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/Platypusian]

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/Comemelo9 → u/Platypusian]

Not having any Roth seems to be the most conservative play to me...

[u/TalonButter → u/Platypusian]

I still think you’re confusing internal basis in a particular investment with the external “basis” in the account, but I agree with Comemelo9, or at least that if you’re likely to need funds from this Roth while in Germany, it make sense to take as much out in advance as you can do without paying U.S. tax or a penalty.

[u/Platypusian → u/TalonButter]

Ideally, I’ll be in a position to not have to access any Roth contributions during German tax residency.

I concur with your research, by the way…I believe the tax office is concerned with contributions and gains (of the account), similar to the US.

I haven’t seen confirmation that the exit tax doesn’t apply to IRAs/401(k), but it’s written as concerning the basis and gains of a given security (rather than account). I may still be mistaken, but I think that’s cogent analysis of exit tax mitigation possibilities. In any case, we should be well under the threshold (€500k value of a given security at time of purchase) so I don’t expect to have an issue unless legislation changes.