in May, so, in that moment i will search "consultas tributarias" and probably I find something new, but i think it would not change a lot from what I have explained in this post and i have larned till now. I will search specially something in the way to apply USA exemption related to the Roth IRA retrieval
Let us know what you find. From what I have seen, there is no final consulta saying what you should do.
And still, it's my understanding Hacienda always tries to answer on its favor. Often things have to be resolved on the courts.

Do you know if there is an effective way for Spanish Hacienda to know if you are doing a distribution on a trad/Roth IRA? Is it reported every year from US?
miguel_alm
Posts: 13
Joined: Sat Feb 27, 2021 10:05 am

Re: Spain and Roth IRAs

Post by miguel_alm »

wineandplaya wrote: Wed Mar 10, 2021 10:55 am
international001 wrote: Wed Mar 10, 2021 8:21 am I thought it was the other way.. they get complicated if you try to pay them and follow the law literally :happy
That's why I bet many people try to comply with the minimum that will get them out of trouble.
I don't see how you will get into trouble if you:
1. Include your IRA holdings in your Modelo 720, but not in wealth tax calculations.
2. Accept that you'll have to pay IRPF with marginal tax rate of 45+ % for Social Security as well as all withdrawals triggering an 1099-R, whether Roth or not, whether contribution or not.
3. Plan ahead and do tax free Roth withdrawals and any other rollovers (e.g 401(k) to IRA) while still a US tax resident.
Thats are my conclusions.
1.You are doing well avoiding 720 risks. When in doubt, its a better choice to declare than not declare them. Moreover, as i have explained, there are some reasons that can be sustained in the way of you are obligated, and inspectors could take this way too. In the other hand, they do not have reasons to reject your declaration, and, if they think you werent obligated to declarate, there is no penalization because of that (some people declares foreing GOLD, and its clear you dont have to declare it. But you dont hide nothing, and it gives the item some legal visibility for the future). The only thing is, at low probability, that they realize you are not declaring in IRPF the withdrawals as "base del ahorro", as it seems to be by the information of the 720, but is easy explanable.
2. Hard to accept, but must be accepted. I admire the ability to understand the payment of taxes of USA citizens. Spanish would insult anyone who passed by the day they know they have to pay 45%.
3. Best solution

PS: In spanish law you can retrieve the pension plan as a monthly rent, not retrieving it in one time, and if this option exists, must be considered, with the objective of not reaching the high sections of the tax rate
miguel_alm
Posts: 13
Joined: Sat Feb 27, 2021 10:05 am

Re: Spain and Roth IRAs

Post by miguel_alm »

international001 wrote: Sat Mar 13, 2021 6:44 pm
So you mean if you contribute $5k before 2007, $10k after 2007, and it grows to double ($30), then your taxable income will be $27.5k? If you have a link to the normative, it would be great.

Many in this thread are saying going back to US and spending one year in US as resident (if you can) and withdrawing it then. Do you see an objection to this plan?

You are talking about trad IRA here? It will be taxed in Spain, and then in US. But everything that you should pay in US should be credited, so that would not matter.

Let us know what you find. From what I have seen, there is no final consulta saying what you should do.
And still, it's my understanding Hacienda always tries to answer on its favor. Often things have to be resolved on the courts.

Do you know if there is an effective way for Spanish Hacienda to know if you are doing a distribution on a trad/Roth IRA? Is it reported every year from US?
***First of all, i have to ensure if this 40% pre-2007 contributions reduction applys for foreing pension plans, something i dont have searched deeply yet. (law probably make a reference to plans made by a specific spanish-law of plans, and not refer to similar foreing plans, so, if this occurs, you wont be able to apply the reduction!). But all my superficial searchs indicate it could be possible and there are some webs that confirm that ( https://www.iberley.es/practicos/caso-p ... pana-91449 ) so it seems and IRA can apply this reduction when retrieved as a capital
The posibility to reduce the 40% of the withdrawal that belongs to the contributions was eliminated in 2015, but they left a transitional regime with the proposit of not breaking consolidated rights and expectations generated by a repealed law in the time it was active

So, it is legislated in the "DISPOSICIÓN TRANSITORIA DUODECIMA"
https://www.boe.es/buscar/act.php?id=BOE-A-2006-20764
Disposición transitoria duodécima. Régimen transitorio aplicable a los planes de pensiones, de mutualidades de previsión social y de planes de previsión asegurados.
1. Para las prestaciones derivadas de contingencias acaecidas con anterioridad al 1 de enero de 2007, los beneficiarios podrán aplicar el régimen financiero y, en su caso, aplicar la reducción prevista en el artículo 17 del texto refundido de la Ley del Impuesto sobre la Renta de las Personas Físicas vigente a 31 de diciembre de 2006.

2. Para las prestaciones derivadas de contingencias acaecidas a partir del 1 de enero de 2007, por la parte correspondiente a aportaciones realizadas hasta 31 de diciembre de 2006, los beneficiarios podrán aplicar el régimen financiero y, en su caso, aplicar la reducción prevista en el artículo 17 del texto refundido de la Ley del Impuesto sobre la Renta de las Personas Físicas vigente a 31 de diciembre de 2006.

3. El límite previsto en el artículo 52.1.a) de esta Ley no será de aplicación a las cantidades aportadas con anterioridad a 1 de enero de 2007 a sistemas de previsión social y que a esta fecha se encuentren pendientes de reducción en la base imponible por insuficiencia de la misma.

4. El régimen transitorio previsto en esta disposición únicamente podrá ser de aplicación, en su caso, a las prestaciones percibidas en el ejercicio en el que acaezca la contingencia correspondiente, o en los dos ejercicios siguientes.

