Victor Gersten, EA, CFP®, MS, MPAS™
An American who retires in Europe does not simply move an existing portfolio across the Atlantic.
Two rulebooks start applying to the same account at once. And the products sold locally are usually the wrong ones to own.
This article covers how to broaden an investment strategy as a US citizen retired in Europe, with Spain as the working example. It is general information rather than advice about your own accounts.
What changes when you retire in Europe
Three things change at once, and they interact.
First, the United States keeps taxing you. US citizens pay tax on worldwide income regardless of residence. Your US return does not go away when your address does.
Second, your country of residence starts taxing you too. A Spanish tax resident pays tax in Spain on worldwide income. Investment income falls into the savings base, at rates currently running from 19% to 30%.
Third, and least expected, European securities regulation changes what you may buy. Meanwhile US tax law changes what is sensible to own. Those two constraints point in opposite directions. The space between them is where the portfolio has to be built.
Why locally sold funds are the wrong answer
The most expensive mistake I see is an American buying a Spanish fondo de inversión, a SICAV, or a European-domiciled ETF. It usually follows a recommendation from a Spanish bank, which has no reason to know how the US tax code treats its own products.
Nearly every non-US pooled fund counts as a passive foreign investment company for US purposes.
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. Each fund also brings its own Form 8621.
Spanish law gives those same products a genuine advantage for residents. 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. There, a traspaso is simply a sale followed by a purchase. So the Spanish benefit and the US cost run at the same time.
The full mechanics are in The PFIC Trap.
Why you may not be able to buy US ETFs either
Under the EU’s PRIIPs regulation, a packaged retail product generally cannot be sold to an EU-resident retail investor without a Key Information Document in the required format. US ETF issuers generally do not produce one, because nothing in US law requires it.
So many brokers will not let an EU-resident retail client buy US-domiciled ETFs.
This restricts new purchases rather than forcing a sale of what you already hold. The treatment also varies between firms and has changed more than once. So it is a question for your specific custodian rather than a general rule.
The American retiree in Europe therefore gets squeezed from both sides. EU rules restrict buying US funds. US tax rules punish owning European ones.
What can an American in Spain actually own?
The building blocks outside the PFIC rules are straightforward. This is the reassuring part of the article.
- 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. Why US Brokerages Are Closing Expat Accounts covers that problem.
FBAR and FATCA are two different filings
Both may apply. People frequently confuse them, including a good deal of published expat content.
They are separate regimes, with separate agencies, thresholds and deadlines.
| FBAR | FATCA reporting | |
|---|---|---|
| Form | FinCEN Form 114 | IRS Form 8938 |
| Agency | FinCEN, part of the Treasury | Internal Revenue Service |
| Filed | Separately, through the BSA E-Filing System | Attached to your income tax return |
| Threshold | Foreign financial accounts over $10,000 in aggregate at any point in the year | Living abroad: over $200,000 at year end or $300,000 at any time (single); $400,000 or $600,000 (married filing jointly) |
| Deadline | April 15, with automatic extension to October 15 | The due date of your return, including extensions |
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. There is 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. The difference between them is large enough to influence where in Spain a retiree chooses to live.
A separate national levy, the Impuesto Temporal de Solidaridad de las Grandes Fortunas, remains in force above its own €700,000 exempt minimum, at rates from 1.7% to 3.5%. Whether it applies in a given year is worth confirming rather than assuming.
How Spain taxes investment income
Dividends, interest and capital gains fall into the savings base. They are taxed on a progressive scale.
| Savings income band | Rate |
|---|---|
| Up to €6,000 | 19% |
| €6,000 to €50,000 | 21% |
| €50,000 to €200,000 | 23% |
| €200,000 to €300,000 | 27% |
| Above €300,000 | 30% |
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.
Currency is a real risk
A retiree whose income arrives in dollars and whose expenses are paid in euros carries an unhedged currency position. Whether or not anyone has called it that.
A move in the exchange rate changes your spending power without anything happening to your portfolio.
There is no single right answer. Holding a portion of near-term spending in euros reduces the exposure that matters most, which is the next few years of living costs. That leaves the long-term portfolio to be managed on its own terms.
What proportion suits you depends on the size of the portfolio, your other income, and how much of your future spending is genuinely euro denominated.
Asset location: 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.
Roth accounts occupy their own uncomfortable position, covered in The Roth IRA in Spain.
The general point is that allocation and location are different decisions. For a cross-border retiree, the second can be worth more than small adjustments to the first.
Working with a cross-border adviser
The work on this topic is specific.
We review current holdings to identify which ones the PFIC rules reach. We 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. 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 1040 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.
Frequently Asked Questions
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. That is 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.
Does Spain have a wealth tax I should worry about?
Possibly. The state exempt minimum is €700,000 per taxpayer, with up to €300,000 more exempt for a primary residence. Regions vary considerably. Model it before choosing where in Spain to live.
Sources
- IRS, Comparison of Form 8938 and FBAR requirements
- IRS, Report of Foreign Bank and Financial Accounts
- IRS, Instructions for Form 8621
- Agencia Tributaria, Impuesto sobre el Patrimonio
- BOE, Ley 38/2022
Related reading: Investing in Retirement From Europe in 7 Steps · 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.
Rules and figures change. The ones here 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.
Please read the full article disclosures, which apply to everything published here.
