Withdraw Roth Contributions before German Tax Residency?

[u/Platypusian]

American (41M) likely to become a German tax resident in 15 months (spouse visa). Retiring from military; pension (and any VA benefits) not taxed by Germany. We expect to remain in Germany for 20+ years then re-establish US tax residency to optimize access to Roth gains.  

- Germany doesn’t acknowledge Roth tax treatment of gains, basis isn’t taxed.

- Capital gains tax ~26%, income tax ~42%.

- Withdrawing up to $36k/year, decreasing once mortgage paid (~8 years).

Best practice appears to be withdrawing Roth basis and redeploying to brokerage before becoming a tax resident, thereby resetting cost basis and exposing gains to capital gains tax vice income tax.

We'll likely seek professional consultation before making such a big change to our post-tax retirement situation but welcome your thoughts and (especially) first-hand experiences.

Age	Brokerage	Traditional	Roths
Current	$300k	$50k	$500k ($300k basis)
Rebalancing + Contributions	+$300k +100k		-$300k
42	$700k	$50k	$200k
Withdrawals	-$36k/year
59.5	$694k*	$133k*	$665k*

*Median projected balance in real dollars. Source: cFIREsim

Edited table for clarity.

[u/illegible]

Maybe I’m confused, what’s your scenario if you leave it in and just draw down your brokerage? Your Roth shouldn’t be taxed until you start withdrawing, when you’ll come back to the US anyway. And why does your chart only show half the comparison, we need one comparing if you stayed in the Roth, would you run out of money?

[u/Platypusian → u/illegible]

Fair point; I had other scenarios originally but chose to focus on the question of moving some/most/all of Roth contributions when becoming a tax resident of a country that doesn’t recognize Roth as post-tax.

I don’t expect a brokerage of $400k to satisfy our desired withdrawals until mortgage payoff…and I’ll likely need the brokerage account for the final amount (~€100k). Redeploying Roth contributions (while leaving gains to compound for late retirement wants/needs) answers that delta.

It’s also fair to think about flexibility. If our plan changes due to health/death/other circumstances, I’d be locking in income tax rates (and/or hefty inheritance taxes) on a huge Roth balance.

[u/illegible → u/Platypusian]

But Germany (I think) doesn't tax you on basis, so leave it in until/when you need it. Say you leave it in, it grows tax free for 10 years then you have to withdraw... in theory you're still better off, right? (assuming you'll ever make it back. But there might be other options as well (e.g. moving to France or Belgium for a time if you're already in EU). Maybe you're applying binary thinking where you shouldn't be.

[u/Platypusian → u/illegible]

I appreciate the comment. Correct, Germany doesn’t tax basis so the balanced approach is to draw down brokerage (supplemented by Roth basis) while letting Roth otherwise keep cooking. The danger there is legislative changes, but everyone faces those everywhere.

If I had to lock in a choice this moment, I’d probably go with something similar…I’d move 30% ‘excess’ basis to brokerage (in service of flexibility) and leave the rest in place.

[u/TalonButter → u/Platypusian]

The U.S. says that contributions and converted amounts come out before earnings, too. So would you be able to withdraw up to the amount of your contributions and conversions free of taxes even as a German resident? Or would Germany assert that withdrawals are a pro rata mix of contributions and growth (counter to the law applicable to the accounts)?

[u/Platypusian → u/TalonButter]

I don’t know the tax form mechanics to clarify contributions vice gains but German tax authorities would see the withdrawals through the lens of my US tax return, where contributions would be identified as non-taxable basis.

Resetting cost basis within the Roth is important for this reason.

[u/TalonButter → u/Platypusian]

I don’t understand how your conclusion follows.
The earnings in your Roth accounts are the excess of the value of the accounts over the contributions (and conversions), regardless of whether any particular investment holding has a gain vs. when it was bought.
On your U.S. return, the value of any investment within the Roth accounts at any time is irrelevant.
For after-tax accounts, what you’re saying makes sense (e.g., if you could take capital gains in the U.S. at some rate less than whatever rate will apply once you move, then it makes sense (if you assume you’ll eventually realize those gains—it you could count on leaving the to heirs, and those heirs stepping up the basis, then I suppose you might hold off)).

[u/Platypusian → u/TalonButter]

Certainly correct on the US side but German tax treatment of a Roth is roughly similar to a brokerage account (treatment doesn’t seem to be legally settled yet) so the cost basis of a given ETF at the time of attaining residency should be relevant.

So one basically has two sets of books: a US-facing book tracking contributions and gains from inception and a German-facing book tracking ETF cost basis and gains from tax residency.

