Jacob SalamaPension Taxation Spain

IRA Types and Their Spanish Tax Treatment

Individual Retirement Accounts (IRAs) are among the most common US retirement vehicles held by Americans living in Spain. Each IRA type has a different tax history in the US — and Spain's treatment is determined by the DTA, not by the US's own view of the account.

Traditional IRA (Pre-Tax)

A Traditional IRA receives pre-tax contributions (which were deducted from US taxable income in the year of contribution) and grows tax-deferred until withdrawal. Withdrawals are fully taxable as ordinary income in the US. Under Article 17 of the US-Spain DTA, distributions from a Traditional IRA are taxable in Spain as the country of residence. They are included in the IRPF base as rendimientos del trabajo (employment income). The US also taxes distributions (at ordinary income rates) as part of its worldwide taxation of citizens. The foreign tax credit mechanism under Article 23 of the DTA is used to prevent full double taxation — Spanish IRPF paid on the distribution is credited against the US tax liability on the same income. However, because the US does not permit a foreign tax credit for taxes attributable to income in the same category taxed by the foreign country at a higher rate, careful planning is needed to ensure the credit is fully usable.

Roth IRA (Post-Tax) — The Major Double-Tax Trap

The Roth IRA is funded with after-tax dollars (no deduction in the year of contribution) and grows tax-free. Qualified Roth distributions are completely tax-free in the US for US purposes. This is one of the most powerful US retirement tools — but it creates a significant trap for Americans resident in Spain:

• Spain does not recognise the Roth's US tax-free status. Spain has no equivalent pension vehicle where distributions are tax-free because contributions were made from taxed income. Under the Spain-US DTA, Roth IRA distributions are treated as distributions from a pension plan and are therefore taxable in Spain as the country of residence under Article 17.
• No credit for US basis. Because the Roth contribution was made from after-tax dollars, it represents the contributor's cost basis. In the US, no tax is owed on qualified distributions because the basis equals the total amount. Spain, however, taxes the full distribution without recognising the US cost basis. There is no mechanism in the DTA for Spain to give credit for the US income tax paid at the point of contribution (which would reduce the Roth's taxable amount in Spain). The result is that the same money is taxed twice: once in the US when it was earned and contributed, and once in Spain when it is distributed.
• No double tax credit available. Because the US owes no tax on qualified Roth distributions (the credit mechanism requires a foreign country to have imposed tax that the US would otherwise also impose — here the US imposes zero tax on qualified Roth distributions), there is no US tax against which to offset the Spanish IRPF. The Spanish tax is a net additional cost with no credit route.

SEP IRA (Simplified Employee Pension)

A SEP IRA allows self-employed individuals and small business owners to make substantially higher contributions than a regular Traditional IRA — up to 25% of net self-employment income (or 25% of compensation, up to certain IRS limits). Contributions are pre-tax and deductible. Distributions are taxable as ordinary income in the US. For Spanish tax purposes, SEP IRA distributions follow the same treatment as Traditional IRA — fully taxable in Spain as rendimientos del trabajo under Article 17. The higher balance potential of a SEP IRA makes the Modelo 720 reporting obligation more likely to be triggered.

SIMPLE IRA (Savings Incentive Match Plan for Employees)

The SIMPLE IRA is a retirement plan available to small businesses with 100 or fewer employees. Contributions are made on a pre-tax basis by both the employee and the employer. Distributions in retirement are taxed as ordinary income in the US. For Spanish residents, SIMPLE IRA distributions are taxable in Spain under Article 17 as rendimientos del trabajo. The same foreign tax credit mechanism applies to avoid double taxation between the US and Spanish liabilities.

401(k) Rollovers to IRA: Spanish Tax Consequences

When an American leaving employment rolls over a 401(k) to a Traditional IRA, this is a routine transaction in the US that is generally not a taxable event (if done as a direct rollover). The question for Spanish residents is whether a 401(k)-to-IRA rollover is treated as a taxable distribution by the AEAT.

