Spain and Roth IRAs

For residents of Spain.
octorindo
Posts: 5
Joined: Mon Feb 08, 2021 3:48 pm

Re: Spain and Roth IRAs

Post by octorindo »

michaelotal wrote: Thu Feb 14, 2019 2:44 pm
Reigniting this thread: Where do people stand on the requirement to report US retirement accounts (401K, Traditional IRA, Roth IRA) on the Modelo 720, assuming you are not retired and are not taking any distributions? How does it look to Hacienda if you report a 401k on the modelo 720 but then do not declare any dividend income in the modelo 100?

How does the new 2019 tax treaty affect this? https://www.treasury.gov/resource-cente ... -2014.pdf
(page 42, Article X): " if a resident of a Contracting State participates in a pension fund established in the other Contracting State, the State of residence will not tax the income of the pension fund with respect to that resident until a distribution is made from the pension fund. Thus, for example, if a U.S. citizen contributes to a U.S. qualified plan while working in the United States and then establishes residence in Spain, paragraph 5 prevents Spain from taxing currently the plan’s earnings and accretions with respect to that individual. When the resident receives a distribution from the pension fund, that distribution may be subject to tax in the State of residence."
(page 5, subparagraph 3a): " U.S. entities that will be regarded as pension funds for purposes of the Convention includes...a section 401(k) plan... a Roth individual retirement account under Code section 408A, [and] a simple retirement account under Code section 408(p)."
international001
Posts: 2748
Joined: Thu Feb 15, 2018 6:31 pm

Re: Spain and Roth IRAs

Post by international001 »

From michaelotal research, it seems you have to include them on modelo 720.

What article X says is that you won't be taxed for income on your retirements accounts till you make a distribution

There is still not 100% clear how you would be income taxed for a Roth account distribution
And how you would be taxed in terms of (the infamous) wealth tax if you do just a $1 distribution.
octorindo
Posts: 5
Joined: Mon Feb 08, 2021 3:48 pm

Re: Spain and Roth IRAs

Post by octorindo »

international001 wrote: Mon Feb 08, 2021 7:07 pm
Thanks. What troubles me is how it will look to Hacienda when I report 401k/IRA accounts on the modelo 720 but then do not declare any dividend income from those assets in my annual income tax filing. (Since I'm not retired and not taking any distributions from the accounts)
international001
Posts: 2748
Joined: Thu Feb 15, 2018 6:31 pm

Re: Spain and Roth IRAs

Post by international001 »

octorindo wrote: Tue Feb 09, 2021 2:06 am
international001 wrote: Mon Feb 08, 2021 7:07 pm
Thanks. What troubles me is how it will look to Hacienda when I report 401k/IRA accounts on the modelo 720 but then do not declare any dividend income from those assets in my annual income tax filing. (Since I'm not retired and not taking any distributions from the accounts)
Having assets doesn't mean they realize gains. Imagine you have an accumulation ETF in another country like France. Pension plans are explicitly exempted from being taxed if you are not doing distributions. Consult your local CPA, but this doesn't seem to be huge problem.

The real problem with Hacienda (Spanish IRS) would seem to be Roth distributions, still kind of a grey area.
inves76
Posts: 33
Joined: Sun Jan 20, 2019 3:39 pm

Re: Spain and Roth IRAs

Post by inves76 »

international001 wrote: Wed Feb 10, 2021 7:03 am
The real problem with Hacienda (Spanish IRS) would seem to be Roth distributions, still kind of a grey area.
Agree. Agencia Tributaria had a chance to clarify taxes on Roth distribution on this question from 2017. But the question does not provide enough information to Agencia Tributaria to understand the difference between plan de pensiones/401k and a Roth account withdraw.

Nº de consulta
V1133-17

Órgano
SG de Fiscalidad Internacional

Fecha salida
10/05/2017

Normativa
CDI Hispano-Estadounidense, artículos 1, 23 y 24.

Descripción de hechos
El consultante es una persona física que actualmente reside y trabaja en EEUU, y que mensualmente hace depósitos en dos "cuentas de jubilación" denominadas "Individual Retirement Account" (IRA). La primera de dichas cuentas es del tipo "Tradicional IRA", que son fondos depositados antes de impuestos y que desgravan fiscalmente cuando se declaran los impuestos en EE.UU. La segunda de ellas es del tipo "Roth Ira", que son fondos depositados después de impuestos.

Esta persona se plantea regresar a vivir y trabajar a España en unos años y dejar estas dos cuentas IRA en EE.UU.

Cuestión planteada
El consultante plantea si serían gravados por la Hacienda española las hipotéticas futuras retiradas de dinero de ambas cuentas, una vez satisfechos los deberes impositivos en EE.UU., y en caso afirmativo cómo se determinaría dicho gravamen.

Contestación completa
Plantea el consultante la tributación de unas retiradas de dinero de unas cuentas en Estados Unidos, en el caso de que se venga a vivir y residir a España. Por ello, se parte de la premisa de que el consultante es un residente fiscal en España, que realiza retiradas de dinero de las dos cuentas IRA de las que éste es titular en Estados Unidos.

Por tanto, en este caso será de aplicación el Convenio entre el Reino de España y los Estados Unidos de América para evitar la doble imposición y prevenir la evasión fiscal respecto de los impuestos sobre la renta, hecho en Madrid el 22 de febrero de 1990 (BOE de 22 de diciembre de 1990).

En primer lugar, procede calificar esas retiradas de fondos de las dos cuentas de jubilación a efectos de la aplicación del Convenio. No se ha aportado documentación ni información alguna sobre las “cuentas de jubilación” que permitan conocer sus características a efectos de la calificación que merecen esas retiradas.

En el escrito de consulta únicamente se indica que se trata de dos cuentas individuales de jubilación en la que el consultante ha ido depositando fondos; de la escasa información contenida, no parece que deriven, como tales, de un empleo anterior ya sea en el sector privado o público; parece que se trata de dos fondos de pensiones contratados por el consultante con una o varias entidades de carácter financiero. Este tipo de rentas no se tratan en ningún artículo del Convenio Hispano-Estadounidense de manera expresa, por lo que sería de aplicación el artículo 23 “otras rentas”, que señala:

“1. Las rentas de un residente de un Estado contratante, cualquiera que sea su procedencia, no mencionadas en los artículos precedentes de este Convenio, sólo pueden someterse a imposición en ese Estado.”.

