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whether they are from contributions or earned income, are subject to tax in the U.S., with an additional tax penalty if withdrawn before age 59.5.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
A Traditional IRA contains pre-tax money. How can Spain claim the full value is wealth, when the actual value to the owner of the IRA is the account value minus the tax that has to be paid when money is withdrawn from the account?
“I’m not sure if I can answer this question because I’m not sure I understood it correctly… If we’re talking about the wealth tax, which as we know doesn’t exist in the USA but does exist in four OECD countries—Colombia, Norway, Spain, and Switzerland—it’s calculated based on the value of a taxpayer’s assets as of December 31 of a given year, regardless of any other taxes paid or unpaid. I have no intention of defending this tax, but that’s the way it is, just like a primary residence is exempt up to a maximum amount of €300,000. And why is that? Since it’s also an asset.”
Of course, if we’re talking about the Modelo 720, it’s important to remember that it’s only an informational declaration, no taxes are paid on it, and it must be declared, including both the IRA and Roth IRA, as part of your assets outside of Spain.”
Does Spain tax capital gains and dividends within a traditional IRA even if no withdrawal/distribution is made? Also, does the over 65 years old rule on capital gains from the sale of a house include houses sold outside of Spain? Gracias!
No, Spain only tax capital gains and dividends from an IRA when withdrawal/distribution are made.
It’s not clear from the article whether capital gains within IRAs are taxed as well (in which case it will be double taxation – both on gains and upon withdrawal).
Does Spain tax gains within IRA if funds are not withdrawn?
You are right! I have read the post again and it is not clear at all… I might edit it later for future readers.
IRAs are taxed in Spain as earned income on the distributions. And Roth IRAs are taxed also as earn income, but only on the distribution’s gains, according to the FIFO calculations; the capital has already paid taxes, so you do not need to do it again, it will be like a brokerage account.
No, to your second question… if there are not distributions you do not have to pay taxes in Spain. You only pay taxes on the distributions.
If I sell a stock from my Roth with the proceeds going to my regular bank account for $200 and I bought it (the stock ) for $100, are there taxes on $200 or $100?
Assuming that there have not been any other transactions in between, you will be paying taxes over the gains, so $100. Remember, if you have had other transactions, selling and buying stocks, you must calculate the value of the gains with the FIFO method.
When you say “ROTH IRA distributions are taxed as capital income in Spain” does this mean that the gains in a ROTH are taxed when distributed or is the entire distribution taxed? Thank you very much.
Thank you for the question, I mean that the gains in a ROTH are taxed when distributed.
Thank you so much for this article! If you don’t mind answering–how would a conversion from tIRA to Roth IRA be treated in Spain? As earned income and taxed accordingly? Or would it be considered foreign earned income and exempt from Spanish tax up to 60,100€? Thanks!
It will be taxed as earned income and taxed accordingly.
Thank you for the question!
Thanks for the article, although some of this information seems inaccurate, but I think it’s Hacienda’s fault.
Reading case V1291-22: https://petete.tributos.hacienda.gob.es/consultas/?num_consulta=V1291-22
As you point out, Hacienda claims that a traditional IRA is employment-based and a Roth IRA is not.
“Respecto del producto denominado IRA tradicional, parece tratarse de un producto de ahorro vinculado al empleo del consultante como funcionario de los Estados Unidos”
…”En cuanto al producto denominado ROTH IRA, es igualmente un producto de ahorro, pero, en este caso, no vinculado al empleo del consultante”
However this is wrong.
IRAs (both Roth and traditional) are “Individual Retirement Arrangements”. They are not tied to a particular employer, you contribute to them on your own as long as you are employed and earning income. 401(k) accounts are tied to your employer (sometimes your employer contributes to the fund too), IRAs aren’t.
Roth IRAs are regulated by section 408A of the Internal Revenue Code (IRC). Traditional IRAs are also regulated by section 408.
These plans ARE considered pension funds according to the 2019 USA-Spain tax treaty ammendment:
https://www.boe.es/boe/dias/2019/10/23/pdfs/BOE-A-2019-15166.pdf
“(a) En el caso de los Estados Unidos, la expresión «fondo de pensiones» comprende los siguientes:
(…) un plan de pensiones calificado conforme al artículo 401(a) del Internal Revenue Code – IRC (que incluye los planes comprendidos en el artículo 401(k) del IRC)
(…) os fideicomisos que constituyan una cuenta individual de jubilación conforme al artículo 408 del IRC, los planes de jubilación individual tipo «Roth» conforme al artículo 408A del IRC”
This last line is referring to traditional and Roth IRAs.
So when Hacienda says, in case V1291-22, that Roth IRAs aren’t pension funds I’m not sure what they are talking about. Here is what they said:
“Y en relación con el producto ROTH IRA, según las manifestaciones del consultante el citado producto no estaría vinculado a un empleo, sino que las aportaciones proceden de los ahorros del consultante mientras estuvo trabajando.
Al caso será de aplicación el artículo 23 del Convenio, a cuyo tenor:
“1. Las rentas de un residente de un Estado contratante, cualquiera que sea su procedencia, no mencionadas en los artículos precedentes de este Convenio, sólo pueden someterse a imposición en ese Estado.”
