Advice about retirement in the EU [Spain ex-pat, US resident]

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rgval
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Advice about retirement in the EU [Spain ex-pat, US resident]

Post by rgval »

[Moved into a stand-alone thread from: Advice about retirement in the EU (Spain) --admin LadyGeek]

Hello experts!
I am new to investing, and I am learning a lot everyday thanks to everyone here. I would like to know how to organize better our finances in preparation for a potential return to the EU.

I am 37 from Spain, based in the US since 2009. My wife, 36, also from Spain has been in the US for 5 years. We hold visas and are resident aliens for tax purposes. We live in NY and our son was born here this February. We are Married Filing Jointly and our income tax bracket is 15%. We don't know where we'll retire but Spain is clearly a possibility.

I would like to share our current financial situation, and ask for advice about what type of accounts we should use to invest knowing that we might retire in our home country:
  • No debts
  • Capital One 360 MMA (Emergency)
  • Around $15k in cash
  • 401k contribution up to 5% employer match (mine, managed by VOYA/morningstar)
  • Fidelity Traditional IRA (hers, 80% AGG, 10% EMB, 9% IVV)
  • HSA with roughly $300 (just started)
  • Wealtfront joint investment account (testing with $1k, 90/10)
  • Betterment joint investment account (testing with $1k, 90/10)
  • After reading more a more about robo-advisors... I just opened a joint investment account in Vanguard ($3k not invested yet)
We have just started saving and our current aim is to save as much a possible in the US and obtain finance independence in around 15 years, keeping our current low annual expenses. We are thinking in a total AA of 90% stocks, 10% bonds.

The US/Spain Tax Treaty is very confusing to me. Can anyone recommend what order of investment and types of account would make more sense in terms of taxes? Start using Vanguard Joint investment account for our retirement savings? And shall we invest in mutual funds or ETFs? Can and should I open a Roth IRA and maximize it? stop contributing to her traditional IRA? Keep 401k contributions, maximize or stop it? What happens with retirement accounts when you are abroad? and if you retire before 59.5? Should we start a 529 or Roth IRA for our son? ... sorry, so many doubts.

plotina, did you find a good tax/financial advisor knowledgeable in US/Spain regulations?


Thanks!
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Re: Advice about retirement in the EU [Spain ex-pat, US resident]

Post by LadyGeek »

Welcome! I don't have the experience to answer your questions, but the wiki article can help: EU investing
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Hyperborea
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Re: Advice about retirement in the EU [Spain ex-pat, US resident]

Post by Hyperborea »

If you really planning to leave the US and move elsewhere (retirement or work or whatever) in a permanent way (not as a temporary move as a US citizen or greencard holder) then you need to look at your life as divided into two separate time periods. Some investments will work well in one and not the other. You will need to think about how to transition investments that aren't suitable in the second, post US, time period from the first. Sometimes, investments that aren't suitable in the second time period are still worthwhile to hold even if they don't make sense post-US because the benefits are high enough and you will be in the US long enough.

Taxable accounts: When you return to Spain you will use the US-Spain tax treaty to deal with interest and dividends from these accounts. You will owe capital gains tax to Spain in whatever way they are taxed there. You may still owe Spanish tax on the interest and dividends but you should get credit for the US tax paid (check Spanish tax laws).

Retirement accounts (401k/IRA/etc.): These should be treated as retirement accounts under the US-Spain tax treaty. They are listed under the "Pensions and Annuities" column of the tables. You will have figure out the Spanish taxes on these as well. Also, you will still be subject the to 10% early withdrawal penalty if you try to withdraw before age 59.5 as usual.

Personally, I used these retirements accounts since the company match plus the immediate tax savings was huge. My plan with these is to hold them until I am 59.5 to avoid the 10% early withdrawal penalty. I will withdraw them when I am in a tax situation outside the US where they will be taxed at 0% by the US and 0% by the country I am residing in. I do take the risk that I will die in the 6 or so years that I am outside the US but holding the accounts.

Roth type accounts: It's important to check these type of accounts for validity in Spain. Some countries don't recognize these as valid retirement accounts and you will owe taxes on them as if they were regular investment accounts. That was the case for my home country, Canada, when these types of accounts were first introduced. That has since changed but it might still apply for other countries. You need to do your research.