Este artículo reconoce en exclusiva la potestad de someter a imposición al Estado de residencia del perceptor de las rentas, que en este caso sería España, sin que Estados Unidos pueda exigir ninguna imposición sobre ellas.

No obstante lo anterior, en caso de que el consultante tuviese nacionalidad estadounidense, y de acuerdo con lo dispuesto en el artículo 1.3 del Convenio, Estados Unidos podrá someter a imposición dicha pensión por razón de ciudadanía como si el Convenio no hubiese entrado en vigor. El artículo 1.3 establece:

“No obstante las disposiciones del Convenio, excepto las contenidas en el apartado 4, un Estado contratante puede someter a imposición a sus residentes (tal como se definen en el artículo 4 –residencia-), y por razón de ciudadanía puede someter a imposición a sus ciudadanos, como si el Convenio no hubiese entrado en vigor.”.

En cuanto a la eliminación de la posible doble imposición, en este caso resultaría aplicable el artículo 24.3 del Convenio:

“3. En el caso de una persona física con ciudadanía estadounidense residente en España, las rentas que puedan someterse a imposición en los Estados Unidos por razón de ciudadanía con arreglo a las disposiciones del apartado 3 del artículo 1 (ámbito general) se considerarán obtenidas en España en la medida necesaria para evitar la doble imposición, siempre que la cuantía del impuesto pagado en los Estados Unidos no sea inferior en ningún caso a la que se hubiera pagado si no se tratará de una persona física con ciudadanía de los Estados Unidos.”.

Lo que comunico a Vd. con efectos vinculantes, conforme a lo dispuesto en el apartado 1 del artículo 89 de la Ley 58/2003, de 17 de diciembre, General Tributaria.
octorindo
Posts: 5
Joined: Mon Feb 08, 2021 3:48 pm

Re: Spain and Roth IRAs

Post by octorindo »

international001 wrote: Wed Feb 10, 2021 7:03 am Having assets doesn't mean they realize gains.
Agreed. I reached out to another American expat who confirmed that Spain doesn't tax undistributed gains on US retirement accounts: he reports IRA and 401K accounts and balances on modelo 100, section H2, "... incluidas las participaciones exentas en el capital social de Cooperativas". The non-distributed gains do not appear anywhere in the completed modelo 100.

As to distributions from US retirement accounts while a fiscal resident in Spain, I am decades away from this so have not done much research.

Re: @inves76 comment: that statement from Hacienda dates from 2017 and makes a big deal about how private pension plans are not explicitly dealt with in the US-Spain Tax Treaty. In 2019 the treaty protocol was updated, and now the US retirement accounts are explicitly mentioned, including Roth (See excerpts in my prior post). Nevertheless I doubt Hacienda's decision will have changed as to their right to tax distributions from any US account, regardless of if it is a Roth.
wishin&hopin
Posts: 24
Joined: Wed Feb 24, 2010 9:25 pm

Re: Spain and Roth IRAs

Post by wishin&hopin »

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.
international001
Posts: 2748
Joined: Thu Feb 15, 2018 6:31 pm

Re: Spain and Roth IRAs

Post by international001 »

octorindo wrote: Wed Feb 10, 2021 12:52 pm Re: @inves76 comment: that statement from Hacienda dates from 2017 and makes a big deal about how private pension plans are not explicitly dealt with in the US-Spain Tax Treaty. In 2019 the treaty protocol was updated, and now the US retirement accounts are explicitly mentioned, including Roth (See excerpts in my prior post). Nevertheless I doubt Hacienda's decision will have changed as to their right to tax distributions from any US account, regardless of if it is a Roth.
In other words, whoever wrote the statement (they usually take 1+ to send an answer), was lazy and an idiot. They didn't bother to google what an IRA was.

Anybody understands this part of the treaty
3. 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.
I guess it means if you are a US citizen in Spain and US wants to tax you $15 of $100, and Spain would have taxed you $20 over $100 (in case you are not a citizen), then Spain will tax you just $5.
But I don't understand they math. It says the tax paid to the United Stats will not be less ($15) than would be paid if the individual were not a citizen of the United States ($20)
international001
Posts: 2748
Joined: Thu Feb 15, 2018 6:31 pm

Re: Spain and Roth IRAs

Post by international001 »

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.
I don't see double taxation on pre-tax 401k. Just that you are likely to have a higher tax bracket in Spain. That's a bullet you have to bite. The bad part is that you cannot plan accordingly because there is no clarity on Roths.

What exit tax you are talking about? You plan to renounce to your US citizenship?
If you are not a US citizen, other complications arise when withdrawing from your 401k.

You may want to consider doing SS and RMDs before, so you fall into lower tax brackets
wishin&hopin
Posts: 24
Joined: Wed Feb 24, 2010 9:25 pm

Re: Spain and Roth IRAs

Post by wishin&hopin »

international001 wrote: Thu Feb 11, 2021 5:29 pm I don't see double taxation on pre-tax 401k. Just that you are likely to have a higher tax bracket in Spain. That's a bullet you have to bite. The bad part is that you cannot plan accordingly because there is no clarity on Roths.

What exit tax you are talking about? You plan to renounce to your US citizenship?
If you are not a US citizen, other complications arise when withdrawing from your 401k.

You may want to consider doing SS and RMDs before, so you fall into lower tax brackets
Right. I mentioned the double taxation was only on my original Roth IRA post-tax contributions. That seems pretty likely unless I empty out my account before becoming a tax resident, based on what I've read here and elsewhere.

I have no plans to renounce my U.S. citizenship.

As to the exit tax, passed in 2015, here's what little I've found out via online research: It applies to gains on any stocks you own worldwide, but only if you stayed more than 10 years of the last 15 years and then return to the U.S. Taxation is imposed when the total value held in those assets exceeds €4 million or you hold a stake of at least 25% in an entity and its value exceeds €1 million.
wineandplaya
Posts: 306
Joined: Fri Sep 14, 2018 9:42 am

Re: Spain and Roth IRAs

Post by wineandplaya »

wishin&hopin wrote: Wed Feb 10, 2021 6:01 pm I'll be living in Madrid, so the wealth tax won't apply -- that's one good thing.
On the other hand, Madrid has one of the highest cost of living in Spain which probably more than offsets marginally lower taxes. And most expat retirees probably prefer to live on the coast or on the islands because of the climate: "Nueve meses de invierno, tres de infierno"..

