RE-THINKING THE ROTH IRA

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chasleslieb Active member

Member since 28 January 2023

chaslesliebActive member13 February 2023 00:32:45

A Roth IRA in Spain is not recognized as a retirement pension account like a 401k IRA.聽 It is considered and investment account.聽 As such one would be taxed at the savings income rate on the dividends, capital gains, and interest that the fund reports...annually.聽

So, if I begin my tax residency in Spain on Jan1 with聽鈧�100,000 in my Roth IRA, that is the starting principle.聽 If, in one year that fund earns 鈧�2000 in dividends, I would be taxed on that 鈧�2000 at the savings income rate (not PIT).

If I take out 鈧�10000 from the IRA (let's say to buy a car) it would not be considered a distribution as income because it is not a pension... it is considered principle and the "distribution" will not be taxed.聽 I would still only pay taxes on whatever dividends accrued by the end of the year. (It appears from my statement that the only source of income to the fund is dividends...not capital gains or interest... easy to find, report, and track)

In addition, I do not have to pay the dividend taxes directly from the Roth IRA.聽 I can pay them from savings. Thus, I am not pulling money out of the Roth and paying taxes with future compounded earnings .聽 I can continue to compound the entire Roth investment tax sheltered in the U.S.聽聽Also, if I should change my mind and move back to the U.S., I would still have a Roth IRA as a sort of safety net.

Initially, I thought of taking the entire Roth distribution and moving it into a money market account or investment mutual fund before moving to Spain.聽 Now I am thinking of keeping the Roth, paying the tax on annual dividends, and consider what would be called a distribution as a savings withdrawal rather than an income.

I'm also thinking that I should use my Roth IRA as "tax free income" and draw it down before touching my regular IRA.聽 This allows the funds in the regular (and larger) IRA, which would be taxed as income, to continue compounding tax sheltered.聽

This is sort of stream of consciousness thinking.聽 I'm open to suggestions, information, and ideas.聽聽The only professional advice in this is the fact that a Roth is considered an investment and not taxed as a retirement pension.

ZiaMan24 Member

Member since 11 August 2023

ZiaMan24Member11 August 2023 19:50:29

@chasleslieb

>> "The only professional advice in this is the fact that a Roth is considered an investment and not taxed as a retirement pension."

Where do you get this conclusion from?

The Technical Explanation memo of the U.S.-Spain tax treaty says the following:

"Subparagraph 3(a) of the Memorandum of Understanding as corrected by the Exchange of Notes sets forth a non-exhaustive descriptive list of those U.S. entities that will be regarded as pension funds for purposes of the Convention. The list includes: a trust providing pension or retirement benefits under an Internal Revenue Code section 401(a) qualified pension plan (which includes a Code section 401(k) plan), a profit sharing or stock bonus plan, a Code section 403(a) qualified annuity plan, a Code section 403(b) plan, a trust that is an individual retirement account under Code section 408, a Roth individual retirement account under Code section 408A..."

This is under Article 2, paragraph 1, on page 5.

chasleslieb Active member

Member since 28 January 2023

chaslesliebActive member14 September 2023 03:41:38

@ZiaMan24

This is very interesting.聽 And thank you for the information.

I am not sure this resolves the issue of the intent of a Roth i.e. not-taxable distribution of the fund.

What I perceive (I don't pretend to understand) is that the Roth is now included as a defined "pension funds for purposes of the Convention".

It does not however answer the question is the Roth disbursement tax exempt.聽 It appears that Spain (might) will tax the Roth as retirement income and that is where a Roth is "not recognized" as a tax-free disbursement.

I am going to seek a Spanish tax advisor to see how the Roth is managed.聽 I may have to cash out my Roth and put it in savings before this tax year to avoid paying taxes on the withdrawal of the funds.聽 This is contrary to my original perception and strategy.

You have been very helpful in exploring this topic.聽 I would appreciate any input on this perception.

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