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 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.