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.”
“I finally figure out how to make sure Spain can’t tax my Roth IRA account: THIS YEAR, I’ll transfer all my money/investments in my Roth IRA account (after tax savings) to my Individual brokerage account or a bank. Capital gain within Roth is tax exempt in the US so I won’t pay any taxes in the US for the transfer.
If I decide to move to Spain, I’ll move in late July. Spain can’t tax me since I’m not a tax resident of Spain this year. Next year, I’ll only pay taxes on the dividends or interest income at the lower savings tax rates.
I’m a retired CPA (not tax CPA), I should have thought of this earlier.”
Conclusion
For U.S. expats, understanding the taxation of Roth IRAs in Spain is essential for effective financial planning. Despite their tax-free advantages in the U.S., Spain treats Roth IRAs differently, taxing them as both investment and pension accounts. This dual classification impacts dividends, capital gains, and withdrawals, often resulting in higher tax burdens and the inclusion of the account value in wealth tax assessments.
Given these challenges, many experts and expats suggest withdrawing funds from Roth IRAs or rolling them into regular brokerage accounts before becoming a Spanish tax resident. Others recommend using Roth IRAs primarily as estate planning tools for U.S.-based beneficiaries to avoid Spain’s taxation complexities.
With varying interpretations and significant financial implications, consulting with a tax advisor who specializes in both U.S. and Spanish tax systems is essential. Such expertise can help expats align their investments with Spain’s tax laws while maintaining compliance and maximizing long-term financial benefits.