The AEAT's general position — consistent with the DTA framework — is that a direct rollover (where the funds move directly from the 401(k) plan to the IRA custodian without the taxpayer receiving the funds) is not treated as a distribution and therefore does not trigger Spanish IRPF. The rollover maintains the pension wrapper and is not a receipt of income. However:

• An indirect rollover (where the employee receives a cheque and re-deposits within 60 days) is riskier — the AEAT could characterise the receipt of funds as a taxable distribution, even if ultimately redeposited into the IRA.
• A Roth conversion during a rollover (transferring from a Traditional 401(k) to a Roth IRA) is explicitly taxable in the US. In Spain, the conversion event is also taxable — see the Roth conversion trap section below.
• If the rollover is to a non-US pension vehicle (for example, rolling a 401(k) to a QROPS or a Spanish plan de pensiones), the transaction would almost certainly be a taxable event in both countries.

US Social Security Benefits: Article 20 of the US-Spain DTA

Article 20 of the 2013 US-Spain DTA contains one of the most significant and unusual provisions in any DTA Spain has signed: US Social Security benefits are taxable exclusively in the United States. They are not taxable in Spain at all. This is the opposite of the standard OECD Model position (which would give the residence country — Spain — the taxing right on social security benefits). The protocol to the 2013 DTA explicitly confirms that US Social Security pensions fall within Article 20 and that Spain has no taxing rights.

In practice, this means:

• US Social Security income is not included in your Spanish IRPF return.
• The US continues to tax up to 85% of Social Security benefits as ordinary income (depending on provisional income calculations), at US rates, as part of worldwide taxation of citizens.
• There is no credit or exemption needed in Spain — Social Security simply falls outside Spanish taxing jurisdiction under the treaty.
• This provision is a meaningful benefit for American retirees in Spain who receive significant Social Security income — it is permanently ring-fenced from Spanish IRPF regardless of income level.

The Roth Conversion Trap for Spanish Residents

Converting a Traditional IRA to a Roth IRA while resident in Spain is one of the most dangerous tax planning mistakes an American expat can make. The conversion works as follows in isolation:

• In the US: the converted amount is added to the taxpayer's ordinary income in the conversion year and taxed at their US marginal rate. After conversion, future qualified distributions from the Roth are US tax-free.
• In Spain: the AEAT treats the conversion as a taxable distribution from a pension plan. The entire converted amount is included in the Spanish IRPF base as rendimientos del trabajo in the year of conversion. Spanish IRPF is applied at the progressive rate.
• Double taxation: both the US and Spain tax the conversion amount in the same year. The foreign tax credit should, in theory, eliminate double taxation — but the mechanics are complex. The US taxes the conversion as ordinary income; Spanish IRPF is paid on the same amount. The American can credit Spanish IRPF against US tax, but only if the Spanish rate does not exceed the US rate (otherwise excess foreign tax credits arise, which may be usable in other years under carryforward rules).

The practical outcome is that a Roth conversion while a Spanish resident almost always results in at least some double taxation. The correct time to convert is before becoming a Spanish tax resident — when only US tax applies to the conversion amount.

FBAR/FinCEN 114 and FATCA Form 8938: Continuing US Filing Obligations

American citizens are required to continue filing US tax returns and certain information returns regardless of where they live. For Americans in Spain with 401(k)s and IRAs:

FBAR (FinCEN 114 — Foreign Bank Account Report)

The FBAR requires annual disclosure of any financial interest in, or signature authority over, foreign (non-US) financial accounts if the aggregate value exceeded $10,000 at any point during the calendar year. For Americans in Spain, their Spanish bank accounts, Spanish investment accounts, and Spanish pension accounts (if any) are the "foreign" accounts from a US perspective. US-held 401(k)s and IRAs are domestic US accounts and are not reportable on the FBAR — they are US accounts. However, if the American has moved their 401(k)/IRA to a non-US custodian (rare but possible), that could be a foreign account. The FBAR is filed electronically via the FinCEN BSA E-Filing System by April 15 (with automatic extension to October 15).

