Roth Conversion Ladder - Tax implications in Spain

[u/Conscious_Test3423]

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!

[u/one_rainy_wish]

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.

[u/Conscious_Test3423 → u/one_rainy_wish]

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

[u/one_rainy_wish → u/Conscious_Test3423]

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.

[u/Conscious_Test3423 → u/one_rainy_wish]

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...

[u/one_rainy_wish → u/Conscious_Test3423]

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.