No obstante, en el caso de contingencias acaecidas en los ejercicios 2011 a 2014, el régimen transitorio solo podrá ser de aplicación, en su caso, a las prestaciones percibidas hasta la finalización del octavo ejercicio siguiente a aquel en el que acaeció la contingencia correspondiente. En el caso de contingencias acaecidas en los ejercicios 2010 o anteriores, el régimen transitorio solo podrá ser de aplicación, en su caso, a las prestaciones percibidas hasta el 31 de diciembre de 2018.
As this "disposición transitoria" refers to the repealed law, (tax laws always this easy), artículo 17.2.b) del texto refundido de la Ley del Impuesto sobre la Renta de las Personas Físicas, aprobado por Real Decreto Legislativo 3/2004, de 5 de marzo (vigente a 31 de diciembre de 2006), that article opened the fiscal benefit possibility
"b) El 40 por 100 de reducción en el caso de las prestaciones establecidas en el artículo 16.2.a) de
esta Ley, excluidas las previstas en el apartado 5º, que se perciban en forma de capital, siempre que
hayan transcurrido más de dos años desde la primera aportación. El plazo de dos años no resultará
exigible en el caso de prestaciones por invalidez."
The specific quantities and your specific case will be calculated by a tax advisor
Many in this thread are saying going back to US and spending one year in US as resident (if you can) and withdrawing it then. Do you see an objection to this plan?
Hacienda would not like this, because probably you moved your "interests central point" to Spain, and it remains there, for example. They could consider you maintain your residence in Spain because of that. Riskly operation, if they realize, they will try to take the money of your pocket, and you have a long litigation next it with low probability to win (specially only 1 year). The worse is that we dont know the probability they realize
You are talking about trad IRA here? It will be taxed in Spain, and then in US. But everything that you should pay in US should be credited, so that would not matter.
All IRA types would be taxable in Spain. But as i have learn from the treat, then, only trad-ira for USA citizens will be taxable in the USA too. I think in that situation, the taxation in USA would be 0, as you deduct in USA the previously tax paid in Spain and considering tax rate is higher in Spain than in USA. But only a supposition
Let us know what you find. From what I have seen, there is no final consulta saying what you should do.
And still, it's my understanding Hacienda always tries to answer on its favor. Often things have to be resolved on the courts.

Do you know if there is an effective way for Spanish Hacienda to know if you are doing a distribution on a trad/Roth IRA? Is it reported every year from US?
Ok, i will post it. You all know now more than the tipical tax advisor, specially those who are not accustomed to this products :D (as i was 3 weeks before...). Nobody is exempt of doubts, after all. Sadly, there are no "consultas" and probably we would not have in years, altough the taxpayer can propose one and it would be answered in at least, half a year, and it is vinculant for him.
They have enhanced their capability to answer consultas in time, and now, as we say "se mojan más", they are more specific answering than before, cause their way to answer was alarmingly poor some years before. The consulta exposed for the IRA, as you can see, is not very specific. Sometimes they only show you the law, and you have the same question you had previous the consulta. Brutal levels of legal insecurity, but hacienda obtains revenues from that.

Historically, AEAT were so much incapable to seek "black money" directly, so, they worked less, and earned more, seeking mistakes in the application of tax benefits, changing their interpretation, or taking advantage of doubtful situations, taking the opposite interpretation to the one you choosed. Now they have more information, they have invested lot of money in information systems/big data/informatics in general, and they have forced taxpayers to make a big % of the work for them, reporting absolutely everything. So, now they seek black money much better,and it is more difficult to avoid them catching you, cause they are continously crossing data given by us, but they continue taking advantage of the mistakes and legal doubts created by them

As i know, in this point, they dont have any information from the USA related to the distribution of the IRA. The most probable is they dont have any information related to the income, till the moment they verificate your IRPF declaration opening a procedure, if they do so: To ask you what have you declared, as they dont have direct proofs of the source compared to a spanish plan that communicates to hacienda. Or, for example, they send a notification to ask you the origin of the 200.000 € that have arrived to your spanish accounts. Altough you declare it in your IRPF, but as they have no link between your declaration and the money, the semi-automatic mechanism shows a discordance and the tax officer wont check so much, they prefer your explanations (it's usual they send letters asking for things you can check looking only a bit, and sometimes they sanction people who dont spend time answering, or dont know they have reason/they have not done anything wrong)

But as i have said, they force us to solve their lack of information, with 720 or other declarations, but the objective of the declarations is firstly to monitor us, not to avoid future tax checks
international001
Posts: 2746
Joined: Thu Feb 15, 2018 6:31 pm

Re: Spain and Roth IRAs

Post by international001 »

miguel_alm wrote: Sun Mar 14, 2021 5:41 am
Many in this thread are saying going back to US and spending one year in US as resident (if you can) and withdrawing it then. Do you see an objection to this plan?
Hacienda would not like this, because probably you moved your "interests central point" to Spain, and it remains there, for example. They could consider you maintain your residence in Spain because of that. Riskly operation, if they realize, they will try to take the money of your pocket, and you have a long litigation next it with low probability to win (specially only 1 year). The worse is that we dont know the probability they realize
That's something I never understood. People often quote the 183 days rule, but it seems it can be overrruled by the unclear definition of interest central point. I guess by litigation. But don't both US and Spain have to agree? Or can both countries declare that you are 'their' resident?

miguel_alm wrote: Sun Mar 14, 2021 5:41 am
You are talking about trad IRA here? It will be taxed in Spain, and then in US. But everything that you should pay in US should be credited, so that would not matter.
All IRA types would be taxable in Spain. But as i have learn from the treat, then, only trad-ira for USA citizens will be taxable in the USA too. I think in that situation, the taxation in USA would be 0, as you deduct in USA the previously tax paid in Spain and considering tax rate is higher in Spain than in USA. But only a supposition
In US it's call a 'credit' (i.e, they give you back a full amount of money - in this case all or part of the money you paid in taxes to Spain - ), independently of your income and the taxes calculated based on that income. I have seem many times talk about a 'deduction' in Spanish taxes. Is it the same concept?

In US you have to fill special forms (1116) and they'll give you the full amount of taxes you paid in Spain via a credit, assuming the amount of taxes you paid in Spain had a higher rate. I think it applies Art24.par 3 of the treaty, and you have to resource the US income as Spanish income so you consider it foreign income from the POV of US taxes.
But I haven't looked much into it and somebody could correct me.