You can lessen your wealth tax by buying a property to live in rather than renting - that will also create a hedge against a weaker dollar.
Elena
Posts: 395
Joined: Mon Nov 21, 2016 4:42 pm

Re: Spain and Roth IRAs

Post by Elena »

It occurs to me that, as a last recourse, one could always move back to the US for 184 days once in a while, become a fiscal resident for that fiscal year, shift and shuffle whatever is needed, then go back to Spain. Not ideal, but still effective, sice we are taking decades away here.
international001
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Joined: Thu Feb 15, 2018 6:31 pm

Re: Spain and Roth IRAs

Post by international001 »

wishin&hopin wrote: Thu Feb 11, 2021 5:47 pm
As to the exit tax, passed in 2015, here's what little I've found out via online research: It applies to gains on any stocks you own worldwide, but only if you stayed more than 10 years of the last 15 years and then return to the U.S. Taxation is imposed when the total value held in those assets exceeds €4 million or you hold a stake of at least 25% in an entity and its value exceeds €1 million.
AFAIK this applies when you renounce to the US citizenship. Please, share any references if you think otherwise.
international001
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Joined: Thu Feb 15, 2018 6:31 pm

Re: Spain and Roth IRAs

Post by international001 »

Elena wrote: Fri Feb 12, 2021 4:01 am It occurs to me that, as a last recourse, one could always move back to the US for 184 days once in a while, become a fiscal resident for that fiscal year, shift and shuffle whatever is needed, then go back to Spain. Not ideal, but still effective, sice we are taking decades away here.
Yes.. that was one of the ideas earlier in the thread. Unfortunately, there is some fear that Hacienda would not consider 184 days enough. So consult with somebody knowledgeable and make your bets.
I considered the Beckham law (lower rate taxation for people that just moved to Spain), but it doesn't seem to give you Spanish Residency, so I'd think you would be doubled taxed (US + lower Spanish rate)
I also thought that since it's a grey area perhaps Hacienda is not yet enforcing Roth distributions, so it may be worth it to test the system just doing small Roth distributions (like $1000) at the beginning of your retirement.
octorindo
Posts: 5
Joined: Mon Feb 08, 2021 3:48 pm

Re: Spain and Roth IRAs

Post by octorindo »

international001 wrote: Fri Feb 12, 2021 9:22 am There is some fear that Hacienda would not consider 184 days enough. So consult with somebody knowledgeable and make your bets.
I considered the Beckham law (lower rate taxation for people that just moved to Spain), but it doesn't seem to give you Spanish Residency, so I'd think you would be doubled taxed (US + lower Spanish rate)
I also thought that since it's a grey area perhaps Hacienda is not yet enforcing Roth distributions, so it may be worth it to test the system just doing small Roth distributions (like $1000) at the beginning of your retirement.
  • 184 days is the main but not only criteria. You have to move the "nexus of your economic activity." Your spouse and dependents would have to leave Spain with you. You may have to show that you have a lease (or own property) in the US, and if you are working, that your income is no longer tied to Spain.
  • Absolutely do the Beckham Law if you can! (In order to qualify you must move to Spain explicitly for a job opportunity, and it only applies to you not your spouse). As a "Non-resident" for tax purposes, you are only taxed on your Spain-sourced income, not global income. Wages are taxed at a lower flat rate (24% I believe). And you're exempted from much of the terrible paperwork (Modelo 720 and wealth tax filings).
TedSwippet
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Location: UK

Re: Spain and Roth IRAs

Post by TedSwippet »

international001 wrote: Fri Feb 12, 2021 9:17 am
wishin&hopin wrote: Thu Feb 11, 2021 5:47 pm
As to the exit tax, passed in 2015, here's what little I've found out via online research: It applies to gains on any stocks you own worldwide, but only if you stayed more than 10 years of the last 15 years and then return to the U.S. Taxation is imposed when the total value held in those assets exceeds €4 million or you hold a stake of at least 25% in an entity and its value exceeds €1 million.
AFAIK this applies when you renounce to the US citizenship. Please, share any references if you think otherwise.
You are conflating two separate exit taxes. The 'exit tax' being discussed above is Spain's. It applies when you terminate Spanish residency:

Spain's Exit Tax | Blevins Franks

It is different to the US's. That applies when you terminate US citizenship or long term permanent residency:

Expatriation Tax | Internal Revenue Service
international001
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Joined: Thu Feb 15, 2018 6:31 pm

Re: Spain and Roth IRAs

Post by international001 »

octorindo wrote: Fri Feb 12, 2021 10:45 am
  • 184 days is the main but not only criteria. You have to move the "nexus of your economic activity." Your spouse and dependents would have to leave Spain with you. You may have to show that you have a lease (or own property) in the US, and if you are working, that your income is no longer tied to Spain.
That's the problematic thing. If you only follow part of the requirements, both Spain and US could get behind you. What if you work in one country and you have kids, but perhaps no spouse, in the other. I have heard sometimes even living in a hotel makes you resident of the country. I'd love to have a clear algorithm.
I guess if the problem arised, somehow you 'd need to go to court and US and Spain fight for your taxes on court. Not sure how easy it is to get your $$ back from the loosing side.
  • Absolutely do the Beckham Law if you can! (In order to qualify you must move to Spain explicitly for a job opportunity, and it only applies to you not your spouse). As a "Non-resident" for tax purposes, you are only taxed on your Spain-sourced income, not global income. Wages are taxed at a lower flat rate (24% I believe). And you're exempted from much of the terrible paperwork (Modelo 720 and wealth tax filings).
[/quote]
So if Beckham law applies to you, you don't have to pay taxes on your US dividends and US pension plans distributions? But you'll have to pay taxes on your Spain-work income both in Spain and US (double taxation). This seems an incentive to get a part time job in your local Spanish McDonalds.

