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whether they are from contributions or earned income, are subject to tax in the U.S., with an additional tax penalty if withdrawn before age 59.5.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!