Question
Continuing to do my research before I move to Spain from the US, and just found out that Spain does not recognize Roth IRA’s as tax-free investment vehicles and consequently withdrawals are taxed at a rate up to 26% on a progressive scale.
Since most of my stock portfolios are in the Roth I was thinking that before I move to Spain that it would be best to liquidate the Roth and move the proceeds to a cash stock account with my brokerage firm in the US. Does anyone know if this maneuver would be tax advantageous or not?
Answers
These are the answers of some Facebook group members:
“I did this. But make sure you wll not be a tax resident in spain that same year.”
“If you make up to $110k in earned income (which 401(k) and IRA distributions are) and you live outside the United States and claim tax residency in another country as a result of that, that income is exempt from U.S. taxes because ostensibly you’d be paying taxes to the country where you’re ordinarily resident. So if you’re withdrawing money from a traditional 401(k), you’re supposed to be paying your taxes to Spain, then you claim an exemption from the U.S. which you can do up to that $110k limit. Hence why with a traditional 401(k) or IRA, you’re only supposed to be taxed once, not twice. The only time you’re taxed twice is if you make more than $110k a year, at which point the U.S. taxes you on any income you make above that $110k limit.
For a Roth, you already paid U.S. taxes so the distributions are tax-free when you’re in the U.S., but outside the U.S. the treatment varies. In Spain they don’t recognize the Roth’s tax-free status at withdrawal, so your Roth disbursements, even if you’ve already paid taxes in the U.S. as you contributed to it so that you don’t pay tax when you take money out, are still subject to Spanish income tax. Hence double tax: you already paid U.S. taxes and yet you STILL have to pay Spanish income tax.”
“Is the theory here that they’ll tax stock gains as capital gains and thereby at a lower rate?
You should consult with a Spanish tax advisor first. My understanding is that the only part of a Roth that gets taxed is the gains, not your original investments when you pull them out. And if you have any gains in that stock account, they’re going to be taxed the same way anyway- progressive up to 26%.
It sucks but the reality is that while the US is weird in some bad ways (making overseas residents file taxes with the US no matter what) it’s also good for retirement investing.
PWC has a good summary of Spainish taxes: Spain – Individual – Income determination“
In conclusion, it appears that liquidating a Roth IRA and transferring the proceeds to a cash stock account with a US brokerage firm before moving to Spain may be a tax-advantageous maneuver. However, it is essential to consult with a Spanish tax advisor to understand the tax implications fully. As discussed in Spainguru’s Facebook group, while the US has some drawbacks for overseas residents, such as requiring them to file taxes with the US, it also has several advantages for retirement investing. Therefore, it is crucial to do proper research and seek professional advice before making any decisions regarding financial planning while relocating to a new country.
Check out our Q&A articles What is the taxation on foreign retirement income from American 401-K or Roth IRA in Spain? and I plan to retire in Spain. Are pension, social security and cash taxable?
