How Roth IRAs are taxed in Andalucía under the tax agreement with USA

General Andalucía tax rules for Roth IRA withdrawals

A Roth IRA operates differently from other U.S. retirement plans because the qualified withdrawal is tax-free in the United States. Spain, however, classifies Roth IRA distributions as taxable income rather than exempt pension income. Spanish tax authorities generally treat Roth IRA withdrawals as investment income, meaning they are subject to Spanish IRPF even if the United States applies a zero-tax rate.

For Spanish residents, a Roth IRA withdrawal increases the taxable income base and can push the taxpayer into a higher tax bracket. The fact that contributions were already taxed in the United States does not exempt the growth or withdrawals from Spanish taxation. Consequently, individuals living in Spain must declare Roth IRA distributions and include them in their yearly tax return.

Application of the USA–Spain tax treaty to Roth IRA income in Andalucía

Under the tax treaty between the USA and Spain, Roth IRA income falls under categories of income that are generally taxable only in the country of residence. Therefore, Spain has exclusive taxing rights over Roth IRA distributions received by residents of Andalucía. The USA, while retaining citizenship-based taxation for American citizens, typically does not impose tax on qualified Roth distributions, so the Spanish tax is often the only real tax impact.

This structure means that a resident of Andalucía cannot rely on the U.S. “tax-free” treatment of Roth IRAs when living in Spain. Spain fully taxes the earnings regardless of whether they are exempt in the U.S. For Americans claiming treaty benefits, supporting documentation may be required on both Spanish and U.S. returns to demonstrate the correct allocation of taxing rights.

Key differences between 401(k) and Roth IRA taxation in Spain

While both 401(k) and Roth IRA withdrawals are taxed in Spain as income, their classification and strategic impact differ. A 401(k) is considered pension income, whereas a Roth IRA distribution is categorised as investment income by Spanish authorities. This distinction affects the applicable Spanish tax rates and how withdrawals appear in the tax return.

Furthermore, the timing strategy differs. A resident of Andalucía may prefer to stagger 401(k) withdrawals to remain in lower Spanish tax brackets. In contrast, Roth IRA withdrawals, which may include capital gains accumulated over years, might be best taken before or after becoming tax-resident in Spain, depending on personal tax planning models. A personalised cross-border strategy is highly recommended.

Wealth tax and reporting rules for Roth IRA accounts

The full market value of a Roth IRA is included in the Spanish Wealth Tax base, as specified in our website. For residents in Andalucía, the valuation of the Roth IRA may push the taxpayer above the regional threshold, triggering annual wealth tax obligations. Calculation rules differ from region to region, so the impact varies depending on where the taxpayer resides in Spain.

In addition, Roth IRAs are generally reportable on the Spanish Modelo 720 if the balance exceeds €50,000. Proper reporting avoids severe penalties for non-compliance. On the U.S. side, U.S. citizens must also report Roth IRAs on Form 8938 if thresholds are met. Therefore, both Spanish and U.S. authorities must be considered in any cross-border Roth IRA tax plan.

Planning Roth IRA distributions while resident in Andalucía

Residents of Andalucía should take a strategic approach to Roth IRA distributions. For some, delaying withdrawals until after leaving Spain may be beneficial; for others, withdrawing before relocating to Spain may reduce tax exposure. Wealth tax impact must also be taken into account because a high Roth IRA valuation may trigger annual wealth tax liabilities.

Ensuring accurate classification of the account and optimisation of treaty protections reduces long-term tax costs. Working with an advisor who understands both systems is highly valuable, especially when applying foreign tax credits and avoiding reporting penalties. With the right structure, Roth IRA holders can minimise both ongoing and distribution-related tax exposure.

To receive personalised international tax advice, contact us via the following link:http://wa.me/34644121802