Out of curiosity, so if you move to Spain under Beckham law, you are fiscal resident of no country?
international001
Posts: 2748
Joined: Thu Feb 15, 2018 6:31 pm

Re: Spain and Roth IRAs

Post by international001 »

TedSwippet wrote: Fri Feb 12, 2021 12:09 pm
international001 wrote: Fri Feb 12, 2021 9:17 am
wishin&hopin wrote: Thu Feb 11, 2021 5:47 pm
As to the exit tax, passed in 2015, here's what little I've found out via online research: It applies to gains on any stocks you own worldwide, but only if you stayed more than 10 years of the last 15 years and then return to the U.S. Taxation is imposed when the total value held in those assets exceeds €4 million or you hold a stake of at least 25% in an entity and its value exceeds €1 million.
AFAIK this applies when you renounce to the US citizenship. Please, share any references if you think otherwise.
You are conflating two separate exit taxes. The 'exit tax' being discussed above is Spain's. It applies when you terminate Spanish residency:

Spain's Exit Tax | Blevins Franks

It is different to the US's. That applies when you terminate US citizenship or long term permanent residency:

Expatriation Tax | Internal Revenue Service
Thanks for chiming in!

I think whiding&hopin wanted to move from US->Spain while keeping his/her US citizenship. I think none of this taxes would apply.
wishin&hopin
Posts: 24
Joined: Wed Feb 24, 2010 9:25 pm

Re: Spain and Roth IRAs

Post by wishin&hopin »

international001 wrote: Fri Feb 12, 2021 6:50 pm
Thanks for chiming in!

I think whiding&hopin wanted to move from US->Spain while keeping his/her US citizenship. I think none of this taxes would apply.
Right. It's all about being a tax resident, not a citizen. The opportunity to become a citizen of Spain wouldn't come up until after 10 years of residency.

The exit tax would only apply to someone if they were to become a tax resident of Spain, stay more than 10 years, and then want to return to the U.S. (and then only if their stock holdings were large enough to fall within Spain's parameters).
international001
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Re: Spain and Roth IRAs

Post by international001 »

wishin&hopin wrote: Fri Feb 12, 2021 7:24 pm
international001 wrote: Fri Feb 12, 2021 6:50 pm
Thanks for chiming in!

I think whiding&hopin wanted to move from US->Spain while keeping his/her US citizenship. I think none of this taxes would apply.
Right. It's all about being a tax resident, not a citizen. The opportunity to become a citizen of Spain wouldn't come up until after 10 years of residency.

The exit tax would only apply to someone if they were to become a tax resident of Spain, stay more than 10 years, and then want to return to the U.S. (and then only if their stock holdings were large enough to fall within Spain's parameters).
Oh... right, I forgot about that one. Perhaps because you need to have more than $4M in assets. I guess this would not apply to pension funds.
Does this apply between US and SPAIN? The taxpayer can request to defer their tax liability (...) When the change of residency for any other reason is to a country which has a double taxation agreement signed with Spain and an information exchange clause.'
It seems a complicated tax, particularly if there are many countries involved
miguel_alm
Posts: 13
Joined: Sat Feb 27, 2021 10:05 am

Re: Spain and Roth IRAs

Post by miguel_alm »

Hello, i'm a spanish tax advisor trying to shed some clarity to the 401k-IRAs / roth
Spanish tax laws, and specifically, 720 declaration, are full of normative gaps and questions without answer are routine. But AEAT dont miss the oportunity to sanction, taking advantage of this situation, so, we have to ensure our decision.

It's the first time I have to declare an IRA (720/IRPF), so, I'm learning the characteristics and linking them to the obligations to declare, and the habitual methods of AEAT in wich i am familiar, convinced that there will not exist the perfect answer (neither the one who made the law knows, or the one who applies it, trust me). I accept the general idea, we dont have to declarate foreing private pension plans. We can consider them as spanish-equivalent-plans, included now in the double tax agreement between USA-SPAIN. Since the last changes in 2019 (of an agreement dated 2013 :confused ), this point is a bit more clarified. The simple IRAs that don't extract other investments, and only represent a liquid quantity deposited in a retirement account, fit perfect on the pure description (i'm learning types of IRA's https://www.thebalance.com/roth-ira-vs- ... nds-358037 ).

But, what about the IRA's that are linked to a brokerage account brokerage / mutual fund account etc ? Do we have a complex product to declarate -separatelly-?
If you are the investor owner of the products that are holded through the IRA account, you are probably the owner of the individual products (funds, shares, etc) where your money is invested. It leads me to think, that you are not only the owner of an IRA account, you are the owner of a few other invest with their particulary international ISIN. I have read that U.S. laws apply the limit of (¿3 months?), prohibiting tax deductibility to the losses when you rebuy the same product you sold with loss, regardless if they are into the IRA account or outside it. So, do i have to declare the other products instead of the IRA itself?
I havent read anyone considering the option to declare the products linked to the IRA in the 720 in those cases, taking them as linked but, in fact, independent. But probably i'm forgetting something you can tell me.

Other declarations:
- Model 714 (impuesto de patrimonio): It's only required to the ones who has +700.000 € value in goods and rights, excluding 300.000 € of your main residence. It includes goods and rights located in all over the world
- Model D# (#=number): Group of statistical models, like, for example, the model D6 related to shares/funds) , we have to present in January, to declare spanish investments in foreign countrys. There are different models depending on the goods to declare the investments abroad in this declaration (there exist sanctions related to this model, but they haven't applied them till today)

I apologize if some words, explanations, or my grammar is not totally correct... my english level has dropped since i studied it in the school! I hope you understand me and we can reach a satisfactorially solution. Sometimes we have to take proofs of the way we choose, because a perfect answer doesnt exist in Spanish taxes problems. Thanks
Last edited by miguel_alm on Sat Feb 27, 2021 12:08 pm, edited 2 times in total.
miguel_alm
Posts: 13
Joined: Sat Feb 27, 2021 10:05 am

Re: Spain and Roth IRAs

Post by miguel_alm »

In adition:
The unit linked life insurances, are commonly associated to a some other underlying assets, like that type of IRA's, and the obligation to present the 720 arises referred to that underlying assets in wich the unit linked shapes its investments

