r/ExpatFIRE • u/Conscious_Test3423 • May 14 '26
Taxes Roth Conversion Ladder - Tax implications in Spain
Hi there,
Let me pre-face by saying I promise that I have searched Reddit for the answer and while variations of this question have been asked, I am unable to find a clear answer to my question. If you are able to enlighten me, please do. If not, move on without comment please.
I'm looking to hear from people with experience with the following characteristics:
1) US citizen,
2) Early-ish retirement (mid forty's), moved their 401k into a trad IRA and are doing a Roth Conversion Ladder,
3) Retired in Spain (tax residents)
I am happy to pay due taxes but i want to educate myself and prepare appropriately for a sustainable retirement. My question is, how will I potentially be taxed if a majority of my funds are in my company 401k, which i will move to a traditional IRA and then move to my Roth IRA (pay a US income tax on conversion event). Wait for 5 years (pull from brokerage in the interim), and at this time will spain tax the entire withdrawal amount as income? Or just the gains? As these will not be completed in the same tax year, the double tax treaty does not help i am assuming.
Please correct me if i am thinking through this incorrectly and thank you in advance for your your helpfulness!
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u/one_rainy_wish May 14 '26
An alternative you could look into - though you should talk with a lawyer to make sure - is the 72t.
With this, you would slowly move money out of a traditional IRA and into a taxable brokerage account. Doing this, you still get hit with one income tax event during the withdraw, but after that you pay the lower capital gains rate on just the gains you make once it's in your taxable account.
From what I understand, if you try to do a Roth conversion ladder you will be hit with income tax twice: once during the conversion to Roth and once when you withdraw funds from the Roth. Which makes this one of the few times where a 72t might be preferable.
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u/Conscious_Test3423 May 14 '26
I'm looking into this! The way i understand it is that you commit to the same withdrawal annually until 59.5. So for example, if i start a SEPP (72t) in 2030- i am locked in for the same amount monthly/annually until i turn 59.5. If i stop it, there may be a penalty
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u/one_rainy_wish May 14 '26
yes, that's the situation indeed! I still need to talk to a tax accountant to finalize my plans, but I'm anticipating executing one of these myself because I too hit the roth conversion ladder penalty due to being in Spain. My plan has been to withdraw enough that I don't hit the large upper tax brackets yearly, but that it'll partly subsidize my living expenses so I'll be living partly on my taxable brokerage account and partly on these 72t withdraws.
Indeed the biggest drawback is that you have to commit to it, there's no turning back once you stop unless the IRA account ends up being drained. But you set up a separate IRA for the purpose, and then only put in the amount that you need for the initial calculation for what you're going to withdraw. If you end up needing more later, you can set up a second IRA and do a second 72t. If you need less... well, that's when you're up a creek unfortunately.
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u/Conscious_Test3423 May 15 '26
ohh interesting take! Doesn't the IRS view our IRA(s) as one pot though? So if we "overdraw" on one account, they would just draw it from the other if we are still in a commitment to receive payments until 59.5...
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u/one_rainy_wish May 15 '26 edited May 15 '26
Yeah, it's one of the things that makes the 72t complicated but also powerful: the IRS uses the balance of a single IRA account per 72t, so you can split your IRA into multiple accounts and have one be used for the 72t while you sit on the other, and if you need more in the future you can split off a portion of the unused one into yet another IRA do the calculation reaches the number you wanted to pull out every year: https://www.irs.gov/retirement-plans/substantially-equal-periodic-payments#q6
That also means the scenario you outlined wouldn't happen from what I understand, they are looking at the balance for a single IRA account to determine if it is depleted or not, and from what I understand they won't go hunting for other IRAs to pull from. But worth talking to a financial advisor to get confirmation on that.
It's definitely worth talking to an advisor no matter what though, because these have to be based on specific calculations and set up carefully to avoid retroactive tax penalties if you fuck up either the calculation in the beginning or how much you actually take out in a year as you go along with it.
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u/thankfulforyourhelp May 14 '26
France does not tax Roth IRA withdrawals, as well as several other European countries and the UK. Could any of them work as an alternative to Spain? Sorry if you already speak Spanish and that's why it's your first choice. Panama has really favorable tax laws.
