In this article on “How to Report IRA and ROTH IRA Accounts in Spain? we will analyze how IRA and ROTH IRA accounts are taxed under IRPF and Wealth Tax, and whether they need to be reported in Form 720.

Obligation to Report on Form 720

An American citizen who is a tax resident in Spain and holds two financial products from the U.S. called IRA and ROTH IRA, to which they make contributions, is now retired and considering withdrawing the value of these accounts, must declare their value at the end of the year on Form 720.

Considerations for IRA and Roth IRA

According to the IRS’s definitions, these financial products may initially be considered foreign pension plans. Based on this, and following repeated rulings from the Spanish Tax Agency (AEAT) such as VI681-13, VI821-15, V0497-18, and VI049-19, it is stated that “consolidated rights in a foreign pension plan are not included in any category of foreign assets mentioned in the 18th Additional Provision of the General Tax Law (LGT) and Articles 42 bis, 42 ter, and 54 bis of the General Regulation on Taxation (RGAT).”

As a result, there should be no obligation to report these, if no event triggering the pension plan’s benefits has occurred, unless the foreign pension plan allows a life insurance-style payout and since this is the case, the account would need to be reported in accordance with Article 42 ter, Section 3 of the RGAT.

Since IRA and ROTH IRA products allow withdrawals at any time (even if this doesn’t trigger a tax penalty), it can be concluded that the taxpayer has a right to withdraw similar to a life insurance policy. Therefore, even if no event has occurred that would trigger a payout from these accounts, the taxpayer must report them according to Article 42 ter of the RGAT.

Impact on IRPF (Income Tax)

According to information on the IRS website, IRA and ROTH IRA accounts have specific features:

• IRA (Individual Retirement Arrangement): This is an employment-linked savings product that allows for tax-deferred investments to provide financial security during retirement. Contributions to traditional IRA accounts are tax-deductible in the U.S., and withdrawals can be made at any time, but must be made by age 72 (or 70.5 before January 1, 2020). Withdrawals, whether they are from contributions or earned income, are subject to tax in the U.S., with an additional tax penalty if withdrawn before age 59.5.
• ROTH IRA: This is a non-employment-linked savings product, where contributions are not deductible in the U.S. Withdrawals can be made at any time without being taxed, if they meet certain conditions: the account must be open for at least 5 years, and the individual must be at least 59.5 years old. Early withdrawals (before age 59.5) are subject to tax penalties.

As a tax resident in Spain, an individual will be taxed on their worldwide income, regardless of where the income is generated or where the payer is located, according to Article 2 of Spain’s IRPF Law (35/2006).

Application of the Double Taxation Treaty

According to the Spain-U.S. Double Taxation Agreement, public pensions from the U.S. linked to employment will be taxed in the U.S. under Article 21 of the treaty. The amounts received from an IRA, because of services performed by the individual, will be taxable only in the U.S. and thus exempt from Spanish IRPF.

For the ROTH IRA, since it is not tied to employment and contributions come from the individual’s personal savings, it falls under Article 23(1) of the treaty, which states that such income can only be taxed in the individual’s country of residence (Spain) and is classified as investment income. As a result, ROTH IRA distributions are taxed as capital income in Spain.

Wealth Tax Impact

Regarding the Wealth Tax, it is regulated by Spain’s Wealth Tax Law (19/1991, June 6). This tax applies to the net wealth of residents in Spain, meaning the total value of assets and rights, regardless of where they are located. Both IRA and ROTH IRA accounts are considered financial assets and should be included in the taxpayer’s net wealth for Wealth Tax purposes.

If you have any doubt, please do not hesitate to contact us US Tax Consultants