Social Security: You should be able to collect SS while outside of the US and even without a greencard/citizenship. You need 40 quarters of "substantial" work (10 years). They will pay out to most countries of the world. https://www.ssa.gov/international/Agree ... spain.html

Estate Tax: This is the real killer item for holding US accounts when you are not a US tax resident. The estate tax will take a large chunk (up to 40%) of the assets you have that are US situs (retirement accounts, brokerage accounts, etc.). This could leave you or your wife in a bad place financially. This is the biggest reason that you need to have a plan to transition your assets out of the US after you leave. Nice easy summary - https://www2.deloitte.com/content/dam/D ... aliens.pdf

Expatriation: This is the process you will need to go through when you leave the US if you are abandoning a greencard or giving up citizenship. If you don't explicitly do this as a greencard holder then it will happen at some point because of lack of presence in the US but the timing will not be of your choosing.

The current laws will apply a punitive exit tax on people who abandon their greencard with over US$2 million in assets and that dollar value is fixed and not adjusted for inflation. The law will slowly ensnare more people as inflation makes the cutoff amount effectively lower. A couple can get out with twice that (each has the $2M limit) and with some work can get out with $9.5M under current laws. See - viewtopic.php?f=1&t=213098&p=3401794&hi ... n#p3399002

The current law has only been in force since 2008 and there have been a number of other expatriation laws over the years. The current law may not be the one in force when you expatriate but I would count on the law getting only harsher and more punitive.

I really recommend the blog written by a US international tax/expatriation lawyer Phil Hodgen. I have learned a lot from it, he writes well, and explains in non-lawyer terms.

This is all really complex and there are not a lot of people who understand all the parts well. You will likely have to become your own "general contractor" for this and may need to hire one or more sub-contractors for individual parts.
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Topic Author
rgval
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Re: Advice about retirement in the EU [Spain ex-pat, US resident]

Post by rgval »

Thank you Hyperborea for your detailed response.

I have been reading more and researching more. You have pointed me to very important aspects that I didn't consider, and I will need to continue exploring the possibilities.

Really appreciated.
wineandplaya
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Re: Advice about retirement in the EU [Spain ex-pat, US resident]

Post by wineandplaya »

rgval, did you find out anything more from your research?
Last edited by wineandplaya on Thu Jun 13, 2019 10:42 pm, edited 1 time in total.
international001
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Re: Advice about retirement in the EU [Spain ex-pat, US resident]

Post by international001 »

I was wondering if you could share your experience
international001
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Re: Advice about retirement in the EU [Spain ex-pat, US resident]

Post by international001 »

This thread may be useful as well: viewtopic.php?t=140340
devich
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Re: Advice about retirement in the EU [Spain ex-pat, US resident]

Post by devich »

Retirement accounts (401k/IRA/etc.): These should be treated as retirement accounts under the US-Spain tax treaty. They are listed under the "Pensions and Annuities" column of the tables. You will have figure out the Spanish taxes on these as well. Also, you will still be subject the to 10% early withdrawal penalty if you try to withdraw before age 59.5 as usual.

Personally, I used these retirements accounts since the company match plus the immediate tax savings was huge. My plan with these is to hold them until I am 59.5 to avoid the 10% early withdrawal penalty. I will withdraw them when I am in a tax situation outside the US where they will be taxed at 0% by the US and 0% by the country I am residing in. I do take the risk that I will die in the 6 or so years that I am outside the US but holding the accounts.

Sorry, I don't know how to get the part of a post I'm responding to to beige background, my reply is the below, first two para's are what I was responding to in Hyperborea's post...devich

Why do you say "they will be taxed 0% by the US and 0% by the country I am residing in" ? If you are US citizen or green card holder the US taxes all your income wherever you live in the world, including 401k/IRA withdrawals at regular income tax rates. If you are Spanish tax resident Spain taxes your worldwide income, including your US held 401k/IRA withdrawals at Spain's (much higher) regular income tax rates. Because Spain income tax rates are so much higher than US the tax treaty should insure you pay no US tax after applying credit earned by paying Spanish tax. But if you live in a country that doesn't tax US 401k's/IRA's then you have to pay the US on those wirhdrawals with no foreign tax paid credit
Last edited by devich on Sun Oct 31, 2021 5:20 pm, edited 3 times in total.
devich
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Re: Advice about retirement in the EU [Spain ex-pat, US resident]

Post by devich »

PS Also, what happens after the six years you mention ? Thanks
international001
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Re: Advice about retirement in the EU [Spain ex-pat, US resident]

Post by international001 »

devich wrote: Sun Oct 31, 2021 5:04 pm Retirement accounts (401k/IRA/etc.): These should be treated as retirement accounts under the US-Spain tax treaty. They are listed under the "Pensions and Annuities" column of the tables. You will have figure out the Spanish taxes on these as well. Also, you will still be subject the to 10% early withdrawal penalty if you try to withdraw before age 59.5 as usual.