I'm still unclear about how you declare on 720 the contents of your IRA if you keep changing investments. Does it only count what you have on 12/31?
wishin&hopin
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Joined: Wed Feb 24, 2010 9:25 pm

Re: Spain and Roth IRAs

Post by wishin&hopin »

international001 wrote: Sun Mar 14, 2021 8:05 pm
In US you have to fill special forms (1116) and they'll give you the full amount of taxes you paid in Spain via a credit, assuming the amount of taxes you paid in Spain had a higher rate. I think it applies Art24.par 3 of the treaty, and you have to resource the US income as Spanish income so you consider it foreign income from the POV of US taxes. But I haven't looked much into it and somebody could correct me.
For what it's worth, the Spanish tax accountant I asked (before deciding not to move to Spain) said I should file my U.S. tax form first, then Spain's.
wineandplaya
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Re: Spain and Roth IRAs

Post by wineandplaya »

When navigating the issue of how best to make use of the treatment of different tax-advantaged accounts, it's important not to lose sight of the big picture, which is that the differences in cost of living and quality of life is often big enough to negate any of these differences. When I lived in Spain and drove across the border to France, the prices jumped right at the border. You can choose to live in Southern France (near the Mediterranean Sea coast) and keep 80 % of your income, hoping that France will keep their supposed exceptionally generous tax conditions for US expats. Or, you can live in Southern Spain, where cost-of-living is half and climate is better, and keep 60 % of your income. You can make the same arguments about living in different regions of Spain. Now there are a lot of other good reasons to choose to live in say France, but I don't understand that anyone would want to do it based on taxes.
wishin&hopin
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Joined: Wed Feb 24, 2010 9:25 pm

Re: Spain and Roth IRAs

Post by wishin&hopin »

When I spent a year in Spain on a student visa, I experienced a higher quality of life and a lower cost of living. Moving seemed a no-brainer. But after researching this thoroughly, I realized that it's quite a different story once you become a tax resident. I've come to the conclusion that if you have a lot of assets/income or not much, you can make it work. But if you're a retiree and fall in the middle, the financial risk is too high thanks to the tax rates (double the U.S.'s), the negation of retirement plan account benefits (particularly Roth), the wealth tax, the exit tax, the onerous form 720, etc.
wineandplaya
Posts: 306
Joined: Fri Sep 14, 2018 9:42 am

Re: Spain and Roth IRAs

Post by wineandplaya »

wishin&hopin wrote: Mon Mar 15, 2021 1:24 pm When I spent a year in Spain on a student visa, I experienced a higher quality of life and a lower cost of living. Moving seemed a no-brainer. But after researching this thoroughly, I realized that it's quite a different story once you become a tax resident. I've come to the conclusion that if you have a lot of assets/income or not much, you can make it work. But if you're a retiree and fall in the middle, the financial risk is too high thanks to the tax rates (double the U.S.'s), the negation of retirement plan account benefits (particularly Roth), the wealth tax, the exit tax, the onerous form 720, etc.
Well, I respectfully disagree. Your financial risks should be minor if you take some basic step before moving: Consolidate your bank accounts/investments at a bank that has a good track record at serving expats (Schwab?). Close down or transfer ownership of 529 accounts. Use up what you have in HSAs, empty out your Roths and move to taxable. Rollover your 401(k) to an IRA before moving.

Spanish exit tax will only hit you if plan to later give up Spanish residency - but in that case Roths won't be an issue - they will grow tax-free during your time there. For Spanish wealth tax, it's not that high for a "retiree that falls in the middle". For a married couple, the first 1.4M EUR aren't taxed at all, and then you'll have to own double that in taxable accounts before the marginal tax rate exceeds 0.5 %. Also keep in mind that the US also has "wealth tax" in the form of property taxes and they are often a lot higher than that.

If your taxable investments are in low-turnover, broad ETFs (mutual funds should be avoided from what I understand), your tax-drag will be small and your capital gains taxation in Spain will have a marginal tax rate of 23 %, which isn't too bad.
wishin&hopin
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Re: Spain and Roth IRAs

Post by wishin&hopin »

I very much want to be persuaded, but unfortunately, that doesn't do the trick! Thanks for the sincere attempt.
international001
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Joined: Thu Feb 15, 2018 6:31 pm

Re: Spain and Roth IRAs

Post by international001 »

wineandplaya wrote: Mon Mar 15, 2021 2:34 pm
wishin&hopin wrote: Mon Mar 15, 2021 1:24 pm When I spent a year in Spain on a student visa, I experienced a higher quality of life and a lower cost of living. Moving seemed a no-brainer. But after researching this thoroughly, I realized that it's quite a different story once you become a tax resident. I've come to the conclusion that if you have a lot of assets/income or not much, you can make it work. But if you're a retiree and fall in the middle, the financial risk is too high thanks to the tax rates (double the U.S.'s), the negation of retirement plan account benefits (particularly Roth), the wealth tax, the exit tax, the onerous form 720, etc.
Well, I respectfully disagree. Your financial risks should be minor if you take some basic step before moving: Consolidate your bank accounts/investments at a bank that has a good track record at serving expats (Schwab?). Close down or transfer ownership of 529 accounts. Use up what you have in HSAs, empty out your Roths and move to taxable. Rollover your 401(k) to an IRA before moving.

Spanish exit tax will only hit you if plan to later give up Spanish residency - but in that case Roths won't be an issue - they will grow tax-free during your time there. For Spanish wealth tax, it's not that high for a "retiree that falls in the middle". For a married couple, the first 1.4M EUR aren't taxed at all, and then you'll have to own double that in taxable accounts before the marginal tax rate exceeds 0.5 %. Also keep in mind that the US also has "wealth tax" in the form of property taxes and they are often a lot higher than that.

If your taxable investments are in low-turnover, broad ETFs (mutual funds should be avoided from what I understand), your tax-drag will be small and your capital gains taxation in Spain will have a marginal tax rate of 23 %, which isn't too bad.
Doesn't exit tax only count after $4M? That's usually nothing for somebody in the middle.
But you have to define who is exactly in the middle. Deductions aside, $100k taxable income will have an effective tax rate of 34% in Spain, 18% in US (assume you live in FL). So you only get 10% more in US. You make up that only in health cost savings.

Mutual funds may or may not be allowed by your financial institution. Just get Vanguard ones, today!! They'll be easy to convert to ETF if you have to.

Don't think a property tax really compares. It should apply to the value of your house. The ROI of a house in US is typically higher, even if you discount the property taxes.

Something that was not brought up were HSAs. I would assume they are treated like pensions.
wineandplaya
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Re: Spain and Roth IRAs

Post by wineandplaya »

international001 wrote: Mon Mar 15, 2021 9:49 pm Doesn't exit tax only count after $4M? That's usually nothing for somebody in the middle.
But you have to define who is exactly in the middle. Deductions aside, $100k taxable income will have an effective tax rate of 34% in Spain, 18% in US (assume you live in FL). So you only get 10% more in US. You make up that only in health cost savings.
I think that the current sweet spot is to try to limit your "work" income to 35.2k EUR single / 70.4k EUR married. Then your effective tax rate (excluding regional taxes) for that income will be just below 25 % in Spain. Remaining income come from long term capital gains and dividends ​in taxable accounts currently taxed at 23 % or lower for up to 200k EUR (rentas del ahorro). But might be hard if you expect a large contribution from Social Security, have large pre-tax accounts, pensions etc.
international001 wrote: Mon Mar 15, 2021 9:49 pm Don't think a property tax really compares. It should apply to the value of your house. The ROI of a house in US is typically higher, even if you discount the property taxes.
US property taxes are very high in comparison with European countries and is used to fund things like schools and local governments that are funded by income taxes in Europe. There is also no reason to believe that the ROI of a house will be higher in the US.
international001 wrote: Mon Mar 15, 2021 9:49 pm Something that was not brought up were HSAs. I would assume they are treated like pensions.
I wouldn't assume that. My assumption is that Spain would treat them as a taxable brokerage account with no tax deferral. They sound like more hassle than they are worth to me, so I will just try to make sure ours is at zero balance when we leave the US
international001
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Re: Spain and Roth IRAs

Post by international001 »

IF you define a sweet spot you have to say why it is worse before X and after X. You'll pay more taxes in Spain regardless of your income. What will make you compute X are the lower cost of certain things (like health, food or a maid service). So it depends on your particular lifestyle.

