How to Report IRA and ROTH IRA Accounts in Spain
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An analysis of how IRA and ROTH IRA accounts are taxed under IRPF and Wealth Tax in Spain, and whether they need to be reported in Form 720.
As a tax resident in Spain, an individual is 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).
Considerations of 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, state 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 if this would be 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.
IRA and Roth IRA according to the IRS
According to information on the IRS website, IRA and ROTH IRA accounts have specific features:
The IRA (Individual Retirement Arrangement) 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whether they are from contributions or earned income, are subject to tax in the U.S., with an additional tax penalty if withdrawn before age 59.5.
The ROTH IRA 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 five years, and the individual must be at least 59.5 years old. Early withdrawals (before age 59.5) are subject to tax penalties.
Application of the Treaty to avoid Double Taxation
According to the Spain–U.S. Agreement to avoid double taxation, amounts received from an IRA, or any other pension plans, when the distributions are related to services performed by the individual as an employee of the U.S. government, under Article 21 of the treaty, are taxable only in the U.S. and therefore exempt from Spanish IRPF, but you need to report them because the amount will be used to calculate the tax rate of the rest of your income. Public pensions from the U.S. linked to employment are taxable in the United States.
On the other hand, any private pension, IRA or not, received for work done as an employee in a private company is fully taxed under Spanish income tax (IRPF).
U.S. Social Security benefits are not considered a public pension under the treaty and are therefore fully taxable under Spanish IRPF.
Spain does not recognize the tax-exempt nature of Roth IRA distributions as the U.S. does. Instead, Roth IRAs are treated similarly to investment accounts (like brokerage accounts), not pension plans. This has two key implications, only gains are taxable (since contributions to a Roth IRA are made with after-tax dollars, the principal (original contributions) is not taxable when withdrawn and only the gains (interest, dividends, capital appreciation) are subject to Spanish taxation.
How Spain Calculates the Taxable Portion of a Roth IRA
Spain uses a cost-basis approach to determine what part of a distribution is taxable.
When you withdraw funds, you must separate the amount into two parts: the non-taxable capital, which is the portion that corresponds to your original contributions, and the taxable gains which is the portion that represents growth (dividends, interest, capital gains).
To do this, you need to track the history of contributions and earnings in your Roth IRA. This is similar to how capital gains are calculated when selling stocks. If you withdraw €10,000 and €6,000 was your original contribution, then €4,000 is taxable as capital income under Spanish IRPF.
Impact on IRPF (Spanish Income Tax Return)
Annual reporting may also be required for dividends and capital gains earned within the Roth IRA, even if not withdrawn and these are taxed under the savings income base at progressive rates (19% to 28%).
Regarding 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. This article states that such income is taxable only in the individual's country of residence (Spain) and is classified as investment income. As a result, Roth IRA distributions are taxed as savings income in Spain.
Conversely, all private IRAs—where the distributions stem from services performed by the individual as an employee of a private entity—are fully taxable under Spanish IRPF as earned income at a progressive rate from 19% up to 47%.
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.
Spanish 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 questions, please do not hesitate to contact US Tax Consultants +34 915 194 392
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