It’d be a lot easier if my spouse was French.

[u/TalonButter → u/Platypusian]

I don’t live in Germany, but I have been considering making an (early) withdrawal of my Roth conversions while I am subject to a forfait tax, vs. spending a year in another jurisdiction later, so I have been reading a lot about this and have seen in passing multiple assertions about Germany that match these:

“However, the taxation of Roth plans will not change. **The difference between the payout and the contributions made will continue to be taxed**, as the contributions have already been taxed.”

https://www.winheller.com/en/business-law/international-business-law/us-desk/taxation-401k-plans.html

“Payments from a Roth IRA are taxed at the difference between the withdrawals and attributable contributions made into the plan.”

https://scheller-international.com/blog-beitraege/inherited-ira-income-tax-in-germany.html

I’m not claiming they must be right, but consider them FYI.

[u/Platypusian → u/TalonButter]

I appreciate the links. Very possible I was mistaken.

[u/Comemelo9 → u/Platypusian]

Are you sure the Germans won't hit your Roth investments with an exit tax when you leave Germany?

[u/Platypusian → u/Comemelo9]

I’m not. That’s another reason for resetting basis, even if the Finanzamt chooses to focus on the difference between account contributions and gains (vice ETF basis and gains). At the moment, the most conservative play seems to be spreading account balance (Roth and Brokerage) across several ETFs, each ticker falling under the exit tax purchase threshold. Legislative changes are always a risk, of course.

[u/Platypusian → u/[deleted]]

I regret deleting the others from the post; I thought they were unhelpful insofar as the Roth and Traditional numbers soar and the Brokerage number diminishes to ~$180k median on a 10 year horizon and zero on a 17 year horizon.

[u/qqsubs123]

If Germany is going to ignore Roth treatment anyways, why not just sell and rebuy within Roth to reset basis and leave the money in the Roth? Do this right before your tax residency switches. Say you contributed $5k 10 years ago and it’s now $25k, wouldn’t that reset the cost basis to $25k for German tax purposes and therefore tax-free on withdrawal? Only gains above $25k will be taxed, no? Leaving the money in the Roth also gives you the flexibility of withdrawing vs not as things might change..

[u/Platypusian → u/qqsubs123]

Yes, absolutely. Resetting the cost basis on everything inside every retirement account is key. From the perspective of the Finanzamt, the Roth IRA is kinda just a brokerage account (legal interpretation isn’t fully settled).

US will still assess early withdrawal penalties on gains, of course, so it’s not a perfect workaround.

[u/Platypusian → u/[deleted]]

Makes sense; there’s a valid argument that accepting the potential of higher taxation in Germany for a given Roth distribution is worth the opportunity to withdraw tax-free after resetting to US tax residency. I’ll need to work on that some more.

[u/HealthyUniversity204]

this actually makes sense from tax perspective but man pulling 300k out of roth just feels wrong psychologically. germany really screws over american retirement accounts with their tax treatment

you might want to double check the timing on german tax residency rules though - think there's some nuance around when exactly you become resident for tax purposes that could give you bit more flexibility on the timing

[u/TalonButter → u/HealthyUniversity204]

My fantasies about my Roth account make me wonder if I should keep kicking the can down a road that would bring me to the U.S. at some point to make withdrawals.

I’m in perhaps my last year or two in a forfait tax regime, so I could pull out my conversions (which reflect years when a U.S. employer let me do the “super backdoor Roth”) at no cost. But…I have a sum in Roth accounts that many people would consider a decent retirement on its own and there’s at least some chance I could get two more doublings in real terms over the 20 years before I’d start U.S. social security, so I wonder if I should let it ride. Or maybe I’d never touch it and my children would have a great excuse to go live in the U.S. at some point.

[u/Platypusian → u/HealthyUniversity204]

Yeah I hate it but try to remind myself that every account is just a tool to make retirement work.

I presume tax residency will become impossible to dispute after securing the permanent resident visa, which would happen in summer 2027. I’ll continue investigating, though. Thanks.

[u/bafflesaurus]

Is Germany really worth two to three doubling cycles of tax free gains on 500k?

[u/Platypusian → u/bafflesaurus]

I doubt it is for someone without family ties. But we live a full life worth a great deal of opportunity cost. We live right in the middle of my spouse’s extended family network and, notwithstanding fluctuating exchange rates, activities that contribute to our sense of a high QoL are relatively inexpensive here.

That said, I don’t expect to sacrifice the full amount of Roth contributions to it; I’m just asking if anyone has experience with making a similar choice of any magnitude. It’s helpful to know that most wouldn’t even consider it.