They make it seem like Roth IRAs are not mentioned in the Treaty and therefore they are taxed exclusively in Spain. But they are mentioned, and the treaty says they are considered pension funds in the US, so I think they should be treated as such and should not be taxed?
What do you think Antonio, is Hacienda not properly identifying that when the 2019 treaty amendment mentions the section 408A of the IRC, that is referring to Roth IRAs as pension funds?
Hi Antonio, you wrote: “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.”
So if my IRA account contains funds that were contributed by my government (non private) employer, then it’s considered a government pension, not a private one, and thus withdrawals are NOT taxed as income in Spain, only in US, correct? Thanks.
If you are an expat living in Spain and you are planning to retire in Spain, why would you even consider a ROTH IRA? The way I understand it is that distributions on ROTH IRA are taxed as capital income in Spain. This undermines the value of a ROTH IRA in a first place, since in the USA this will not happen. Right?
Under the treaty, Traditional IRA distributions are exempt from Spanish taxes (IRPF), making them more favorable. Additionally, U.S. federal tax (no state taxes) on Traditional IRA withdrawals is significantly lower than Spain’s capital income tax rates. Roth IRA withdrawals are taxed in Spain as investment income, eroding the tax-free benefit enjoyed in the U.S.
Thanks very much for your post. It is usually really difficult to answer some questions because each person has a situation that makes them different from the next person and you cannot generalize and that is why the binding questions from the Treasury refer only to the case they are analyzing with the corresponding particularities. Definitely, the benefits and advantages of a RothIRA in the USA do not have to be maintained in Spain, it is about different legislations and in fact the treatment is different. Although the Double Taxation Treaty establishes where taxes must be paid according to the different types of income, the most important thing is that in Spain the Spanish legislation must be applied, which always refers to residents and in the USA the American legislation must be applied and normally refers to US Persons (US citizens, Green Card holders and Resident Aliens).
So, I agree with your first paragraph and it seems correct to me.
Regarding the beginning of your second paragraph, I do not agree, or at least it needs to be qualified. The only distributions exempt from the IRPF are those from Public Pensions (this is what the treaty says), as long as the Taxpayer is not Spanish and anyway the amount must be considered to calculate the Tax Rate of the rest of the income. As the article says, traditional IRA annuities are linked to your earned income and therefore pay taxes according to the “general tax base”, and in the case of the RothIRA, taxes will be paid on increases in value on the capital deposited, not on the total amount of the distribution, what in Spain is called the “savings base”.
And yes, “Roth IRA withdrawals are taxed in Spain as investment income, eroding the tax-free benefit enjoyed in the U.S.”
Muchas gracias
So confused by all of this. Is the following correct:
1-Roth IRAs are seen by Spain as investment accounts and so one is taxed in Spain on the basis of capital gains, but not taxed in the US.
2-Traditional IRA distributions are taxed as income.
3-401ks are tied to a specific employer so distributions are not taxed by Spain.
Thanks all.
Please give me a couple of days to answer the previos posts and I hope that helps you.
1- Roth IRAs are seen by Spain as investment accounts and so one is taxed in Spain on the basis of capital gains, but only on the income generated, since contributions came from funds already taxed, but not taxed in the US.
2- Traditional IRA distributions are taxed as income. The same as the 401K
3- The only pensions exempt from taxation in Spain are the US Public Pensions
4- and U.S. Social Security Benefits are texed in Spain as income on the 100% of the gross income
Hi Antonio, we spoke at 18:30 on December 11. I read through everything and I want to make sure my understanding is correct for American citizens reisding in Spain.
-IRA/401K: never taxed by IRPF (neither realized capital gains without distributions nor income from distributions), always taxed by wealth tax.
-ROTH IRA: always taxed by wealth tax. Realized capital gains (selling stocks to buy different stocks) without distributions are not taxed by IRPF. Distributions when you withdraw from the account are taxed as ordinary income by IRPF.
Also, in one of your comments you wrote “if we’re talking about the Modelo 720, it’s important to remember that it’s only an informational declaration, no taxes are paid on it.”–Are you implying that there are situations where you would report an asset but NOT HAVE TO pay wealth tax on it?
Jordan, I am so sorry, but it seems to me that I did not explain my self correctly. There are three different and independent reports or tax returns in Spain: Modelo 100 IRPF, Modelo 714 Weah Tax and Modelo 720 assets abroad, which is only an information rerun, no taxes involved.
-IRA/401K: are always taxed by IRPF as earned income. You must also report it in the Wealth tax (714) and pay taxes if it corresponds to your assets’ situation. You must also include it in the list of assets abroad (720) in the second section, investments.
-ROTH IRA: only taxed on the realized capital gains and taxed as “base del ahorro” not as earned income. You must also include it in your 714 and 720.
-The 720 is the only declaration that does not imply to pay taxes, it is only an information report.
I hope that it is clearer now.
Thank you Antonio. The only doubt that remains for me is how the income/savings tax works on the IRA and 401k. Assuming that I am not of retirement age and I am not going to withdraw funds from these accounts but I am going to sell stocks and to buy more stocks within the account. Do I pay taxes on these stock sales or not?