Advice about retirement in the EU (Spain)

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plotina
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Advice about retirement in the EU (Spain)

Post by plotina »

I have been a lurker for a few months, and have learnt a lot from the forum. I am happy to have found this wonderful community, and hope to some day be able to contribute.

I am usually very rational when dealing with my finances, but there is an issue I have very irrationally ignored for years. I know it is not going to have an easy answer, but any suggestions would be greatly appreciated.

Background: My husband and I are from Spain and Italy. We are in our early 40s. We have been working in the US for 10 years, and have a child who was born here.

We have been investing as if we were to retire in the US. We both contribute to 401ks and Roth IRAs. Throughout the different accounts we try to replicate a standard 3-fund portfolio, and the resulting allocation largely overweighs US assets.

The issue: we would like to retire in Spain. I imagine that just planning for that would be complicated in terms of taxes and the like, but it is actually even harder because a) there is a small chance that we will retire here. Whether we will do so depends on where our child will go to college and many other family-related variables that are too difficult to predict in advance; and b) there is a small chance that a job opportunity will come up that will allow us to move to Spain before retirement.

Question 1: I know you cannot help resolve the uncertainty, but just starting to read about the tax consequences of moving will be very helpful for me (I feel totally clueless at the moment). Is there any good source of information you could direct me to? Similar posts I have read mentioned the wiki but gave no links, and I have not been able to find any article about moving to the EU/Spain.

Question 2: Would you recommend that I consult with a tax/financial advisor, and if so what type of professional should I be looking for? I have always followed the do-it-yourself route and have been wary of financial advisors, so I would not be too sure where to begin. I imagine it would have to be somebody with specific expertise on the US-Spain tax systems (I do not believe there is a tax treaty between the two countries). Any suggestion on how to look for such a person?

If you have made it this far, thank you so much for taking the time to read!

Plotina
Matej Vela
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Re: Advice about retirement in the EU (Spain)

Post by Matej Vela »

Hello from a fellow EU citizen and welcome!
plotina wrote: We have been investing as if we were to retire in the US. We both contribute to 401ks and Roth IRAs. Throughout the different accounts we try to replicate a standard 3-fund portfolio, and the resulting allocation largely overweighs US assets.

The issue: we would like to retire in Spain. I imagine that just planning for that would be complicated in terms of taxes and the like, but it is actually even harder because a) there is a small chance that we will retire here. Whether we will do so depends on where our child will go to college and many other family-related variables that are too difficult to predict in advance; and b) there is a small chance that a job opportunity will come up that will allow us to move to Spain before retirement.
Actually, I think 401(k) and Roth IRAs are solid choices even if you're not sure about retiring in the US. For a US tax resident, most non-US-domiciled funds are basically off limits due to PFIC rules. Due to FATCA reporting requirements, most EU firms will flat out refuse you or liquidate your accounts as soon as they learn you're a US resident or citizen. (I think I checked degiro.eu, saxobank.com, stocktrade.co.uk, davy.ie, and some of these disallow even IRA-like accounts that are specifically exempt from FATCA by intergovernmental agreements with the US.) There are private retirement schemes in Malta advertising to US clients, but they either make unlikely claims about being completely exempt from IRS reporting, or charge 4 figures to provide you with the right Form 3520-A.

Nonresident alien taxation also has useful pointers. In particular, US-domiciled funds are problematic for nonresidents because of the much smaller estate tax exclusion (~40% tax above $60K if you have the poor taste to die with assets still in the US).

If you've been in the US for 10 years, I assume you have a green card or US citizenship. If you need to renounce either and your assets are over $2M or previous tax liabilities over ~$150K, the HEART Act imposes a hefty exit tax.

Vanguard will normally allow you to keep 401(k) and IRAs as a nonresident. For taxable accounts, I've seen reports of Vanguard, Schwab, and Fidelity asking to liquidate, but you can transfer those over via ACATS to Interactive Brokers -- no-frills service, but cheap and apparently the friendliest to expats.
plotina wrote: Question 1: I know you cannot help resolve the uncertainty, but just starting to read about the tax consequences of moving will be very helpful for me (I feel totally clueless at the moment). Is there any good source of information you could direct me to? Similar posts I have read mentioned the wiki but gave no links, and I have not been able to find any article about moving to the EU/Spain.
You can take some time to go through the US/Spain income tax treaty. Unfortunately, most of these make for dry reading with easy-to-miss pitfalls, and this one doesn't have a technical explanation from the US Treasury. Looking at Article 20, Social Security can be taxed by both countries, while other pensions are taxable only by the country of residence, i.e. Spain if you retire there. However, Article 1 paragraph 3 contains what is known as the "saving clause": US and Spain can tax their own residents/citizens as if the treaty were not in force, and paragraph 4 doesn't have an exception for the relevant bits of Article 20. Also, there's no provision about pensions being taxable only to the extent they are paid out, which is how the US could tax you now on retirement funds in Spain that you'll only receive decades from now. (Compare treaties with the UK, Netherlands, and Belgium, which are better about this.)