Property tax is different than wealth tax. You can avoid property tax by not buying that particular property (renting, for instance). If the property it's an investment, it's like a TER on a mutual fund. Even with a high TER, the ROI may be better than a ROI with a low TER. Even when you discount property taxes (and other costs like maintenance costs), a house is a better investment in US than in Spain.

HSA treatment should depend (per treaty) if 'generally exempt from income taxation in the United States, and operated principally (...) to administer or provide pension or retirement' so the meaning of 'principally' and 'retirement' should be interpreted.
international001
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Re: Spain and Roth IRAs

Post by international001 »

wishin&hopin wrote: Sun Mar 14, 2021 8:57 pm
international001 wrote: Sun Mar 14, 2021 8:05 pm
In US you have to fill special forms (1116) and they'll give you the full amount of taxes you paid in Spain via a credit, assuming the amount of taxes you paid in Spain had a higher rate. I think it applies Art24.par 3 of the treaty, and you have to resource the US income as Spanish income so you consider it foreign income from the POV of US taxes. But I haven't looked much into it and somebody could correct me.
For what it's worth, the Spanish tax accountant I asked (before deciding not to move to Spain) said I should file my U.S. tax form first, then Spain's.
I thought it was the other way around, but perhaps you can explain the process

https://lostinsantcugat.blogspot.com/20 ... s-for.html
wishin&hopin
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Re: Spain and Roth IRAs

Post by wishin&hopin »

international001 wrote: Tue Mar 16, 2021 9:47 pm
wishin&hopin wrote: Sun Mar 14, 2021 8:57 pm
international001 wrote: Sun Mar 14, 2021 8:05 pm
In US you have to fill special forms (1116) and they'll give you the full amount of taxes you paid in Spain via a credit, assuming the amount of taxes you paid in Spain had a higher rate. I think it applies Art24.par 3 of the treaty, and you have to resource the US income as Spanish income so you consider it foreign income from the POV of US taxes. But I haven't looked much into it and somebody could correct me.
For what it's worth, the Spanish tax accountant I asked (before deciding not to move to Spain) said I should file my U.S. tax form first, then Spain's.
I thought it was the other way around, but perhaps you can explain the process

https://lostinsantcugat.blogspot.com/20 ... s-for.html
That's what the accountant advised, but the rationale wasn't clear to me. Since I'm not going to move to Spain after all, I didn't look into it any further.
wineandplaya
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Re: Spain and Roth IRAs

Post by wineandplaya »

international001 wrote: Tue Mar 16, 2021 9:43 pm IF you define a sweet spot you have to say why it is worse before X and after X. You'll pay more taxes in Spain regardless of your income. What will make you compute X are the lower cost of certain things (like health, food or a maid service). So it depends on your particular lifestyle.
I define sweet spot as paying the least amount of taxes given that you are moving to Spain. Before moving, you have a (limited) ability to redistribute your future income between general rate (taxed up to 45+ %) and savings rate (taxed up to 23 %, or 26 % if your income is over 200k EUR). Your costs for health care, food etc will not depend on how large proportion of your income comes from taxable accounts so they are not relevant here.
international001 wrote: Tue Mar 16, 2021 9:43 pm HSA treatment should depend (per treaty) if 'generally exempt from income taxation in the United States, and operated principally (...) to administer or provide pension or retirement' so the meaning of 'principally' and 'retirement' should be interpreted.
HSA is hardly operated principally to provide retirement income.
international001
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Re: Spain and Roth IRAs

Post by international001 »

wineandplaya wrote: Wed Mar 17, 2021 4:10 am I define sweet spot as paying the least amount of taxes given that you are moving to Spain. Before moving, you have a (limited) ability to redistribute your future income between general rate (taxed up to 45+ %) and savings rate (taxed up to 23 %, or 26 % if your income is over 200k EUR). Your costs for health care, food etc will not depend on how large proportion of your income comes from taxable accounts so they are not relevant here.
Ahh.. I was not thinking one variable was doing redistribution first to taxable account.
I was thinking that with and amount to distribute X from your pension plan, at which point was better to move to Spain or stay in US. Then the amount of expenses would become relevant

You are right you can move from tax-protected to taxable and you'll have a lower tax rate in Spain. However, you have to model other things. Wealth tax is one. The other is the loss of compounding effect you would have into your tax-protected account.

Consider a tax efficiency of 0.5% for a etf like VTI (consider no state tax, and total tax 24% - per Spain taxation -)
After 20 years, you would have earned 1.005**20 = 10% more on a tax-protected account. So the longer you live, the more money you could have in your tax-deferred account (even if you are kicked to a higher Spanish tax bracket).

wineandplaya wrote: Wed Mar 17, 2021 4:10 am HSA is hardly operated principally to provide retirement income.
401k is operated for retirement income, emergency income (with a penalty), and to get you a loan.
HSA is operated both for retirement income and for medical expenses. If you do max contributions, it becomes more a retirement vehicle than a medical expense account, just by necessity.

