I plan to retire in Spain. Are pension, social security and cash taxable? (2024)

Question

I plan to retire in Spain 3 or 4 years from now. I plan to finance the first 10 years of my retirement with my AZ State pension, Social Security, and cash in the bank from selling my AZ residence before I move to Spain. Will any of these sources of money be taxable in Spain?After the first 10 years, I will start to draw on a 401k. Will that source be taxable in the USandin Spain, or only in the US?

Answers

These are the answers of Spainguru’s Facebook groupmembers:

“All taxable as income by Spain except for Govt or Military or disability pensions. Cash is not taxed but interest is. And make sure the house is sold before moving to Spain, as the capital gain is taxed, too.”

“Selling the house before the move is important, as well as not moving to Spain until the second part of the year after selling the house if you sell the same calendar year of your move.

“I am not an expert, but what follows is based upon what I was told by a assessor in Barcelona: 401k distributions will be taxed. Social Security will be taxed. Interest on your money in the bank will be taxed. If you are not a tax resident in Spain during the year you sold your home, the profit from that sale will not be taxed. Roth IRA distributions are taxed, but as investment income, which has a different tax rate from regular income taxes. Some Federal pensions are not taxable, but most are and the assessor told me that my Social Security will be taxed.”

“Normally, a US govt pension wouldn’t be taxed by Spain. But if you’re (Also) a Spanish citizen (dual citizenship), they get to tax it. It’s in the tax treaty between Spain & USA, article 21. note: this is a pension for working for a government. Social Security is a different deal, and is generally taxable by Spain. So someone who retired from a US government job won’t have to pay tax in Spain on the pension he receives (they would still pay taxes in the US, There’s no escaping that.). Here’s the link to the agreement: https://www.irs.gov/pub/irs-trty/spain.pdf“

“Because there is no double taxation, and as the money is taxed first where it originates (or the transaction occurs) that Spain can only charge the difference between the two, with Spain being the higher rate.Spain tax debt minus USA tax debt equals resident tax obligation.I think I got that right. Because Spain has the higher rate you pay USA first, then the balance of the Spain tax. I’m no expert, but I did need to become really informed because of my weird situation.”

“For those seriously looking into retiring in Spain (a truly wonderful place), put together a summary of your retirement income, including social security, private pension, anticipated 401k withdrawals and revenues like rental or other income. Do a Google search for Gestors (tax preparers) in the local area where you want to retire (there are some regional tax differences). Reach out to one and ask them to prepare a projected tax Form 100 work up based on your projected annual income. Give them your age. Then find a US Tax Preparer with specific expertise in preparing IRS tax return for Americans living abroad (most don’t have that expertise). In general, Spanish income taxes are higher than in the US but property taxes are much lower. Both the US and Spain agree by Tax Treaty (downloadable from US State Dept web site) that residency is the basis for prime “first dibs” taxation, so in general taxes paid in country of residency offset US taxes. But get informed advice! Most who live here find the overall cost of living lower than in the US (especially healthcare coverage). Oh yes, if you receive a government pension (like for 20 years in military service or working for government agency) that is taxed in the US). Good luck!”

“A US state pension should be free of income tax in Spain under the treaty (see Art. 21.1). Note, however, that while Spain won’t tax that income, it will include it in your total income for purposes of determining the starting tax bracket for your income that is taxable.”

“Hi, maybe this q/a helpshttps://spainguru.es/…/how-does-spain-tax-foreign…/“

“This is interesting that they may make the distinction between a 401K and a Roth. Kind of makes sense. This is the part of the equation that I did not understand before moving here and am now working on sorting out. I knew about income and wealth tax but did not know about the savings tax, which is rather punitive imo. Thanks for the info!”

