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Alexandra Sabalier
March 07, 2022
2 min

How are Roth IRA withdrawals taxed in Puerto Rico?

The Tax Incentive Code, known as “Act 60”, provides tax exemptions to businesses and investors that relocate to, or are established in, Puerto Rico. Under the law referred to as Act 60 (formerly Act 20 and Act 22), Puerto Rico has enacted several tax incentives that have prompted the relocation of many investors, savvy taxpayers , and retirees. Naturally, one of the most important aspects of this relocation is understand how the US tax saving retirement accounts are implemented in Puerto Rico.

Let's shortly discuss how IRAs withdrawals would likely look like for you if you decide to retire in Puerto Rico.

Does Puerto Rico honor Roth IRA tax free withdrawals?

Withdrawals from an IRA, 401(k), or other US tax deferred retirement account would not be covered by Act 22. So moving to the island won’t lessen the tax on withdrawals. The situation is the same with Social Security and other pension income.

Puerto Rico has its own IRA system, with both traditional and Roth plans, but it is distinct from the US IRA system. Income from employment in Puerto Rico cannot contribute to a US IRA and vice versa. 

For a resident of Puerto Rico, a distribution from a US Roth IRA would be taxable by the Puerto Rican government. That is unless the US Roth IRA liquidates and the proceeds are used to contribute to a Puerto Rican Roth IRA subject to contribution limits, which are similar to the US.

The opposite is true as well.

A distribution from a US traditional IRA to a Puerto Rico resident would be taxable by both the US and the Puerto Rican government, unless it is liquidated, and the proceeds are used to contribute, subject to contribution limits, to a Puerto Rican traditional IRA, in which case the distribution would only be taxable by the Puerto Rican government.

How are distributions taxed?

For purposes of sourcing pension income, there are two components: contributions to the pension plan, and the earnings accrued from investing those contributions. The contribution portion is sourced according to where services are performed that earned the pension. The investment earnings portion is sourced according to the location of the pension Trust.

On the other hand, U.S. social security benefits are considered to be from U.S. sources. Example: A U.S. citizen worked in Puerto Rico for a U.S. company. All services were performed in Puerto Rico. Upon retirement, taxpayer remained in Puerto Rico and began receiving a pension from the U.S. pension trust of their employer. Distributions from the U.S. pension trust must be allocated between (1) contributions, which are Puerto Rico source income and (2) investment earnings, which are U.S. source income.

For taxable distributions, there is an available method that allows you to credit the taxes paid to either government for taxes dueto be paid on the distributions so this allows you to prevent double taxation, and you end up effectively only paying the higher rate of taxes to only one of the two countries: either US or Puerto Rico. 

I'm here to help

To get specific answers to your doubts, questions, or inquiries get in contact with me.I will happily provide you all the information and guidance you need to make an informed and conscious decision when moving, investing, and retiring in Puerto Rico. I can help through the process of transferring your accounts while strategically planning your tax outcome from the US to Puerto Rico and guide you on every step of your relocation. Book a consultation at the most convenient date and time for you and I will be looking forward to assisting you.

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