Investing in Retirement From Europe in 7 Steps

Victor Gersten, EA, CFP®, MS, MPAS™

The seven steps of building an investment plan do not change when you retire to Europe.

Two of them get considerably harder. And one new constraint appears that has no equivalent at home.

This is the Europe version of that sequence, written for American retirees, with Spain as the working example. It is general information, not advice about your own accounts. If you haven’t built an investment plan before, start with Getting Started With Investing in 7 Steps for the basics; this one picks up from there for the added complications of living abroad.

Step 1: Define the goal

Retirement is the obvious goal. Living abroad tends to add others that were not on the list before.

Flights home for holidays, weddings and emergencies. A cushion for a possible return to the United States. Support for family in another country.

Those are real, recurring and often underestimated. Naming them now is what stops them being funded out of the long-term portfolio at the wrong moment.

Step 2: Attach a time horizon

Short term is up to three years. Medium is three to ten. Long is ten or more.

The horizon decides the investment, not the other way around.

For a retiree abroad there is a currency dimension too. Money you will spend in euros within a few years is a different asset from money you will spend in dollars in twenty. Decide which is which rather than holding one pool and hoping.

Step 3: Understand your cash flow, in two currencies

Work out what actually arrives and what actually goes out. Note which currency each is in.

Most American retirees in Spain receive dollars and spend euros. So the exchange rate quietly changes their spending power every year. Holding a portion of near-term spending in euros reduces the exposure that matters most, which is the next few years of living costs, and leaves the long-term portfolio to be managed on its own terms.

This is also the point to look at how retirement income will be taxed. A Spanish tax resident pays tax in Spain on worldwide income, while the United States continues to tax them as a citizen.

The foreign tax credit relieves the overlap. It does not remove the need to plan the order of withdrawals.

Step 4: Size the emergency fund for living abroad

The usual three to six months of expenses is a starting point. Abroad, two additions are worth making.

The first is genuine travel money. Enough to get home at short notice without selling an investment.

The second is a larger reserve if a return to the United States is plausible. Relocating back is expensive, and it tends to happen on someone else’s timetable rather than your own.

Step 5: Establish your real risk tolerance

The question is not what allocation the arithmetic recommends. It is what allocation you will still be holding after a bad year.

The most expensive mistake in investing is selling after a decline and not returning.

For a retiree there is a second consideration people miss. Sequence of returns risk means a poor stretch early in retirement does more damage than the same stretch later, because you are selling into it. A portfolio that suits a fifty year old still accumulating may not suit the same person two years into drawing on it.

There is also an inflation point specific to living abroad. A dollar-denominated portfolio has to keep pace with the cost of living in the city where you actually spend. That is not the same problem as keeping pace with US inflation.

Step 6: The account question is harder abroad

This is the first of the two steps that change materially.

Some US institutions restrict or close accounts once the address of record becomes foreign. The trigger is usually the address rather than your citizenship. Policies also differ between the brokerage arm and the retirement plan arm of the same firm.

The practical version of this step is simple. Ask each institution, in writing, what its policy is for a client who becomes tax resident in Spain. Keep the answer. Ask before you change the address, not after.

If a closure notice does arrive, the tax cost of the fix usually matters more than the closure itself. Why US Brokerages Are Closing Expat Accounts sets out the sequence.

One thing not to do is keep a US address you do not live at. It creates problems with the firm, with FATCA reporting and with Spanish residency questions.

Which account holds what

Once two tax systems apply, the question of which account holds an asset carries more weight than it did at home.

US retirement accounts remain useful shelters from current US tax. But Spain generally taxes the distributions when they come out, so the deferral is a US benefit rather than a joint one.

Taxable accounts are where you can deliberately manage the sequencing of gains against the Spanish savings bands, which are set out below.

Roth accounts occupy their own uncomfortable position, covered in The Roth IRA in Spain.

Allocation and location are different decisions. For a cross-border retiree, the second can be worth more than small adjustments to the first.

Step 7: What you can actually buy

This is the constraint with no domestic equivalent. It is the reason generic investing advice fails Americans in Europe.

The US side

Nearly every non-US pooled fund is a passive foreign investment company.

Under the default rules of section 1291, a gain on disposition is allocated back across the holding period. The earlier slices are taxed at the highest ordinary rate in force for each of those years. An interest charge runs on top. And each holding brings its own Form 8621.

That is what makes the Spanish fund your bank recommends the wrong purchase for you specifically. Spanish law gives those same products a genuine advantage for residents, because the traspaso rule lets a Spanish tax resident switch between funds without triggering a Spanish capital gain. That rule has no effect on the US side, where a traspaso is simply a sale followed by a purchase. So the Spanish benefit and the US cost run at the same time.

The European side

The PRIIPs regulation means US-domiciled ETFs generally cannot be sold to EU-resident retail investors. US issuers do not publish the required Key Information Document, because nothing in US law requires it. Many brokers block those purchases once your address is European.

This restricts new purchases rather than forcing a sale of what you already hold. Treatment varies between firms and has changed more than once, so it is a question for your specific custodian rather than a general rule.

So EU rules restrict buying American funds, and US tax rules punish owning European ones.

What remains, which is enough

• US-domiciled mutual funds and ETFs, held in a US brokerage account that still accepts clients resident in Spain. A US-registered fund is a domestic vehicle, so the PFIC rules do not reach it.
• Individual stocks and bonds, US or foreign. A share in an operating company is not a PFIC, so an American in Spain can hold Iberdrola or Telefónica directly. Direct holdings bring their own work, including withholding, currency and diversifying one line at a time.
• US retirement accounts you already hold. They generally continue to function as before, subject to how Spain taxes the distributions.