'principally' may be challenged the courts, of course.
miguel_alm
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Re: Spain and Roth IRAs

Post by miguel_alm »

international001 wrote: Tue Mar 16, 2021 9:47 pm
wishin&hopin wrote: Sun Mar 14, 2021 8:57 pm
international001 wrote: Sun Mar 14, 2021 8:05 pm
In US you have to fill special forms (1116) and they'll give you the full amount of taxes you paid in Spain via a credit, assuming the amount of taxes you paid in Spain had a higher rate. I think it applies Art24.par 3 of the treaty, and you have to resource the US income as Spanish income so you consider it foreign income from the POV of US taxes. But I haven't looked much into it and somebody could correct me.
For what it's worth, the Spanish tax accountant I asked (before deciding not to move to Spain) said I should file my U.S. tax form first, then Spain's.
I thought it was the other way around, but perhaps you can explain the process

https://lostinsantcugat.blogspot.com/20 ... s-for.html
Reading the double taxation agreement, my conclusion is you first present and pay in Spain, and then in the U.S., not the other way
international001
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Re: Spain and Roth IRAs

Post by international001 »

miguel_alm wrote: Sat Mar 20, 2021 6:01 am
Reading the double taxation agreement, my conclusion is you first present and pay in Spain, and then in the U.S., not the other way
So is the process described in the link accurate

1. Calculate 1040-NR taxes (jus for your info)
2. Take the credit in Spain for 1
3. Take the credit in US for 2 (doing some foreign income resourcing)

I'd think that because Spanish taxes are filed later, you would likely have to ask for a US extension.
wineandplaya
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Re: Spain and Roth IRAs

Post by wineandplaya »

international001 wrote: Sat Mar 20, 2021 6:45 pm
miguel_alm wrote: Sat Mar 20, 2021 6:01 am
Reading the double taxation agreement, my conclusion is you first present and pay in Spain, and then in the U.S., not the other way
So is the process described in the link accurate

1. Calculate 1040-NR taxes (jus for your info)
2. Take the credit in Spain for 1
3. Take the credit in US for 2 (doing some foreign income resourcing)

I'd think that because Spanish taxes are filed later, you would likely have to ask for a US extension.
What credit? Why would Spain care about your US taxes at all? Will they not just tax your global income? I would think you file your Spanish taxes first if you're resident there, then claim a foreign tax credit when you file US taxes.
miguel_alm
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Re: Spain and Roth IRAs

Post by miguel_alm »

international001 wrote: Sat Mar 20, 2021 6:45 pm
miguel_alm wrote: Sat Mar 20, 2021 6:01 am
Reading the double taxation agreement, my conclusion is you first present and pay in Spain, and then in the U.S., not the other way
So is the process described in the link accurate

1. Calculate 1040-NR taxes (jus for your info)
2. Take the credit in Spain for 1
3. Take the credit in US for 2 (doing some foreign income resourcing)

I'd think that because Spanish taxes are filed later, you would likely have to ask for a US extension.
If the way to do it is first presenting in Spain, in our IRPF you cannot subtract any quantity of US taxes.
Double taxation only make effect in the second country of payment, when double taxation is allowed in the agreement, as is in this case to U.S. citizens
miguel_alm
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Re: Spain and Roth IRAs

Post by miguel_alm »

My last posts were referred to the situation of someone who have not reached the age of retirement and 720. I want to add more information in this point: Pension plans have to be declared always when you have reached the conditions to redeem them, and you dont redeem it because you dont want to do it yet. And the possible beneficiary of the plan as a life insurance always have to declare too

As i have read sometimes that you don't have to declare it till you take the money. Now we have some consultas that are more or less clear at this point, and my conclusion is, if you reach the conditions, you have to declare it
If you dont reach the conditions (you are not retired yet), you have to declare specific investments, but this is because of the way invests are behind IRA's in the US, (different to other countrys that function like Spain at this point)
international001
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Re: Spain and Roth IRAs

Post by international001 »

miguel_alm wrote: Sun Mar 21, 2021 6:00 am My last posts were referred to the situation of someone who have not reached the age of retirement and 720. I want to add more information in this point: Pension plans have to be declared always when you have reached the conditions to redeem them, and you dont redeem it because you dont want to do it yet. And the possible beneficiary of the plan as a life insurance always have to declare too

As i have read sometimes that you don't have to declare it till you take the money. Now we have some consultas that are more or less clear at this point, and my conclusion is, if you reach the conditions, you have to declare it.
If you don't reach the conditions (you are not retired yet), you have to declare specific investments, but this is because of the way invests are behind IRA's in the US, (different to other countries that function like Spain at this point)
That's confusing to me. What does it mean 'retired', I guess in Spanish terms? In US, 'retired' is a subjective term. Usually you can take distributions from US pensions plans (401ks, IRAs) after 59.5 w/o penalties, but there are exceptions to that general rule.

So pre-retirement, you have to declare the investments of an IRA but no declare an IRA on the 720? What is the difference?
international001
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Re: Spain and Roth IRAs

Post by international001 »

miguel_alm wrote: Sun Mar 21, 2021 6:00 am My last posts were referred to the situation of someone who have not reached the age of retirement and 720. I want to add more information in this point: Pension plans have to be declared always when you have reached the conditions to redeem them, and you dont redeem it because you dont want to do it yet. And the possible beneficiary of the plan as a life insurance always have to declare too

As i have read sometimes that you don't have to declare it till you take the money. Now we have some consultas that are more or less clear at this point, and my conclusion is, if you reach the conditions, you have to declare it.
If you don't reach the conditions (you are not retired yet), you have to declare specific investments, but this is because of the way invests are behind IRA's in the US, (different to other countries that function like Spain at this point)
That's confusing to me. What does it mean 'retired', I guess in Spanish terms? In US, 'retired' is a subjective term. Usually you can take distributions from US pensions plans (401ks, IRAs) after 59.5 w/o penalties, but there are exceptions to that general rule.

So pre-retirement, you have to declare the investments of an IRA but no declare an IRA on the 720? What is the difference?
bagle
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Re: Spain and Roth IRAs

Post by bagle »

international001 wrote: Sat Mar 20, 2021 6:45 pm I'd think that because Spanish taxes are filed later, you would likely have to ask for a US extension.
You get an automatic 2-month extension until June 15th (July 15 this year, due to Covid) with the IRS if you are a (1) US citizen/resident alien living abroad or (2) non-resident alien who is not employee/self-employed or has no office/place of business.

https://www.irs.gov/individuals/interna ... ent-aliens

https://www.irs.gov/individuals/interna ... ens-abroad

In Spain, you can file your return 7 April - 1 July this year, so that leaves some time to file later in the US.

I also understand that you are supposed to file first in Spain as primary residence , then US (source: Lucía Goy, who is licensed to practice law in both US and Spain.
wineandplaya
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Re: Spain and Roth IRAs

Post by wineandplaya »

I didn't see this mentioned in this thread, but here is something I realized when doing my own expatriation tax planning: If you plan to withdraw all your Roth contributions immediately before expatriation, you should refrain from doing any convertions into the Roth in the preceding four tax years.