Personally, I used these retirements accounts since the company match plus the immediate tax savings was huge. My plan with these is to hold them until I am 59.5 to avoid the 10% early withdrawal penalty. I will withdraw them when I am in a tax situation outside the US where they will be taxed at 0% by the US and 0% by the country I am residing in. I do take the risk that I will die in the 6 or so years that I am outside the US but holding the accounts.

Sorry, I don't know how to get the part of a post I'm responding to to beige background, my reply is the below, first two para's are what I was responding to in Hyperborea's post...devich

Why do you say "they will be taxed 0% by the US and 0% by the country I am residing in" ? If you are US citizen or green card holder the US taxes all your income wherever you live in the world, including 401k/IRA withdrawals at regular income tax rates. If you are Spanish tax resident Spain taxes your worldwide income, including your US held 401k/IRA withdrawals at Spain's (much higher) regular income tax rates. Because Spain income tax rates are so much higher than US the tax treaty should insure you pay no US tax after applying credit earned by paying Spanish tax. But if you live in a country that doesn't tax US 401k's/IRA's then you have to pay the US on those wirhdrawals with no foreign tax paid credit
?? I don't either understand what do you mean 0% taxed by everybody

The URL table you reference is gone. Are you referring to https://www.irs.gov/pub/irs-utl/Tax_Tre ... 19_Feb.pdf ?

There is a 0% I see is for pensions and annuities; for taxing in the US, but still taxed on Spain. Typically Spain taxes at a higher rate, so it doesn't matter *much* whether US taxes or not.
Last edited by international001 on Mon Nov 01, 2021 6:36 pm, edited 1 time in total.
devich
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Re: Advice about retirement in the EU [Spain ex-pat, US resident]

Post by devich »

Hyperborea wrote: Sun Aug 27, 2017 3:01 pm

Retirement accounts (401k/IRA/etc.): These should be treated as retirement accounts under the US-Spain tax treaty. They are listed under the "Pensions and Annuities" column of the tables. You will have figure out the Spanish taxes on these as well. Also, you will still be subject the to 10% early withdrawal penalty if you try to withdraw before age 59.5 as usual.

Personally, I used these retirements accounts since the company match plus the immediate tax savings was huge. My plan with these is to hold them until I am 59.5 to avoid the 10% early withdrawal penalty. I will withdraw them when I am in a tax situation outside the US where they will be taxed at 0% by the US and 0% by the country I am residing in. I do take the risk that I will die in the 6 or so years that I am outside the US but holding the accounts.

Regarding 401k/IRA, why do you say "they will be taxed 0% by the US and 0% by the country I am residing in" ? If you are US citizen or green card holder the US taxes all your income wherever you live in the world, including 401k/IRA withdrawals at regular income tax rates. If you are Spanish tax resident Spain taxes your worldwide income, including your US held 401k/IRA withdrawals at Spain's (much higher) regular income tax rates. Because Spain income tax rates are so much higher than US the tax treaty should insure you pay no US tax after applying credit earned by paying Spanish tax. But if you live in a country that doesn't tax US 401k's/IRA's then you have to pay the US on those withdrawals with no foreign tax paid credit.
Also, what happens after the six years you mention ? Thanks

Last edited by devich on Sun Oct 31, 2021 3:20 p
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Re: Advice about retirement in the EU [Spain ex-pat, US resident]

Post by Hyperborea »

devich wrote: Sun Oct 31, 2021 5:04 pm
Hyperborea wrote: Retirement accounts (401k/IRA/etc.)[/b]: These should be treated as retirement accounts under the US-Spain tax treaty. They are listed under the "Pensions and Annuities" column of the tables. You will have figure out the Spanish taxes on these as well. Also, you will still be subject the to 10% early withdrawal penalty if you try to withdraw before age 59.5 as usual.