Also take a look at Social Security totalization agreements and estate tax treaties. Spain appears to be covered for the former, but not the latter.
plotina wrote: Question 2: Would you recommend that I consult with a tax/financial advisor, and if so what type of professional should I be looking for? I have always followed the do-it-yourself route and have been wary of financial advisors, so I would not be too sure where to begin. I imagine it would have to be somebody with specific expertise on the US-Spain tax systems (I do not believe there is a tax treaty between the two countries). Any suggestion on how to look for such a person?
Yes, definitely worth talking to a professional, and take anything you read on the Internet with large amounts of salt (me included!). I'd suggest to look for a CPA with international experience -- google something like "CPA FBAR FATCA PFIC <your area>". For what it's worth, I've been quoted rates of $90-$350/hr. If there's something they can't answer themselves, they should be able to refer you to an international tax attorney. You'd think large accounting firms like PwC would be good at this, but I've had a poor experience and heard similar stories from others.

Also, if you've worked in Europe before coming to the US and have retirement funds left over in the EU, you'll want to check you're handling them correctly now, and investigate how they would be taxed on withdrawal if you stay in the US. In most cases, the advice is to report these every year on FinCEN 114 (FBAR) and Form 8938 (FATCA). The hairy ones are Form 8621 (PFICs that look through pension wrappers) and Form 3520 (foreign trusts), which is where the immediate taxation comes in.

(If my reply gets stuck in moderation and TedSwippet beats me to it, +1 to everything he says, I only wish I'd found this forum sooner!)
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xystici
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Re: Advice about retirement in the EU (Spain)

Post by xystici »

As you mentioned there are many variables difficult to control. One variable that you did not mention, and as important or more as the many others you referred to, is that your kid most likely will live and work here in the US (a good guess from my part...). Most likely part of your (US) assets will go to support his/her college and inheritance if you decide to support to do so.

We see ourselves closer to our kids and their future families here in America than in Spain as years go by. But again, who knows... The beauty and exciting part of life...

Interesting post for sure. Thanks. Looking forward to the responses. Good luck to you. Xystici
Trust yourself, Break the rules, Don't be afraid to fail, Don't listen to naysayers, Work your butt off. "It is in your moments of decision that your destiny is shaped. Choose now and well"
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TomatoTomahto
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Re: Advice about retirement in the EU (Spain)

Post by TomatoTomahto »

Re your kid's college and retiring in Spain.

When I was in college and my younger sibling was in HS, my parents retired in Ibiza. I found more excuses to visit them in Ibiza than I had to visit them in New Jersey. :D

That was long ago, and things have changed, but I would not preclude a retirement overseas. Just be relatively close to an airport.

ETA: I was in college in the US and my sister moved to HS in Mallorca, then HS in the US.
I get the FI part but not the RE part of FIRE.
TedSwippet
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Re: Advice about retirement in the EU (Spain)

Post by TedSwippet »

Khuen wrote:If my reply gets stuck in moderation and TedSwippet beats me to it, +1 to everything he says, ...
The interaction between the 'exit tax' of HEART and holding a non-Roth 401k or IRA is a potential ugly red flag, but unlike before around 2010 or so this can be reasonably easily defused by a Roth conversion of some type. There is another potential problem, section 2801, with being a covered expat and gifting or bequeathing to a US citizen -- in this case the child, assuming they don't renounce US citizenship after leaving the US -- but that may be far into the future.

...and these are all I can think of to add! I have read your reply through three times now, and cannot find a single thing I could have put better (although I did find a few things I would probably have put worse!). Thank you, Khuen, for taking the time to write this up so thoroughly.
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Re: Advice about retirement in the EU (Spain)

Post by LadyGeek »

New member rgval has a similar question which I've moved into a new thread: Advice about retirement in the EU [Spain ex-pat, US resident]
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rgval
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Re: Advice about retirement in the EU (Spain)

Post by rgval »

LadyGeek wrote: Sun Aug 27, 2017 9:29 am New member rgval has a similar question which I've moved into a new thread: Advice about retirement in the EU [Spain ex-pat, US resident]
Thank you LadyGeek!
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