Question
ROTH IRA Taxation in Spain questions: According to most sources, Spain does not honor the features of the Roth IRA and instead treats this as ‘a brokerage account’.
How do you declare this to the Spanish authorities when doing your taxes?
(1) Do you declare dividends and capital gains that occurred within the account throughout the year and pay taxes based on that? or
(2) Do you declare the distribution (withdrawal) as income and subtract some kind of cost-basis? In this case, how do you calculate the cost-basis and declare that?
(3) Do you think a lot of people ‘forget’ about their Roth IRA when paying their Spanish taxes?
Answers
These are the answers of Spainguru’s Facebook group members:
“It’s unfortunate to be sure but depending on the situation and amounts, I typically advise my clients to either withdraw all funds from your Roth into a brokerage account or not spend anything from your Roth and live on your other assets. Use the Roth as more of an estate planning tool to give your US based beneficiaries tax free income to use in the future.”
“Unfortunately they tax it as income, but the account value also counts towards the wealth tax. The worst of both tax treatments.”
“They treat them as pension accounts, so unfortunately as income. Same as a traditional IRA would be. Which means you lose out on the best benefit of a Roth IRA – the tax free income.”
“Spain & the U.S. agreed in an exchange of diplomatic notes related to the recent amendments to the Tax Treaty that Roth IRAs are included among the types of accounts considered pension accounts by the Treaty.”
“Best advice I saw was do a full withdrawal of your Roth into a regular account before you become a tax resident.”
“Roll it into a regular (non-IRA), before becoming tax resident in Spain, that’s what we are doing … regular IRA will be taxed when you pull out money in retirement, taxed as regular income”
“Unrealized capital gains are not taxed. If any assets are sold then they are taxed.
As for rolling it into a normal IRA, probly a good idea. But it is beyond my ken.”
“Unfortuantely, Spain doesn’t recognize the tax-free growth benefits of these accounts like the U.S. does. Typically, you’d need to declare any dividends and capital gains from your Roth IRA annually and pay taxes on them, rather than waiting until you take distributions.
When it comes to withdrawals, most of the distribution might not be taxed again since you’ve already paid taxes on the gains over the years, similar to selling stock. However, this can be a bit tricky to handle, so I’d strongly recommend consulting with a tax advisor who understands both U.S. and Spanish tax laws.”
Conclusion
For U.S. expats, understanding the taxation of Roth IRAs in Spain is pivotal. Despite the tax-free advantages Roth IRAs offer in the U.S., in Spain, these accounts are not treated with the same leniency.
Spanish tax authorities classify them similarly to pension accounts, leading to their dual treatment as both investment and pension sources, which complicates financial planning for expatriates.
This ambiguity necessitates strategic financial adjustments, such as potentially withdrawing funds before becoming a Spanish tax resident or restructuring investments to align with Spain’s tax protocols.
Given these complexities, it is advisable for expats to seek the expertise of a tax professional who can navigate both Spanish and U.S. tax systems.
This proactive approach ensures compliance and optimizes the financial benefits of Roth IRAs under the constraints of Spanish tax law.