Personally, I used these retirements accounts since the company match plus the immediate tax savings was huge. My plan with these is to hold them until I am 59.5 to avoid the 10% early withdrawal penalty. I will withdraw them when I am in a tax situation outside the US where they will be taxed at 0% by the US and 0% by the country I am residing in. I do take the risk that I will die in the 6 or so years that I am outside the US but holding the accounts.
[Sorry, I don't know how to get the part of a post I'm responding to to beige background, my reply is the below, first two para's are what I was responding to in Hyperborea's post...devich

Why do you say "they will be taxed 0% by the US and 0% by the country I am residing in" ? If you are US citizen or green card holder the US taxes all your income wherever you live in the world, including 401k/IRA withdrawals at regular income tax rates. If you are Spanish tax resident Spain taxes your worldwide income, including your US held 401k/IRA withdrawals at Spain's (much higher) regular income tax rates. Because Spain income tax rates are so much higher than US the tax treaty should insure you pay no US tax after applying credit earned by paying Spanish tax. But if you live in a country that doesn't tax US 401k's/IRA's then you have to pay the US on those wirhdrawals with no foreign tax paid credit
There are two reasons for that: 1) I'm not a Spanish citizen or resident and I'm not planning on becoming one; 2) I was a US green card holder but no longer and have expatriated. Therefore neither Spain nor the US will tax my retirement accounts. This was a side note explaining my own situation in a longer post on retirement issues for people who live in the US and plan to leave.
devich wrote: Mon Nov 01, 2021 9:42 am Also, what happens after the six years you mention ? Thanks
Well, that post was from over 4 years ago and at the roughly 6 year mark after that post I will be 59+ and therefore not subject to the 10% early withdrawal penalty. Current world situation with Covid have meant that I'm not yet in the country where I will withdraw my retirement accounts.

However, that penalty might not be applicable on IRA/401k withdrawals by non-US residents according to some things I've read recently. Whether the IRA / 401k providers would abide by that or not is a big question.
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Re: Advice about retirement in the EU [Spain ex-pat, US resident]

Post by international001 »

Hyperborea wrote: Mon Nov 01, 2021 9:52 am

There are two reasons for that: 1) I'm not a Spanish citizen or resident and I'm not planning on becoming one; 2) I was a US green card holder but no longer and have expatriated. Therefore neither Spain nor the US will tax my retirement accounts. This was a side note explaining my own situation in a longer post on retirement issues for people who live in the US and plan to leave.
So what residency you plan to have while having 401k distributions?

I guess you don't have enough $$ for the exit tax to kick in?
devich
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Re: Advice about retirement in the EU [Spain ex-pat, US resident]

Post by devich »

Hyperborea wrote: Mon Nov 01, 2021 9:52 am
devich wrote: Sun Oct 31, 2021 5:04 pm
Hyperborea wrote: Retirement accounts (401k/IRA/etc.)[/b]: These should be treated as retirement accounts under the US-Spain tax treaty. They are listed under the "Pensions and Annuities" column of the tables. You will have figure out the Spanish taxes on these as well. Also, you will still be subject the to 10% early withdrawal penalty if you try to withdraw before age 59.5 as usual.

Personally, I used these retirements accounts since the company match plus the immediate tax savings was huge. My plan with these is to hold them until I am 59.5 to avoid the 10% early withdrawal penalty. I will withdraw them when I am in a tax situation outside the US where they will be taxed at 0% by the US and 0% by the country I am residing in. I do take the risk that I will die in the 6 or so years that I am outside the US but holding the accounts.
[Sorry, I don't know how to get the part of a post I'm responding to to beige background, my reply is the below, first two para's are what I was responding to in Hyperborea's post...devich

