Taxes on Public Pensions and Public IRA from U.S.

chasleslieb

Active member

Member since 29 January 2023

chasleslieb

30 January 2023 22:39:03

chasleslieb

30 January 2023 22:39:03

I have a rollover IRA from my 401a (not 401k) that was funded by employment with the state of Alaska.

It now is a rollover account at a private company (Vanguard). I'm not sure how to prove the 401a source of the rollover IRA but am working on it. The transfer took place over 20 years ago so records have been lost during multiple moves during that time period...

This is my largest source of retirement income.

Because it was funded from work by the state are the disbursements of the fund exempt as a public pension?

From what I have read my pension from the state (which is separate and in addition to the IRA) is exempt from Spain taxes though the amount is applied to my income to determine my tax bracket.

With respect to social security: I have read that portion of social security from government employment is also exempt. I have a mix of public (US government) and private company contributions. How is that determined?

With respect to Roth...I assume taxes are applied only on distribution s. My Roth is decades old, how do they divide the distribution between principle and div/int/cap gains.

It's terribly difficult to get a straight answer on these questions.

I will be consulting with an advisor in the near future and will share their thoughts. In the meantime if anyone has direct experience or knowledge I would appreciate it.

I'm working on it

Thanks in advance

chasleslieb

Active member

Member since 29 January 2023

chasleslieb

06 February 2023 21:35:21

chasleslieb

06 February 2023 21:35:21

Information on Roth IRA from tax advisor:

A Roth IRA will be taxed as a private investment. This means every year Spain will tax the capital gains and distributions from the fund just as though it was a regular mutual fund. There is no tax deferred shelter to the investment.

A Roth is made up of post-tax contributions (principle) and earnings. The investment company accounts for distributions on a "last in first out" basis. They do not separate the distribution by principle and earning so it is difficult, if not impossible to separate them unless one has very accurate personal records.

In addition, Spain will tax the entire distribution of the Roth.

The advice is to convert the entire Roth distribution to savings or an investment before moving to Spain.

By doing this you will not be taxed on the cash distribution, only the capital gains and dividends and/or interest on the new investment.

For example: $100,000 Roth account. The entire $100,000 would be taxed as it is distributed (over time) so one would end up with $75,000 up front (assuming 25% tax rate) and continued taxation of investment gains.

Dumping the Roth before moving: You keep the $100,000 tax free; invest it and only pay the capital gains etc. on the investment moving forward (which you would do anyway in Spain.)

lovebeethoven

New member

Member since 22 March 2023

lovebeethoven

10 April 2023 18:34:54

lovebeethoven

10 April 2023 18:34:54

If you have not got the right answers yet? I can ask a CPA friend that specializes in US tax law and writes books for the AICPA. Cheers John

chasleslieb

Active member

Member since 29 January 2023

chasleslieb

14 April 2023 03:28:02

chasleslieb

14 April 2023 03:28:02

@lovebeethoven

Thanks John

I think I've got a plan. I've moved my Roth into a money market account. Spain will consider this as a savings account and tax the dividends but the principle I can use as tax free savings... not income.

So, I am going to stop pulling money out of my retirement IRA (which would be taxed) until I am required to withdraw the minimum. I think with the reduced cost of living, the addition of my wife's social security to my social security, public and private pensions I can stretch the draw down of the Roth... especially when I have to start taking money out of the IRA.

Another strategy just to keep things simple (for me anyway) is to store disposable income in Wise and use their debit card and always maintain less than $10,000 in the Spanish bank. It saves sending one report to the U.S. Wise isn't a bank.

I had an informal discussion about public money in a private IRA and discovered that it is not considered public money... so that covers that path though I do have a public pension which is referenced in the language of the treaty.

I am definitely going to have a tax advisor in Spain and will start out having a U.S. tax preparer just to learn the process. However, my tax situation is simple and repeats every year so I intend to copy and paste U.S. tax returns in the future.

Thanks for reaching out

Chuck

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