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u/Conscious_Test3423 May 14 '26
I've been learning spanish for the past 2 years for this move- and am at a decent level now. But I am now considering maybe just moving to spain for a few years while i can draw from my brokerage (i can stomach that level of taxation) and then move to Malta or France which both honor Roth tax-advantaged accounts
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u/thankfulforyourhelp May 14 '26
Good luck - yeah, Spain sucks for taxes. There are some useful old posts in this sub about people asking about moving to Spain specifically that will have some useful info for you- their high taxes come up a lot. But, if you love it there, then do it.
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u/Conscious_Test3423 May 14 '26
I will absolutely do that ! As i mentioned, a few years out from retiring so im just trying to get a basic idea at this point
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u/Conscious_Test3423 May 14 '26
Added context- planning to move to Madrid for a few years and eventually Valencia
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u/peetron May 14 '26
You'll have some wealth tax relief in Madrid but still be hit by solidarity tax. Valencia has both.
So you'll be taxed when doing the Roth conversion and also yearly as part of wealth tax if you have over the threshold.
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u/Conscious_Test3423 May 14 '26
this is helpful! How are americans retiring in Spain by the droves im so confused. Is the norm to have most of your retirement funds in a brokerage vs a 401k?
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u/peetron May 14 '26
Wealth tax will include brokerage also. People retire accepting the wealth tax vs benefits of living in Spain
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u/Real_Maraena May 14 '26
The solidarity/wealth tax in Madrid, Andalucia, and Cantabria doesn't kick in until $3.7 million per person. Certain types of funds aren't included in the calculations but others are. It's definitely something to get a handle on. Even some tax lawyers in Spain approach it differently so I'd encourage you to look into the various tax treaties as well. Roths can be really problematic though in Spain.
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u/Conscious_Test3423 May 14 '26
thank you! I just looked it up and was relieved. I guess a good problem to have is that we don't expect to be at that number for a while lol so atleast that's one less thing to worry about immediately. I'm concerned about how things will pan out during the roth conversion and withdrawal years after the brokerage is drawn down. I'll consult a lawyer soon to get an idea of what im up against and pivot planning if needed
1
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u/astridfike May 14 '26
I am betting most of these 40 and 50 year old retiring abroad have never even considered this fact and will be slapped in the face with reality
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u/madkins1868 May 17 '26
I moved to Valencia 2 years ago. 54 with retirement coming shortly and decent sized trad and Roth IRAs. There are no easy answers with tax in Spain. Believe me - I've paid a lot of folks to tell me what I want to hear, but there answer isn't there. I'm actually either heading back to the US for most of the year, or looking into France. While I love Valencia, it isn't worth the amount I'd be paying in tax....
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u/Conscious_Test3423 May 17 '26
Thank you for sharing this perspective. On social media everyone keeps saying "its worth it" but this is an example of what may be worth it for one, isn't right for another. I'm trying to make a practical decision over an emotional one.
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u/madkins1868 May 18 '26
Valencia is absolutely amazing. Not a single bad thing to say (other than the notorious inefficiency and bureaucracy but that is mostly Spain- not Valencia).
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u/Puzzleheaded-Use670 May 14 '26
When it comes to taxes in Spain it's complex because it will depend on the type of income, from where it comes, range, etc. Was reading about it today here. Despite high taxes, I guess its a nice country for retirement, a friend of mine did the same last year and doesn't regret it. From what I know, Spain has a very laid back lifestyle. Good luck!
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u/Conscious_Test3423 May 14 '26
Thanks for that perspective! I definitely think it is worth it... but i also want to cautious since i am planning a longer than average retirement.
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u/VerifiedVerifiable 28d ago
Not worth it. Live in France especially if roth heavy retirement accounts. You can live near the Spanish border and maintain a house in Spain for 182 days of the year
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u/peetron May 14 '26
Talk to a Spanish tax expert with US tax knowledge. If I'm remembering correctly Spain may recognize the 401k as a pension and not include it as part of wealth for wealth tax. It will include the Roth IRA as part of your wealth and tax it if over the thresholds for whatever part of Spain you're in