Why do you say "they will be taxed 0% by the US and 0% by the country I am residing in" ? If you are US citizen or green card holder the US taxes all your income wherever you live in the world, including 401k/IRA withdrawals at regular income tax rates. If you are Spanish tax resident Spain taxes your worldwide income, including your US held 401k/IRA withdrawals at Spain's (much higher) regular income tax rates. Because Spain income tax rates are so much higher than US the tax treaty should insure you pay no US tax after applying credit earned by paying Spanish tax. But if you live in a country that doesn't tax US 401k's/IRA's then you have to pay the US on those wirhdrawals with no foreign tax paid credit
There are two reasons for that: 1) I'm not a Spanish citizen or resident and I'm not planning on becoming one; 2) I was a US green card holder but no longer and have expatriated. Therefore neither Spain nor the US will tax my retirement accounts. This was a side note explaining my own situation in a longer post on retirement issues for people who live in the US and plan to leave.
devich wrote: Mon Nov 01, 2021 9:42 am Also, what happens after the six years you mention ? Thanks
Well, that post was from over 4 years ago and at the roughly 6 year mark after that post I will be 59+ and therefore not subject to the 10% early withdrawal penalty. Current world situation with Covid have meant that I'm not yet in the country where I will withdraw my retirement accounts.

However, that penalty might not be applicable on IRA/401k withdrawals by non-US residents according to some things I've read recently. Whether the IRA / 401k providers would abide by that or not is a big question.
Thanks, I do appreciate your response. I made some incorrect assumptions about your status/situation in forming my questions. Your last two sentences carry the day on the whole enchilada, despite all the research we make too many big questions remain on these international rules/regs, I'm fearing there in no there there, and great financial peril in transgressing unknown unknowns.
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Re: Advice about retirement in the EU [Spain ex-pat, US resident]

Post by Hyperborea »

international001 wrote: Mon Nov 01, 2021 6:37 pm
Hyperborea wrote: Mon Nov 01, 2021 9:52 am

There are two reasons for that: 1) I'm not a Spanish citizen or resident and I'm not planning on becoming one; 2) I was a US green card holder but no longer and have expatriated. Therefore neither Spain nor the US will tax my retirement accounts. This was a side note explaining my own situation in a longer post on retirement issues for people who live in the US and plan to leave.
So what residency you plan to have while having 401k distributions?
I am planning on Portuguese residency. However, the tax amounts on retirement accounts / pensions has changed on the non-habitual tax residency system since I wrote that initial post. There is now a 10% Portuguese tax on retirement account withdrawals.

international001 wrote: Mon Nov 01, 2021 6:37 pm I guess you don't have enough $$ for the exit tax to kick in?
I am not a covered expatriate. Note that a single person can get out with US$2 million, a couple can directly get out with US$4 million (split assets in a community property state before you leave), or currently about US$15 million with some gifting assets back and forth and staggering when they expatriate.
It’s not just that facts don’t seem to matter anymore. It’s that it doesn’t seem to matter that facts don’t matter.
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Re: Advice about retirement in the EU [Spain ex-pat, US resident]

Post by assyadh »

Hyperborea wrote: Thu Nov 04, 2021 10:01 am
international001 wrote: Mon Nov 01, 2021 6:37 pm
Hyperborea wrote: Mon Nov 01, 2021 9:52 am

There are two reasons for that: 1) I'm not a Spanish citizen or resident and I'm not planning on becoming one; 2) I was a US green card holder but no longer and have expatriated. Therefore neither Spain nor the US will tax my retirement accounts. This was a side note explaining my own situation in a longer post on retirement issues for people who live in the US and plan to leave.
So what residency you plan to have while having 401k distributions?
I am planning on Portuguese residency. However, the tax amounts on retirement accounts / pensions has changed on the non-habitual tax residency system since I wrote that initial post. There is now a 10% Portuguese tax on retirement account withdrawals.

international001 wrote: Mon Nov 01, 2021 6:37 pm I guess you don't have enough $$ for the exit tax to kick in?
I am not a covered expatriate. Note that a single person can get out with US$2 million, a couple can directly get out with US$4 million (split assets in a community property state before you leave), or currently about US$15 million with some gifting assets back and forth and staggering when they expatriate.

Just a note on the 4M. The gift tax free thresholds for non citizen spouses are low (~150k year). So you have to anticipate this early. in the form 8854, it's not who has an interest on the account that matters but under who's name the account is.

Example: You could have an IRA with 100k in it. from a community property point of view, and in case of a divorce, each spouse has 50k of interest in the IRA.

In the case of the form 8854, only the holder matters. So in order to achieve a real 4M exit tax free, you have to track this accurately.

In my case for instance, for each dollar I put in a 401k, I match it in a taxable brokerage account under my wife's name only.
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