So, my conclusion, considering the reasons in my previous post, the similaritis with the investing mechanism of unit linked insurances, that have to be declarated separating the specific investments; and considering the caution we have to take always with the AEAT and specifically, with this hardly punishable obligation; is that IRA's associated to a brokerage accounts/mutual funds with specific products, have to be declarated in 720, and so I'm going to do.
And what's more, despite it could be punishable aswell, is better to include in the 720 statement, goods/rights you dont have to include, that not including those good if you are obligated. And the possible sanctions in this case, are only formal, far the amount the sanctions carried by not presenting the statement for those goods

But, as it is my personal conclusion based on my own ideas of the IRA's character and the general info of 720, so I appreciate other opinions or, of course, information

PS: Usually, tax inspectors know less than us in this subject, and cant assure if it exists the obligation or not, so, we dont have serious problems when we all share the same doubts
international001
Posts: 2748
Joined: Thu Feb 15, 2018 6:31 pm

Re: Spain and Roth IRAs

Post by international001 »

miguel_alm wrote: Sat Feb 27, 2021 12:01 pm
It's the first time I have to declare an IRA (720/IRPF), so, I'm learning the characteristics and linking them to the obligations to declare, and the habitual methods of AEAT in wich i am familiar, convinced that there will not exist the perfect answer (neither the one who made the law knows, or the one who applies it, trust me). I accept the general idea, we dont have to declarate foreing private pension plans. We can consider them as spanish-equivalent-plans, included now in the double tax agreement between USA-SPAIN. Since the last changes in 2019 (of an agreement dated 2013 :confused ), this point is a bit more clarified. The simple IRAs that don't extract other investments, and only represent a liquid quantity deposited in a retirement account, fit perfect on the pure description (i'm learning types of IRA's https://www.thebalance.com/roth-ira-vs- ... nds-358037 ).

But, what about the IRA's that are linked to a brokerage account brokerage / mutual fund account etc ? Do we have a complex product to declarate -separatelly-?
If you are the investor owner of the products that are holded through the IRA account, you are probably the owner of the individual products (funds, shares, etc) where your money is invested. It leads me to think, that you are not only the owner of an IRA account, you are the owner of a few other invest with their particulary international ISIN. I have read that U.S. laws apply the limit of (¿3 months?), prohibiting tax deductibility to the losses when you rebuy the same product you sold with loss, regardless if they are into the IRA account or outside it. So, do i have to declare the other products instead of the IRA itself?
I think you are confused.
The link you sent is only about ROth IRA pension plan. It tells you about practical options to open a Roth IRA account, but they are not important from a legal point of view.
I'm not sure what do you mean by Roth IRA and the linked investments and other investments. A Roth IRA is a structure composed of different investments inside. They can be mutual funds, ETFs, stocks, cash, bonds, etc. When the link you sent refers to buying Mutual Funds is a poorly structured statement, but it indicates to buy a mutual fund outside of a Roth IRA (in a taxable account)

Spanish Pension Plans are the same. They have component investments inside. This one is probably the best right now: https://myinvestor.es/inversion/planes-pensiones/

So if you don't have to declare Roth IRA (or a traditional IRA, or a 401k account) in a model 720, I don't see how you would have to declare it's components either. It would be absurd.

From the previous posts, it seems you don't have to declare any US pension plan structure in model 714, and I would assume on model D either. But it's not 100% sure

Are you sure the inspector don't know the answer or at least they don't take a consistent approach to deal with it? I'm talking about the higher level functionary (inspector of Hacienda), not the lower level (tecnico de Hacienda)
miguel_alm
Posts: 13
Joined: Sat Feb 27, 2021 10:05 am

Re: Spain and Roth IRAs

Post by miguel_alm »

international001 wrote: Sun Feb 28, 2021 10:57 am
miguel_alm wrote: Sat Feb 27, 2021 12:01 pm
It's the first time I have to declare an IRA (720/IRPF), so, I'm learning the characteristics and linking them to the obligations to declare, and the habitual methods of AEAT in wich i am familiar, convinced that there will not exist the perfect answer (neither the one who made the law knows, or the one who applies it, trust me). I accept the general idea, we dont have to declarate foreing private pension plans. We can consider them as spanish-equivalent-plans, included now in the double tax agreement between USA-SPAIN. Since the last changes in 2019 (of an agreement dated 2013 :confused ), this point is a bit more clarified. The simple IRAs that don't extract other investments, and only represent a liquid quantity deposited in a retirement account, fit perfect on the pure description (i'm learning types of IRA's https://www.thebalance.com/roth-ira-vs- ... nds-358037 ).

But, what about the IRA's that are linked to a brokerage account brokerage / mutual fund account etc ? Do we have a complex product to declarate -separatelly-?
If you are the investor owner of the products that are holded through the IRA account, you are probably the owner of the individual products (funds, shares, etc) where your money is invested. It leads me to think, that you are not only the owner of an IRA account, you are the owner of a few other invest with their particulary international ISIN. I have read that U.S. laws apply the limit of (¿3 months?), prohibiting tax deductibility to the losses when you rebuy the same product you sold with loss, regardless if they are into the IRA account or outside it. So, do i have to declare the other products instead of the IRA itself?
I think you are confused.
The link you sent is only about ROth IRA pension plan. It tells you about practical options to open a Roth IRA account, but they are not important from a legal point of view.
I'm not sure what do you mean by Roth IRA and the linked investments and other investments. A Roth IRA is a structure composed of different investments inside. They can be mutual funds, ETFs, stocks, cash, bonds, etc. When the link you sent refers to buying Mutual Funds is a poorly structured statement, but it indicates to buy a mutual fund outside of a Roth IRA (in a taxable account)

Spanish Pension Plans are the same. They have component investments inside. This one is probably the best right now: https://myinvestor.es/inversion/planes-pensiones/

So if you don't have to declare Roth IRA (or a traditional IRA, or a 401k account) in a model 720, I don't see how you would have to declare it's components either. It would be absurd.

From the previous posts, it seems you don't have to declare any US pension plan structure in model 714, and I would assume on model D either. But it's not 100% sure

Are you sure the inspector don't know the answer or at least they don't take a consistent approach to deal with it? I'm talking about the higher level functionary (inspector of Hacienda), not the lower level (tecnico de Hacienda)
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
wineandplaya
Posts: 306
Joined: Fri Sep 14, 2018 9:42 am

Re: Spain and Roth IRAs

Post by wineandplaya »

miguel_alm,

Is it correctly understood that your view is that:

1. The individual investments held inside an IRA must be declared in Modelo 720 and Modelo 714, but they are still excluded from wealth tax (impuesto de patrimonio).