Custody decides most of this rather than product selection. If your US brokerage will not keep an account with a Spanish address, what to own becomes academic. The PFIC Trap covers the detail.

How Spain taxes investment income

Dividends, interest and capital gains fall into the savings base. They are taxed on a progressive scale.

Two planning consequences follow.

Realizing gains in measured amounts across several years, rather than in one large sale, keeps more of the total inside the lower bands.

And because the same gain is generally taxable in both countries, the foreign tax credit shapes the final result. So the sequencing question belongs on both returns at once, not on either one alone.

The US reporting that comes with it

Two obligations tend to arrive unannounced, and people frequently confuse them. They are separate regimes, with separate agencies, thresholds and deadlines.

The $10,000 figure that circulates everywhere belongs to the FBAR. It is not a FATCA rule.

Filing one does not satisfy the other. As the IRS puts it in its own comparison, the Form 8938 requirement does not replace or otherwise affect the obligation to file FinCEN Form 114.

Note also that the Form 8938 thresholds are far higher for a taxpayer living abroad than for one living in the United States. That is why many American retirees in Spain file an FBAR every year and never file a Form 8938 at all.

What Spain requires

Spanish residency brings its own reporting, independent of anything owed to the IRS.

Modelo 720

This is an informational return covering assets held outside Spain. There are three separate categories: accounts, securities and rights, and real estate. Each carries its own €50,000 threshold.

The threshold is per category rather than a total. Once a category has been declared, you only declare it again when its value rises by more than €20,000 over the last figure reported, or when you dispose of a reported asset. Modelo 720 works through it in detail.

Wealth tax

This is the one most American retirees have never heard of.

The Impuesto sobre el Patrimonio applies a state exempt minimum of €700,000 per taxpayer, with a further exemption of up to €300,000 for a primary residence. A filing obligation can arise on gross assets above €2,000,000 even where no tax is due.

Regions set their own rules, and the difference between them is large enough to influence where in Spain a retiree chooses to live. Some apply a full relief that removes the charge entirely.

A separate national levy, the Impuesto Temporal de Solidaridad de las Grandes Fortunas, reaches net wealth above €3,000,000, at rates running from 1.7% to 3.5%. It applies uniformly across Spain, so no region can relieve it. That is why choosing a region solves the problem for some households and not for others. Whether it applies in a given year is worth confirming rather than assuming.

Frequently Asked Questions

Can I keep my US brokerage account after moving?

Often yes. It depends entirely on the institution. Confirm the policy in writing before changing your address of record, because that is what triggers the review.

Why can I not buy US ETFs from Spain?

EU rules require a Key Information Document in a prescribed format for products sold to retail investors. US issuers generally do not produce one. The restriction is on new purchases and it varies by broker.

Can I keep buying the index funds I already own?

If they are US-domiciled funds in a US account that accepts your Spanish address, generally yes, subject to your broker’s own restrictions once the address is updated. If a broker steers you toward European-domiciled equivalents, that is where the PFIC rules become relevant.

Do I report my US brokerage account to Spain?

An ordinary US taxable brokerage account is reportable on Modelo 720 under the securities and rights category, once that category exceeds €50,000. The treatment of IRAs and 401(k) plans is less settled and depends on the plan’s own terms.

Is the $10,000 threshold a FATCA rule?

No. That is the FBAR, filed with FinCEN on Form 114. FATCA reporting on Form 8938 has much higher thresholds for taxpayers abroad and goes to the IRS with your return.

Do I pay tax twice on investment income?

Both countries may tax the same income. The foreign tax credit relieves the double charge. You claim it on a return filed afterward, so the sequencing still matters.

Working with a cross-border adviser

Steps 1 through 5 you can work through yourself.

Steps 6 and 7 are where people need help. The answer depends on US tax law, EU securities regulation and your specific custodian’s policy at the same time.

The work is specific. We review current holdings to identify which ones the PFIC rules reach, then confirm directly with your custodian whether it will keep an account with a Spanish address and what it will let you buy. We rebuild the portfolio out of instruments that are both investable from Spain and clean on the US return. And we sequence any sales so the tax cost is visible on both returns before anything is executed.

Cross Border Wealth Advisors is a fee-only fiduciary firm serving US citizens living in or moving to Spain. I hold both the CFP® certification and an Enrolled Agent license.

That matters here. For an American in Europe, what to own and what the tax return looks like are the same question. Separating them across two firms is how people end up holding a product that made sense to whoever was only looking at one side.

Everything above is general information, not advice about your accounts or your tax position. Those depend on facts I would need to see.

To talk it through, book an introductory conversation at cbwealthadvisors.com or email info@cbwealthadvisors.com.

Sources

• IRS, Instructions for Form 8621
• IRS, Comparison of Form 8938 and FBAR requirements
• IRS, Report of Foreign Bank and Financial Accounts
• IRS, Foreign tax credit
• Agencia Tributaria, Modelo 720 FAQ
• Agencia Tributaria, Impuesto sobre el Patrimonio
• BOE, Ley 38/2022

Related reading: The PFIC Trap · Five Financial Mistakes Americans Make Before Moving to Spain

Disclosures

This article is general educational information published by Cross Border Wealth Advisors, a company of Gersten Financial Planning Inc., an investment adviser registered with the State of California (CRD 309890). It is not investment, tax, legal or immigration advice.

Investing involves risk, including possible loss of principal. Diversification does not guarantee a profit or protect against loss. Past performance is not indicative of future results. Rules and figures change and are stated as of the date above. References to specific securities or issuers illustrate a category and are not recommendations. Cross Border Wealth Advisors is fee-only and receives no commissions. Registration does not imply a certain level of skill or training.

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