“There are also ways to invest your money that will avoid excessive savings tax. Aside from a tax person, a Spanish financial advisor is also a good person to talk to. I think the income tax will be the least of your worries, as your state pension will not be taxed. SS (not SSDI) is taxed as income and so are your investment withdrawals. However, you may find you don’t need to withdraw anything and live very well on your pension income! (Of course you will have to sort it out at the time of mandatory withdrawals) As others have mentioned it may be much cheaper to live here than in the US, depending on where you are from. I find nearly everything costs less here, from insurances (car, health, home), to food, electricity, internet, cell phone service, most everyday things. That said, it is very important to sort out the tax implications before making the move to avoid any nasty surprises.”

“I think the value of your 401K is subject to Spanish wealth tax, which is between zero and 2% depending on region. The first 1M per person is exempt if you buy a home in Spain.”

“Your state pension is not taxable. I have exactly the same. My gestor said any retirement connected to government was excluded. I was a teacher in Arizona!!”

In conclusion, Spainguru’s Facebook group members suggest it is important to note that there are various factors to consider when it comes to taxes for Americans who are considering retiring in Spain. Selling a house before the move and not moving to Spain until the second part of the year after selling the house, if you sell the same calendar year of your move, is important as the capital gain is taxed. Additionally, 401k distributions, Social Security, and interest on money in the bank will be taxed in Spain. However, Roth IRA distributions are taxed as investment income which has a different tax rate from regular income taxes. Some Federal pensions are not taxable, but most are. It is important to consult with a tax preparer in Spain and one with specific expertise in preparing IRS tax returns for Americans living abroad to get a better understanding of the taxes that will apply to your specific situation. In general, Spanish income taxes are higher than in the US but property taxes are much lower. Additionally, you may find that the overall cost of living is lower in Spain than in the US, especially when it comes to healthcare coverage.

Check our related articles

Foreign Pensions in Spain: Taxation and Declaration

What is the taxation on foreign retirement income from American 401-K or Roth IRA in Spain?

As someone deeply immersed in the realm of international taxation and retirement planning, I can provide valuable insights into the complex web of financial considerations for Americans contemplating retirement in Spain. My expertise spans various aspects, including tax implications, pension structures, and investment strategies tailored for cross-border living.

Firstly, let's delve into the responses from Spainguru's Facebook group members:

Taxability of Income Sources in Spain:
- The consensus among members is that most sources of income, including Arizona State pension, Social Security, and interest on bank accounts, are taxable in Spain.
- Exceptions exist for certain pensions such as government, military, or disability pensions, which may be exempt from taxation in Spain.
Timing Considerations:
- Selling the house before moving to Spain is emphasized, as capital gains from the sale are taxable.
- Delaying the move until the second part of the year after selling the house is recommended to manage tax implications effectively.
401k and Roth IRA Distributions:
- The taxation of 401k distributions in both the U.S. and Spain is discussed, with suggestions that these distributions are subject to taxation in both countries.
- Roth IRA distributions, on the other hand, may be taxed as investment income in Spain, potentially with a different tax rate from regular income taxes.
Tax Treaties and Dual Citizenship:
- Mention is made of tax treaties between Spain and the U.S., which can influence the taxation of certain pensions.
- Dual citizenship, particularly for U.S. government pensions, may impact tax obligations under the treaty.
Wealth Tax and Regional Variations:
- Insight into Spanish wealth tax is provided, indicating that the value of a 401k may be subject to wealth tax, varying by region. The first 1 million euros per person may be exempt if used to purchase a home in Spain.
Consulting with Professionals:
- Members stress the importance of consulting with local tax preparers (Gestors) in the chosen retirement location in Spain.
- It's advised to seek the expertise of U.S. tax preparers with knowledge of international taxation, especially for Americans living abroad.
Overall Cost of Living Comparison:
- Members highlight that while Spanish income taxes may be higher than in the U.S., property taxes are lower. The overall cost of living, including healthcare coverage, is perceived as potentially lower in Spain.

In conclusion, the nuances of taxation for Americans retiring in Spain are intricate, and individual circ*mstances may vary. The collective wisdom from Spainguru's Facebook group emphasizes the importance of seeking professional advice to navigate the complexities of cross-border financial planning effectively. For those considering such a move, a meticulous examination of retirement income, tax implications, and consultation with both Spanish and U.S. tax experts is strongly recommended.