2. For the purposes of IRPF, they are considered pension plans, as the double taxation treaty makes clear (https://www.irs.gov/businesses/internat ... -documents).

3. Spain will make no distinction between traditional IRAs (no income tax has been paid in the US) and Roth IRAs (income tax was paid in the US the year it was deposited).

4. I will pay IRPF only on the growth inside a Roth IRA. For example: In year 2015, I put $5000 of my own (already taxed) money in a Roth IRA. In 2021, the value has grown to $8000 and I am now a Spanish resident. If I withdraw the $8000, I will have to pay IRPF on the $3000 gain. For people with high income, the marginal tax rate will be ~45 %, not ~23 % as if I had sold investments outside an IRA.

Thanks!
international001
Posts: 2748
Joined: Thu Feb 15, 2018 6:31 pm

Re: Spain and Roth IRAs

Post by international001 »

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).
inves76
Posts: 33
Joined: Sun Jan 20, 2019 3:39 pm

Re: Spain and Roth IRAs

Post by inves76 »

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.
international001
Posts: 2748
Joined: Thu Feb 15, 2018 6:31 pm

Re: Spain and Roth IRAs

Post by international001 »

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?
international001
Posts: 2748
Joined: Thu Feb 15, 2018 6:31 pm

Re: Spain and Roth IRAs

Post by international001 »

wineandplaya wrote: Sat Mar 06, 2021 7:43 am miguel_alm,

Is it correctly understood that your view is that:

1. The individual investments held inside an IRA must be declared in Modelo 720 and Modelo 714, but they are still excluded from wealth tax (impuesto de patrimonio).

2. For the purposes of IRPF, they are considered pension plans, as the double taxation treaty makes clear (https://www.irs.gov/businesses/internat ... -documents).
I thought it was clear that ROth IRA was consider a pension plan by the treaty. A different thing is how the heck does Spain decide to tax them
wineandplaya wrote: Sat Mar 06, 2021 7:43 am
3. Spain will make no distinction between traditional IRAs (no income tax has been paid in the US) and Roth IRAs (income tax was paid in the US the year it was deposited).
That contradicts point 4 if traditional IRAs distribution are meant to be taxed as regular income in Spain.

wineandplaya wrote: Sat Mar 06, 2021 7:43 am
4. I will pay IRPF only on the growth inside a Roth IRA. For example: In year 2015, I put $5000 of my own (already taxed) money in a Roth IRA. In 2021, the value has grown to $8000 and I am now a Spanish resident. If I withdraw the $8000, I will have to pay IRPF on the $3000 gain. For people with high income, the marginal tax rate will be ~45 %, not ~23 % as if I had sold investments outside an IRA.

Thanks!
That would be funny to implement. Are you supposed to keep track of the contributions? And do pro-rata when you do partial distributions? And choosing what kind of distribution it is if you are a US resident (since order of distributions is well defined in US - contributions first-).
btraven
Posts: 105
Joined: Tue Jul 02, 2013 3:27 pm

Re: Spain and Roth IRAs

Post by btraven »

I've read through this thread and I am not sure if my understanding is correct. Could you please look at the following statements and correct them as necessary?:

1a. Traditional IRA withdrawals are taxable 1b. Roth withdrawals are probably taxable
2. As of the 2019 Tax Treaty, traditional IRA and Roth IRA accounts do not count for the Wealth Tax
3. Unrealized capital gains from tIRA and Roth IRA are not taxable
4. Social security is not taxable

I have some questions on the wealth tax that I haven't seen addressed:
1. Can the wealth tax be filed married, filing jointly?
2. Do the couple's exclusions (e.g. 1400k euros) apply to the totality of the couple's assets if all the assets are NOT held jointly? For example, if one of the couple has 200k Euro assets, can the couple take advantage of the full 700k euro exclusion, applying the remainder to the total where the other's assets can use it?
3. Do you get the house exclusion (300k euros) on a house in the US or only in Spain?
4. Is any wealth (including unrealized capital gains) from the period in Spain included in the Exit Tax?

Thank you!
Barcelonasteve
Posts: 65
Joined: Tue Oct 22, 2019 10:50 am

Re: Spain and Roth IRAs

Post by Barcelonasteve »

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.
international001
Posts: 2748
Joined: Thu Feb 15, 2018 6:31 pm

Re: Spain and Roth IRAs

Post by international001 »

btraven wrote: Tue Mar 09, 2021 4:50 pm I've read through this thread and I am not sure if my understanding is correct. Could you please look at the following statements and correct them as necessary?:

1a. Traditional IRA withdrawals are taxable 1b. Roth withdrawals are probably taxable
2. As of the 2019 Tax Treaty, traditional IRA and Roth IRA accounts do not count for the Wealth Tax
3. Unrealized capital gains from tIRA and Roth IRA are not taxable
4. Social security is not taxable
Roth is still a guess game, 2 seems likely, 3 solid
Where was SS discuss?
btraven wrote: Tue Mar 09, 2021 4:50 pm I have some questions on the wealth tax that I haven't seen addressed:
1. Can the wealth tax be filed married, filing jointly?
2. Do the couple's exclusions (e.g. 1400k euros) apply to the totality of the couple's assets if all the assets are NOT held jointly? For example, if one of the couple has 200k Euro assets, can the couple take advantage of the full 700k euro exclusion, applying the remainder to the total where the other's assets can use it?
3. Do you get the house exclusion (300k euros) on a house in the US or only in Spain?
4. Is any wealth (including unrealized capital gains) from the period in Spain included in the Exit Tax?

Thank you!
If you file married in Spain, wealth tax exclusions are doubled, so better to do it like this. But be careful with the exclusions, that changes with the region. House exclusion applies to your primary residence. I don't see how you can have your primary residence in US while being a Spanish tax resident. I think exit tax affects any unrealized gains. So it you have > $4M, consult an advisor
international001
Posts: 2748
Joined: Thu Feb 15, 2018 6:31 pm

Re: Spain and Roth IRAs

Post by international001 »

Barcelonasteve wrote: Tue Mar 09, 2021 6:37 pm
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.
That may seem legal only for a Spaniard ;)
But why would you need the certificate if you are not paying taxes at all?
Barcelonasteve wrote: Tue Mar 09, 2021 6:37 pm 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.
I guess I'm naive and didn't even consider that. If you have a trust, the money flows back to you and it has to be taxed to you, no?
I heard it's not the case for an irrevocable trust, what perhaps it's aa solution if you just want that money to your heirs.