This means in particular avoiding "backdoor Roth" and "mega backdoor Roth" in those years. You can still do regular Roth 401k.contributions and, if you are income eligible, regular Roth IRA contributions, but if you do any convertions, they should happen at least 5 tax years earlier or you'll get hit by the 5-year-rule for Roth convertions.
international001
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Re: Spain and Roth IRAs

Post by international001 »

You should plan for it, but this doesn't mean you can't do it.
Try to have no pre-tax conversion dollars on your Roth (this is the amount you have a 1099-R for when doing a (mega)backdoor)
Still, if you move to Spain before 59.5 you'll have to pay taxes and penalties for the earnings.

Leaving some money in the Roth may not be that bad. Particularly, if the alternative was to invest it on taxable, and you plan to spend the leftover money in the Roth many years in the future.
wineandplaya
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Re: Spain and Roth IRAs

Post by wineandplaya »

international001 wrote: Wed May 26, 2021 5:14 am You should plan for it, but this doesn't mean you can't do it.
Try to have no pre-tax conversion dollars on your Roth (this is the amount you have a 1099-R for when doing a (mega)backdoor)
Still, if you move to Spain before 59.5 you'll have to pay taxes and penalties for the earnings.

Leaving some money in the Roth may not be that bad. Particularly, if the alternative was to invest it on taxable, and you plan to spend the leftover money in the Roth many years in the future.
There is a good case for leaving Roth *earnings*, agreed. After all, since they are earnings you have already essentially avoided paying capital gains tax on them. I think that there is a much weaker case to leave already taxed contributions or de-facto contributions (via backdoor / mega backdoor) however.
international001
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Re: Spain and Roth IRAs

Post by international001 »

Well, you may think about it before doing contributions. But if both contributions and earnings are already in the Roth, at the time of the distribution you don't care where they came from
Assume you have X money on a Roth and you distribute X1 to move it to taxable and X2 to leave it in the Roth.
Without any plan restrictions, you would want to X1 to be the money you are going to spend in the near future and X2 what you are going to spend
in the far future. It depends on your assumptions and other assets, get a spreadsheet and make your computations.

Results are sensitive to the assumptions, but it's likely that X2 will be >0. So don't sweat it and contribute.
Avoid the penalty for taxable conversion dollars. I think it's 10% and for only 5 years it's not worth the compounding benefit
international001
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Re: Spain and Roth IRAs

Post by international001 »

A thought of something that may be worth exploring, even if it has marginal utility.
If you are resident in Spain, and you do a conversion pre-tax 401k -> Roth, does it pay taxes in Spain? If Spain thinks Roth = pre-tax 401k, probably not

Usually you don't want to pay taxes one year on the conversion on the US and another on the distribution in Spain. Because you cannot match FTC. But for small amounts, you may still be able to get the full US credit. And if you go back to US, money is already in Roth.
inves76
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Re: Spain and Roth IRAs

Post by inves76 »

can the roth gains taxes on distribution paid in Spain offset the US social security taxes as a foreign tax credit?
international001
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Re: Spain and Roth IRAs

Post by international001 »

inves76 wrote: Sun Jul 11, 2021 8:46 am can the roth gains taxes on distribution paid in Spain offset the US social security taxes as a foreign tax credit?
Taxes on a roth distribution is US source income. So why would you get a US foreign tax credit?
inves76
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Re: Spain and Roth IRAs

Post by inves76 »

international001 wrote: Wed Jul 14, 2021 3:21 am
inves76 wrote: Sun Jul 11, 2021 8:46 am can the roth gains taxes on distribution paid in Spain offset the US social security taxes as a foreign tax credit?
Taxes on a roth distribution is US source income. So why would you get a US foreign tax credit?
Roth distributions do not pay taxes in US. However, based on the Spain-US tax treaty, they could have to be taxed in Spain as any Plan de Pensiones.
As a US citizen you have to fill your taxes with all your income, including the US social security. My question is if you can claim the taxes paid in Spain for the Roth distribution as a foreign tax credit against your US social security income tax.

https://www.irs.gov/individuals/interna ... tax-credit
international001
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Re: Spain and Roth IRAs

Post by international001 »

I think you can only take a credit for foreign taxes when it's foreign income.

Consider the case you have stocks in US with $100 dividends. In US you pay $15 (by treaty, US gets 15%)
In Spain you have to pay $19 and you take a $15 credit , so you only pay $4 to Spain.
You cannot claim a credit in the US for the $4 you paid in Spain

Roth distribution is like dividends, but instead of 15% is 0%
inves76
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Re: Spain and Roth IRAs

Post by inves76 »

From 1116 instructions
f. Certain Income Re-Sourced by Treaty

If a sourcing rule in an applicable income tax treaty treats U.S. source income as foreign source, and you elect to apply the treaty, the income will be
treated as foreign source.
Article 20 from Spain-US Tax treaty.

(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
Therefore, if Roth is taxed by Spain is because it is considered an income in Spain per tax treaty.

This the section that applies to your dividend argument. US is not going to refund any money beyond the tax treaty agreement. Agree. However, the treaty is not clear about the Roth taxation in Spain. If Agencia Tributaria has decided to apply the code in that direction to money that has already paid taxes per US tax code, it is not my fault. And it is clearly double taxed.
Foreign Taxes Not Eligible for a Credit

You can't take a credit for the following foreign taxes.
1. Taxes paid to a foreign country that you don't legally owe, including amounts eligible for refund by the foreign country. If you don't exercise
your available remedies to reduce the amount of foreign tax to what you legally owe, a credit for the excess amount isn't allowed. The amount of tax actually withheld by a foreign country isn't necessarily 100% creditable. See Regulations section 1.901-2(e)(2)
international001
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Re: Spain and Roth IRAs

Post by international001 »

Look at the same quote in the treaty that came in the consultation you showed;

In the case of an individual who is a citizen of the United States and a resident of Spain, income
which may be taxed by the United States by reason of citizenship in accordance with paragraph 3 of
Article 1 (General Scope) shall be deemed to arise in Spain to the extent necessary to avoid double
taxation, provided that in no event will the tax paid to the United States be less than the tax that would
be paid if the individual were not a citizen of the United States.
It tells you when you can actually resource US income as if it was income in Spain. This happens only for the case you are a US citizen.
Imagine US tells you you have to be taxed at 35% just *only* because being citizen in Spain you are taxed at 20%. Then for $100 of income you pay $20 in Spain and you can take a credit for $20 in US (so you pay only $15 in US). If in US you had to be taxed at 15%, then you would take $15 as credit and not pay anything to US

That's the general idea, details can be more complicated and I'm not that familiar with them.