FATCA Form 8938 (Statement of Specified Foreign Financial Assets)

Form 8938 is filed with the US federal income tax return and requires disclosure of specified foreign financial assets above threshold amounts ($50,000 on the last day of the tax year or $75,000 at any point during the year for single filers; higher thresholds for married filers and those living abroad). US-based 401(k) and IRA accounts are explicitly excluded from Form 8938 reporting — they are US domestic accounts. Spanish bank accounts, Spanish investment accounts, and interests in any non-US pension vehicles would be reportable on Form 8938 if the thresholds are met. The penalty for failure to file is $10,000 per year, with additional penalties for continuing non-compliance.

Modelo 720 for US Retirement Accounts

Spain's Modelo 720 (foreign assets declaration) requires Spanish tax residents to report foreign assets above €50,000 per category. US retirement accounts are foreign assets from a Spanish perspective:

• 401(k) plans: A 401(k) with a vested balance above €50,000 must be reported in Modelo 720. The account is classified as an account with a foreign financial institution (Section 3 of Modelo 720).
• Traditional IRA: Same as 401(k) — reportable if the balance exceeds €50,000.
• Roth IRA: Also reportable in Modelo 720 if the value exceeds €50,000. The fact that Roth distributions are US tax-free does not affect the Spanish reporting obligation. Modelo 720 is a reporting requirement, not a tax-charging mechanism — it reports the existence of the asset, not the income from it.
• SEP IRA / SIMPLE IRA: Reportable on the same basis as Traditional IRA.
• Pension plan (employer defined benefit): A defined-benefit pension entitlement from a US employer — where you have no current fund, only a right to future income — is generally not reportable in Modelo 720 as there is no quantifiable asset balance. However, a defined-benefit arrangement with a transferable cash value (as in some US hybrid plans) may need to be assessed on a case-by-case basis.

After the 2022 reforms following the CJEU ruling (case C-788/19), the proportional penalties for Modelo 720 failures were abolished, but the fixed penalties for each non-declared asset remain. The obligation to file continues even if no new assets have been acquired — only the initial declaration triggers automatic follow-up for subsequent years (subsequent Modelo 720 filings are only required when asset values change by more than €20,000 compared to the last reported figure).

Worked Example: US Retiree's Spanish IRPF Calculation

Consider an American retired to Andalucía receiving the following annual income:

• US Social Security: $36,000 per year (approximately €33,000 at 2024 average rates)
• 401(k) distributions: $24,000 per year (approximately €22,000)
• Spanish rental income: €9,600 per year (a small flat rented to a Spanish tenant, net after 60% reduction = €3,840 taxable)

Spanish IRPF calculation:

• Social Security (€33,000): Excluded from Spanish IRPF under Article 20 of the DTA. Zero Spanish tax.
• 401(k) distributions (€22,000): Included in general IRPF base as rendimientos del trabajo. Less the work income reduction (approximately €3,700 for this income level). Net taxable: approximately €18,300.
• Rental income (€9,600 gross, after 60% long-term rental reduction = €3,840): Added to the general IRPF base. Total general base: approximately €22,140.
• IRPF on general base (combined Andalucía rates): On €22,140 — approximately €3,800–4,200 depending on exact rate application and personal allowances.
• US foreign tax credit: The Spanish IRPF on the 401(k) distribution is creditable against the US tax on that same income, substantially reducing the US federal tax bill on the 401(k) income.

The total Spanish IRPF liability for this retiree is modest — particularly because Social Security (often the largest US pension component) is entirely excluded from Spanish tax under the DTA. The 401(k) distributions bear Spanish IRPF, but at moderate rates given the income level and the work income reduction.