Roth IRAs in Spain: What US Expats Need to Know About Tax and Reporting
The issue with Roth IRAs in Spain is complex, not least because the US-Spain Tax Treaty was signed before Roth IRAs were established in the US. Generally, the Spanish authorities will consider a Roth IRA to be most similar to a regular, taxable account and will not consider them to be tax-deferred or a pension plan.
In terms of tax treatment in Spain, trades inside the account should not trigger a taxable event. If the gains and dividends are not distributed, no tax liability should occur in Spain.
However, if the client takes a distribution and is considered tax resident in Spain, it may trigger a taxable event. The Spanish tax authority will likely tax the earnings and growth that are distributed.
Importantly, the US Roth IRA rules specifically designate the order in which distributions are categorized. In the US, the original contributions are withdrawn tax-free first, before proceeding to designate withdrawals as earnings and growth. Spain does not use this method. They apply a pro-rata cost basis method, under which every distribution the client receives will be categorized as a proportional mix of original contributions and growth and earnings.
Scenario 1:
If no distributions taken there will be no tax liability in Spain.
However, the client will still need to declare the full amount of the account to the Spanish tax authorities for the Wealth Tax or Solidarity Tax. Which one applies depends on the client’s regional residence and net worth.
If the aggregate total of foreign financial accounts (including IRAs and bank accounts) exceeds €50,000, they must be declared on the clients’s Spanish tax return (Modelo 720).
Scenario 2:
Once again, no tax liability accrues in Spain merely for trading activity within the account.
Distribution tax will be calculated as follows:
Find the proportion of the account that is attributable to basis and that which is attributable to growth and earnings
Apply the growth and earnings proportion to the amount being distributed. This is the amount that will be liable to taxation in Spain.
Add this amount to the client’s Spanish savings income base
Refer to the Spanish Savings Tax Scale, which is generally 19%-29%, but can be up to 30%.
Note that the client cannot claim a Foreign Tax Credit on their US tax return to offset the liability in Spain, as the IRS considers that these distributions should not attract taxation.
The client will still need to declare the full amount of the account to the Spanish tax authorities for the Wealth Tax or Solidarity Tax. Which one applies depends on the client’s regional residence and net worth.
If the aggregate total of foreign financial accounts (including IRAs and bank accounts) exceeds €50,000, they must be declared on the clients’s Spanish tax return (Modelo 720).
Scenario 3:
No distribution means no tax liability in Spain.
The client will still need to declare the full amount of the account to the Spanish tax authorities for the Wealth Tax or Solidarity Tax. Which one applies depends on the client’s regional residence and net worth.
If the aggregate total of foreign financial accounts (including IRAs and bank accounts) exceeds €50,000, they must be declared on the client’s Spanish tax return (Modelo 720).
Scenario 4:
Taking a distribution will incur a liability in Spain
Distribution tax will be calculated as follows:
Find the proportion of the account that is attributable to basis and that which is attributable to growth and earnings
Apply the growth and earnings proportion to the amount being distributed. This is the amount that will be liable to taxation in Spain.
Add this amount to the client’s Spanish savings income base
Refer to the Spanish Savings Tax Scale, which is generally 19%-29%, but can be up to 30%.
Note that the client cannot claim a Foreign Tax Credit on their US tax return to offset the liability in Spain, as the IRS considers that these distributions should not attract taxation.
The client will still need to declare the full amount of the account to the Spanish tax authorities for the Wealth Tax or Solidarity Tax. Which one applies depends on the client’s regional residence and net worth.
If the aggregate total of foreign financial accounts (including IRAs and bank accounts) exceeds €50,000, they must be declared on the client’s Spanish tax return (Modelo 720).
Planning Ahead Holding a Roth IRA while living in Spain doesn't have to be a problem, but it does take some planning. When you take distributions, how Spain calculates the taxable part, and which wealth and reporting rules apply to you can all make a real difference. Everyone's situation is different, so if you have questions about how this applies to you, please get in touch with our team. We're happy to talk it through.
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