So assuming Spain has higher brackets, you just won't have to pay anything to US. But you are not going to offset anything.

Perhaps you can explain exactly what you mean by US SS taxes . They are payable in Spain. Perhaps I didn't understand your question completely.


Your quote 'Foreign Taxes Not Eligible for a Credit' is not relevant. It only means that sometimes you pay (1) that you actually legally owe (2). Just consider (2) always.
devich
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Re: Spain and Roth IRAs

Post by devich »

Just for fun, read this whole thread carefully all the way through and tell me when you are finished that your eyes are not bleeding. The most simple questions do not have a clear answer. If I was a hedge fund manager, a tax accountant, and a tax attorney, upon retirement it would be a full time job and stress squared to plan and track and report and pay all this welfare state high tax nonsense, and here we find little of the US gotcha's that Uncle Sam is waiting to feast on. I'm none of those things and I'm old and tired and it would be muy caro to hire all that talent. This thread doesn't even touch on the cogent threat involving the situation that almost no bank or broker on either side of the Atlantic wants to have US "tax person" clients living in the EU. Unless you thread a needle US domiciled investments are taxed punitively by Spain and non-US domiciled funds are taxed punitively by the US of A.

I don't care how cheap the tapas and beers and pisos are in Javea, I'll chill and take a beach in a low cost area of no income tax Florida. The Med's not that great off the shores of Spain anyway.

Rant concluded, good luck to all.
international001
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Re: Spain and Roth IRAs

Post by international001 »

Thanks for the rant (January 6th everybody gets presents in Spain).

Yes, unfortunately there are no clear answers, and it's unfortunate that this is the nature of the laws (particularly in Spain).
I don't think it's a matter of having all that talent but of knowing somebody who will tell you how the laws are actually used.
Not sure what you meant by 'US domiciled investments are taxed punitively by Spain'. Just a higher tax rate (24%). IB will gladly hold your US ETFs, if anybody else will.

You forgot to mention the Spanish wealth tax, if you are that lucky.
Also, for many here managing your taxes is more a hobby than a source of stress ;-)
devich
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Re: Spain and Roth IRAs

Post by devich »

Thanks for your gentle response. Yes, Espana! Feliz Dia de Los Reyes Magos ! My shoes are under the tree here in CA and the reyes did get here last night. Seriously true.

I like Spain a lot. I lived there three years in the 1980's and met my Spanish wife of 31 years now there. I still speak Spanish passably. Was in the Navy, so was shielded from the tax resident and many other hassles by status of forces agreements or whatever. We fully intended and looked forward to retiring to tapas and tintos de verano on the coast. I've been deeply saddened by what I have learned about becoming a Spanish resident over the last couple of years, both specifically about our situation, but also generally by the demanding, voracious, complicated and heavy handed behemoths we have let our governments become in these matters. The penalties for non-compliance are shockingly high.

Anyway, we'll still get there a few months a year, but avoid the 183 days and making Spain the "center of our economic interests". Epitome of 'great place to visit but I wouldn't want to live there'.

Yes, I did mention hiring talent vs do it yourself, but expensive. You're right, get to know someone local who can advise, danger there is sands are subject to interpretation even by govt reps, and shifting. If I was 20 damn the torpedoes but as retiree the risk/reward is sadly just not there.

That's the thing, I don't even know exactly what I meant about US domiciled investments and the tax on them...I meant mutual funds/ETF's. I read somewhere there are "reporting" US funds that are taxed as normal in Spain but if the funds are non-reporting Spain taxes the entire amount of the account at the top 45 % income tax rate or some such. Reporting seems to mean funds provide data to meet Spain's requirements. Hard to find a list of the reporting funds or much info on the topic, I can find it for the UK but not Spain. After Brexit UK maintained many of the EU policies but don't know if that's the case with reporting funds. As a sidebar, ETF's were OK to buy until 2019 when new EU regs cut that off. True they can be held. IB is there and Schwab still but Schwab dropped France and Italy in 2019 or 2020. I spoke to a Schwab International rep last year and after a nice discussion he said 'check with us again before you come (to Spain) because these things are changing all the time'.

Tax rate is 24 % on 'savings' income/capital gains (might have gone up to 26%), but 401k and IRA withdrawals, even Roth's, are taxed as ordinary income which gets you to the 45% tier pretty quick.

Yep, we get the good fortune of wealth tax. In Valencia that now starts when you have 500,000 euros! Wealth?

Inheritance tax and mandated by law beneficiaries another quagmire. Starts at low amounts and high progressive rates.
Even spouse doesn't inherit tax free upon death of spouse.

Got 80 views but no replies to my D6 and ETE question post. I emailed a Span firm with the question, we'll see...

I had the hobby point of view for a while, a challenge, keep my brain tuned up, etc. Got to be too much, and again, the downside can cost a lot more than golf.

Now to those presents on the shoes..
international001
Posts: 2746
Joined: Thu Feb 15, 2018 6:31 pm

Re: Spain and Roth IRAs

Post by international001 »

Hope you got some coal for not becoming a Spanish resident ! :-)

You are right about the 401k taxation and wealth tax. But you have to be practical and see what would be your actual income and how it would be taxed. Check this thread for some numbers: https://bogleheads.org/forum/viewtopic. ... 5&t=346789

Wealth tax may be your worse bitch if you are wealthy enough. You could move to Madrid and avoid it. You can buy a house, create your own company or move to Madrid. Of course, who knows which law will be passed in the future.

When you talk about reporting US funds I think it's for US ETFs hold on EU brokers (https://www.justetf.com/ch/news/etf/us- ... -etfs.html). You'll have to hold them on a US broker.