Barcelonasteve wrote: Tue Mar 09, 2021 6:37 pm 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.
That cracked me up ;-)
WhiteMaxima
Posts: 3338
Joined: Thu May 19, 2016 5:04 pm

Re: Spain and Roth IRAs

Post by WhiteMaxima »

Too much of trouble. A US citizen could live in EU for 90 days out of 6 months and 180 days out of a calender year. So just do 90 days and visa run to max 180 per year in EU. Then come back to US for health check up. US actually is more tax friendly than Spain. If Spain consider you a tax resident, your wealth include your US property could be taxed. Stay out of trouble.
btraven
Posts: 105
Joined: Tue Jul 02, 2013 3:27 pm

Re: Spain and Roth IRAs

Post by btraven »

international001 wrote: Tue Mar 09, 2021 7:12 pm
btraven wrote: Tue Mar 09, 2021 4:50 pm
Where was SS discuss?
I think someone said any pension paid by a government entity was not taxed
wineandplaya
Posts: 306
Joined: Fri Sep 14, 2018 9:42 am

Re: Spain and Roth IRAs

Post by wineandplaya »

It seems to be clear from this thread that your taxes in Spain get very complicated if you try to avoid paying them.
international001
Posts: 2748
Joined: Thu Feb 15, 2018 6:31 pm

Re: Spain and Roth IRAs

Post by international001 »

WhiteMaxima wrote: Tue Mar 09, 2021 10:31 pm Too much of trouble. A US citizen could live in EU for 90 days out of 6 months and 180 days out of a calender year. So just do 90 days and visa run to max 180 per year in EU. Then come back to US for health check up. US actually is more tax friendly than Spain. If Spain consider you a tax resident, your wealth include your US property could be taxed. Stay out of trouble.
Well.. if living as a tourist works for you is perfect. Even if you are in Spain 9 months of the year, nobody is going to check unless you are loaded
https://www.archyde.com/this-is-how-hac ... eps-style/
international001
Posts: 2748
Joined: Thu Feb 15, 2018 6:31 pm

Re: Spain and Roth IRAs

Post by international001 »

btraven wrote: Wed Mar 10, 2021 1:50 am
international001 wrote: Tue Mar 09, 2021 7:12 pm
btraven wrote: Tue Mar 09, 2021 4:50 pm
Where was SS discuss?
I think someone said any pension paid by a government entity was not taxed
Check again. Couldn't find it. Perhaps it was referring to a goverment pension in the US sense. Like if you work as a policemen in the US. Treaties tend to tax them in a different way.
international001
Posts: 2748
Joined: Thu Feb 15, 2018 6:31 pm

Re: Spain and Roth IRAs

Post by international001 »

wineandplaya wrote: Wed Mar 10, 2021 6:15 am It seems to be clear from this thread that your taxes in Spain get very complicated if you try to avoid paying them.
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.
That's unfortunately, true for foreigners and nationals, complicated laws to follow and sever punishments for not doing it

That's scary:
https://www.libremercado.com/2019-07-19 ... 276641939/
WhiteMaxima
Posts: 3338
Joined: Thu May 19, 2016 5:04 pm

Re: Spain and Roth IRAs

Post by WhiteMaxima »

Stay out of trouble. Tax is a serious issue. You don't want end your silver years in Spanish prison or suffer heavy fine on your 401k.
wineandplaya
Posts: 306
Joined: Fri Sep 14, 2018 9:42 am

Re: Spain and Roth IRAs

Post by wineandplaya »

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.
WhiteMaxima
Posts: 3338
Joined: Thu May 19, 2016 5:04 pm

Re: Spain and Roth IRAs

Post by WhiteMaxima »

Stay Spain for less 183 days per year to avoid tax resident trouble. Spain has wealth tax which covers all your world wide properties but only if they consider you as tax resident. Plus all EU countries has VAT tax which is about 20% which is much heavy than US.
wishin&hopin
Posts: 24
Joined: Wed Feb 24, 2010 9:25 pm

Re: Spain and Roth IRAs

Post by wishin&hopin »

WhiteMaxima wrote: Wed Mar 10, 2021 11:27 am Stay Spain for less 183 days per year to avoid tax resident trouble. Spain has wealth tax which covers all your world wide properties but only if they consider you as tax resident.
The wealth tax is applied differently by each province. Currently, the Madrid region doesn't apply it (by negating it entirely through a tax credit, based on what I've read).
international001 wrote: Wed Mar 10, 2021 8:21 am
wineandplaya wrote: Wed Mar 10, 2021 6:15 am It seems to be clear from this thread that your taxes in Spain get very complicated if you try to avoid paying them.
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.
That's unfortunately, true for foreigners and nationals, complicated laws to follow and sever punishments for not doing it

That's scary:
https://www.libremercado.com/2019-07-19 ... 276641939/
That is scary. You try to do the right thing and fill out the 720 to the best of your ability...and then that happens.
international001
Posts: 2748
Joined: Thu Feb 15, 2018 6:31 pm

Re: Spain and Roth IRAs

Post by international001 »

wineandplaya wrote: Wed Mar 10, 2021 10:55 am 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.
An alternative idea. For a 401k/trad IRA, do a lump sump distribution while you are a US resident, perhaps at 24% bracket, and invest everything in a taxable account. You'll loose compounding power, but you'll be taxed at a lower rate. If you don't live more than X years, it will become more tax efficient (compute X for your own case).