If < 183 days works for you, it's a great plan, though. Not so much if you stay in CA. State taxation is often overlooked.
bagle
Posts: 329
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Re: Spain and Roth IRAs

Post by bagle »

miguel_alm wrote: Sun Mar 14, 2021 5:41 am
international001 wrote: Sat Mar 13, 2021 6:44 pm


As i know, in this point, they dont have any information from the USA related to the distribution of the IRA. The most probable is they dont have any information related to the income, till the moment they verificate your IRPF declaration opening a procedure, if they do so: To ask you what have you declared, as they dont have direct proofs of the source compared to a spanish plan that communicates to hacienda. Or, for example, they send a notification to ask you the origin of the 200.000 € that have arrived to your spanish accounts. Altough you declare it in your IRPF, but as they have no link between your declaration and the money, the semi-automatic mechanism shows a discordance and the tax officer wont check so much, they prefer your explanations (it's usual they send letters asking for things you can check looking only a bit, and sometimes they sanction people who dont spend time answering, or dont know they have reason/they have not done anything wrong)

But as i have said, they force us to solve their lack of information, with 720 or other declarations, but the objective of the declarations is firstly to monitor us, not to avoid future tax checks
My limited understanding (from a FA and TedSwippet) is that the US tax authorities (IRS) do not currently inform their Spanish counterparts about IRA distributions to Spanish residents. Although the US-Spain agreement (FATCA IGA) requires the US to reciprocate fully, in practice the US is only providing information about interest-bearing accounts. The Bank Secrecy Act (BSA) was modified to allow this. (The banking lobby and libertarian Republicans in Congress are opposed to allowing further disclosure to foreign governments.)

Perhaps others here are better informed than me - kindly advise.
bagle
Posts: 329
Joined: Tue Feb 22, 2011 4:59 am

Re: Spain and Roth IRAs

Post by bagle »

bagle wrote: Mon Jan 10, 2022 6:08 am
miguel_alm wrote: Sun Mar 14, 2021 5:41 am
international001 wrote: Sat Mar 13, 2021 6:44 pm


As i know, in this point, they dont have any information from the USA related to the distribution of the IRA. The most probable is they dont have any information related to the income, till the moment they verificate your IRPF declaration opening a procedure, if they do so: To ask you what have you declared, as they dont have direct proofs of the source compared to a spanish plan that communicates to hacienda. Or, for example, they send a notification to ask you the origin of the 200.000 € that have arrived to your spanish accounts. Altough you declare it in your IRPF, but as they have no link between your declaration and the money, the semi-automatic mechanism shows a discordance and the tax officer wont check so much, they prefer your explanations (it's usual they send letters asking for things you can check looking only a bit, and sometimes they sanction people who dont spend time answering, or dont know they have reason/they have not done anything wrong)

But as i have said, they force us to solve their lack of information, with 720 or other declarations, but the objective of the declarations is firstly to monitor us, not to avoid future tax checks
My limited understanding (from a FA and TedSwippet) is that the US tax authorities (IRS) do not currently inform their Spanish counterparts about IRA distributions to Spanish residents. Although the US-Spain agreement (FATCA IGA) requires the US to reciprocate fully, in practice the US is only providing information about interest-bearing accounts. The Bank Secrecy Act (BSA) was modified to allow this. (The banking lobby and libertarian Republicans in Congress are opposed to allowing further disclosure to foreign governments.)

Perhaps others here are better informed than me - kindly advise.

Bagle (sorry for poor formatting above)
international001
Posts: 2746
Joined: Thu Feb 15, 2018 6:31 pm

Re: Spain and Roth IRAs

Post by international001 »

Interesting. So do they report nothing else? 401k distributions? SS income? Dividends?
I would be great to have a clear path to comply, but it's more difficult when the authorities don't even care. Even the Spanish tax authorities won't get the info from the Spanish banks for the wealth tax ..
Really depressing
bagle
Posts: 329
Joined: Tue Feb 22, 2011 4:59 am

Re: Spain and Roth IRAs

Post by bagle »

international001 wrote: Fri Jan 14, 2022 6:42 pm Interesting. So do they report nothing else? 401k distributions? SS income?
Presumably, the US shares SS income with Spain if a taxpayer invokes the Spain-US totalization agreement. Otherwise, I'm not sure.

Of course, US government agencies do not always coordinate with other US agencies: a non-resident US taxpayer must report bank interest income using one foreign exchange rate to the IRS (Form 1040) and bank account balances using another rate to the US Treasury (FBAR).
international001
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Joined: Thu Feb 15, 2018 6:31 pm

Re: Spain and Roth IRAs

Post by international001 »

On one of the related topics on the thread, EU will force changes on the 720

https://spainsnews.com/what-is-model-720/

So at least the problems for not complying to the right interpretation will not be like a life sentence. Good news for all expats residing in Spain.
bagle
Posts: 329
Joined: Tue Feb 22, 2011 4:59 am

Re: Spain and Roth IRAs

Post by bagle »

international001 wrote: Thu Jan 27, 2022 9:05 am On one of the related topics on the thread, EU will force changes on the 720

https://spainsnews.com/what-is-model-720/

So at least the problems for not complying to the right interpretation will not be like a life sentence. Good news for all expats residing in Spain.
The European Court of Justice´s ruling states clearly that the Spanish government fines for non-compliance have been "disproportionate".

The basis for the ruling is that these fines violate the principle of free movement of capital among EU member states. Seems to me that Spain could still maintain draconian fines for investments domiciled outside of the EU (e.g. US).

In any event, the Finance Minister (Montera) has said this law will be "reformulated" before the Modelo 720 is due on March 31st. She was quick to assert that the filing requirement itself is still legal, and that only the amount of fines and statute of limitations wil be affected.
Wishful Thinking
Posts: 3
Joined: Tue Feb 22, 2022 6:32 pm

Re: Spain and Roth IRAs

Post by Wishful Thinking »

A very interesting thread, which has seemingly answered some of my questions.

Our story in brief: husband and wife who will soon have both children in college. Have been thinking about moving to Spain for some time now (long enough to have been studying Spanish for several years). We have the full suite of potential issues: 401(k), 403(b), traditional IRA, Roth IRA, 529 accounts and assets that would push us across the wealth tax threshold.

The tax rates in Spain relative to the tax rates in the US are discouraging but, on the plus side in our case, they're not really any higher than where we currently live in New Zealand.

A few basic questions:
1. There are references to converting mutual funds to ETFs within an IRA structure. Why would that be helpful?
2. There is at least one reference made to converting 401(k) accounts to IRAs prior to becoming a Spanish tax resident. Why?
3. How are 529 accounts addressed by the Spanish tax code?

Oh, and by the way, does anyone know a good Spain/US tax advisor in New Zealand? Just kidding...
international001
Posts: 2746
Joined: Thu Feb 15, 2018 6:31 pm

Re: Spain and Roth IRAs

Post by international001 »

I think your US broker may have a problem if you hold a mutual fund because of registration issues, not so much for ETFs
I don't thin 529 have been discussed here. If they are taxed by Spain w/o distributions, then you could be subject to double taxation. So better to get rid of them before coming to Spain. They cannot be used in that many Spanish Universities, anyway.
Not sure about the 401k to IRA conversion. wineandplaya would have to explain.
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