Of course, consider wealth tax, etc.
international001
Posts: 2748
Joined: Thu Feb 15, 2018 6:31 pm

Re: Spain and Roth IRAs

Post by international001 »

wishin&hopin wrote: Wed Mar 10, 2021 4:45 pm
WhiteMaxima wrote: Wed Mar 10, 2021 11:27 am Stay Spain for less 183 days per year to avoid tax resident trouble. Spain has wealth tax which covers all your world wide properties but only if they consider you as tax resident.
The wealth tax is applied differently by each province. Currently, the Madrid region doesn't apply it (by negating it entirely through a tax credit, based on what I've read).
There are politicians saying they'll remove the credit. And there are some saying they'll remove the wealth tax.
All planning is futile. :annoyed
wishin&hopin
Posts: 24
Joined: Wed Feb 24, 2010 9:25 pm

Re: Spain and Roth IRAs

Post by wishin&hopin »

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).
Thanks, Barcelonasteve. Sadly, after a year of being committed to the idea of moving to Madrid, I've come to the same conclusion you and your DW did. My heart says yes, but my head says no. It's just too risky, for the reasons you enumerate. I'm now looking at alternative scenarios.
wineandplaya
Posts: 306
Joined: Fri Sep 14, 2018 9:42 am

Re: Spain and Roth IRAs

Post by wineandplaya »

international001 wrote: Thu Mar 11, 2021 7:34 am
wineandplaya wrote: Wed Mar 10, 2021 10:55 am 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.
An alternative idea. For a 401k/trad IRA, do a lump sump distribution while you are a US resident, perhaps at 24% bracket, and invest everything in a taxable account. You'll loose compounding power, but you'll be taxed at a lower rate. If you don't live more than X years, it will become more tax efficient (compute X for your own case).

Of course, consider wealth tax, etc.
I think that there is a maximum amount of money that it makes sense to own in pre-tax accounts when relocating. A pre-tax amount that pushes you into the 45 % tax bracket in Spain (For 2021: 60k eur single or 120k eur married) is probably too big. A pre-tax amount that pushes you into the 37 % tax bracket in Spain (For 2021: 35.2k eur single or 70.4k eur married) may or may not make sense.

For example: If I were to retire at age 60, I would plan to withdraw 70.4k eur/year (or whatever amount it will correspond to then) before Social Security kicks in at age 70. That gives a reasonable pre-tax amount, between me and my wife, of around $500k. I would then any additional amount so that RMD + Social Security correspond to 70.4k eur / year after age 70.
international001
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Joined: Thu Feb 15, 2018 6:31 pm

Re: Spain and Roth IRAs

Post by international001 »

I don't know how you make your $500k computations. Specially for just a 10 year frame, it may depend a lot on the sequence of returns.
Spanish taxes are higher, but at $70k range consider the effective tax rate, not only the marginal tax rate. Of course, you have to compare to taxes in a no state tax like FL, not in a high tax state like CA. Also consider that many of your service expenses will be 1/2 that what you'll have in US (cleaning maids, long teerm care, etc).
miguel_alm
Posts: 13
Joined: Sat Feb 27, 2021 10:05 am

Re: Spain and Roth IRAs

Post by miguel_alm »

wineandplaya wrote: Sat Mar 06, 2021 7:43 am miguel_alm,

Is it correctly understood that your view is that:

1. The individual investments held inside an IRA must be declared in Modelo 720 and Modelo 714, but they are still excluded from wealth tax (impuesto de patrimonio).

2. For the purposes of IRPF, they are considered pension plans, as the double taxation treaty makes clear (https://www.irs.gov/businesses/internat ... -documents).

3. Spain will make no distinction between traditional IRAs (no income tax has been paid in the US) and Roth IRAs (income tax was paid in the US the year it was deposited).

4. I will pay IRPF only on the growth inside a Roth IRA. For example: In year 2015, I put $5000 of my own (already taxed) money in a Roth IRA. In 2021, the value has grown to $8000 and I am now a Spanish resident. If I withdraw the $8000, I will have to pay IRPF on the $3000 gain. For people with high income, the marginal tax rate will be ~45 %, not ~23 % as if I had sold investments outside an IRA.

Thanks!
Hello @wineandplaya. I answer you. This products are new for me, I'm now learning this to USA clients, for the first time, but i have already some ideas in conclusion

1.- Not exactly. In "modelo 714 - impuesto de patrimonio", i would group all the individual investments, and declare them agrouped in one line for each IRA agreement, in the place we declare exempt elements. But rules in modelo 720 are different, and the best is to declare all the specific investmens instead of the IRA agreement itself, because is not exactly a patrimonial declaration, but a declaration you represent goods and rights you have the control, all over the world (not only direct owners have to present the declaration).
The "impuesto de patrimonio" belongs in recaudation and gestion to the "comunidades autónomas". So, some of them, have stablished a reduction of 99%, as Comunidad Autónoma de Madrid. But government is trying to erase these differences and to pay the same tax of "patrimonio" in all the country

2.- Yes. As the double taxation treaty recognizes, IRAs or Roth IRA are equivalent to our "planes de pensiones", and they are taxable considering that condition.

3.- Thats it. In Spain all pension plans are similar to traditional IRA, so they receive tax benefits when you contribute during your life, and, in accordance, you pay taxes when you retrieve them, hoping you will have lower tax rates in your retirement. So, my conclusion is Roth IRA are affected because they didnt receive tax benefits, and now they will pay when you retrieve it being a spanish resident, because there is no difference compared to any Spanish retrieving a "pension plan". I havent seen any reciprocity treatment in the tax exemption related to Roth IRAs or any "consulta tributaria" in that way

4. You will pay till 45% (some "Autonomías" reach 52%) for all the withdraw. The 8.000 will add completely to your "rendimientos del trabajo" in "base general". You dont pay 45% till you reach 60.000 € more or less (tax percentage increases by sections, and we all have a non-taxable amount). 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). It would be better to retrieve roth ira before coming to Spain. The IRA will pay in Spain and in USA if you live in Spain.

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
miguel_alm
Posts: 13
Joined: Sat Feb 27, 2021 10:05 am

Re: Spain and Roth IRAs

Post by miguel_alm »

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.
"Planes de pensiones" and "plan de previsión asegurado" have the same tax benefits. When retrieving, you declare it in "base general" and they pay from 19-45% (since 2021 we have another % section, 49% from 300.000 € amount)

But plan individual de ahorro sistematico PIAS, are not pension plans. They are literally, life and money savings insurance. They have other tax benefits and the retrieval is related to the "base del ahorro" taxable (19-23%, and since now, in 2021, 26% to +200.000 € amount)
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