Germany–USA · Retirement savings and tax treaty law
Roth IRAs in Germany
A Roth IRA can provide tax-free distributions in the United States if certain conditions are met. This exemption does not automatically apply for German tax purposes. The Germany–U.S. income tax treaty generally protects the accumulation phase. The German taxation of a distribution, however, depends on the legal structure of the plan, its contribution history and the particular benefit paid.
Three separate legal questions
What the treaty provides for Roth IRAs
Roth IRAs under section 408A of the Internal Revenue Code are expressly listed in paragraph 16(a)(aa) of the treaty Protocol as pension plans within Article 18A(4). This recognition matters, but it does not resolve every German tax question.
| Question | Legal basis | Effect |
|---|---|---|
| Income earned within the plan | Article 18A(1) and (4); Protocol paragraph 16(a) | Generally defers taxation of the participant until a distribution is made to or for the benefit of that participant. |
| Deduction of new contributions | Article 18A(2) and (3); Protocol paragraph 16(b) | Additional conditions apply. Roth IRAs are excluded from the automatic German recognition as corresponding occupational pension plans provided by this provision. |
| Taxation of a distribution | Treaty allocation rules and German income tax law | Germany’s right to tax and the amount subject to tax must be determined separately. |
The exception in paragraph 16(b)(aa) concerns recognition for the purposes of Article 18A(3)(b) and (5)(d). It does not exclude Roth IRAs from the treaty as a whole or from deferral under Article 18A(1). Conversely, recognition as a pension plan does not create a general German exemption for distributions.
Legal sources: Treaty and Protocol; U.S. Technical Explanation of Article 18A.
Article 18A(1) of the treaty
Income within a Roth IRA is generally tax-deferred
For a participant resident in Germany under the treaty, income earned within a recognized U.S. pension plan may generally be taxed only when, and to the extent that, it is paid out of the plan to or for the benefit of the participant.
Dividends, interest and realized capital gains retained within the plan therefore generally do not trigger annual German taxation of the participant. Selling an investment and reinvesting the proceeds within the Roth IRA does not, by itself, constitute a distribution.
- Document the plan’s U.S. status under section 408A
- Determine treaty residence under Article 4
- Distinguish internal income from benefits paid to the holder
- Also examine payments made for the holder’s benefit
- Assess transfers to other U.S. plans separately
- Distinguish deferral from permanent exemption
The treaty also expressly excepts income transferred to another pension plan in the other contracting state. For a German resident, this concerns transfers to another U.S. plan. This rule is particularly relevant when assessing rollovers and Roth conversions.
Contributions and documentation
Roth contributions are generally not deductible
Regular Roth IRA contributions are generally not deductible from income under U.S. law. The main tax benefit is the potential exemption of later qualified distributions. Traditional IRA contributions may be deductible, although nondeductible contributions are also possible.
For German purposes, pension-plan status alone does not establish a contribution deduction. In particular, Roth IRAs do not benefit from the automatic recognition and corresponding relief under section 3 no. 63 of the German Income Tax Act (EStG) provided by paragraph 16(b) of the Protocol. Any German deduction requires a separate legal basis that applies to the particular circumstances.
For later distributions, regular contributions, converted amounts, rollovers and earnings must remain separately traceable. The actual tax treatment matters, not merely the account’s name.
German income tax
How is a Roth IRA distribution taxed in Germany?
A qualified distribution that is tax-free under U.S. law is not, on that basis alone, exempt in Germany. Equally, the entire distribution should not be treated as taxable income without analysis. The plan and the benefit must first be classified under German law.
1. Classify the plan
For foreign pension arrangements, the application of section 22 no. 5 EStG depends in particular on structural comparability with the German pension arrangements covered by that provision. General treaty recognition of a Roth IRA does not automatically replace this analysis.
Relevant documents and features include the custodial agreement, statutory basis, access rights, distribution conditions and promised retirement benefits.
2. Establish contribution relief
If section 22 no. 5 EStG applies, the analysis depends on the extent to which the benefit derives from tax-favored contributions. Since 2025, comparable foreign contribution relief actually granted also counts.
U.S. exemption of a later distribution must be distinguished from tax relief on the original contributions.
3. Identify the type of benefit
For contributions that did not receive qualifying relief, section 22 no. 5 sentence 2 EStG distinguishes annuity payments from other benefits. For capital payments covered by letter (b), it refers to section 20(1) no. 6 EStG in the version applicable to the contract.
Where the corresponding difference-based taxation applies, contributions attributable to the benefit reduce the taxable amount.
4. Explain the legal conclusion
Section 22 no. 5 sentence 2 letter (c) is not a universal fallback for every foreign retirement account. According to the Federal Fiscal Court (BFH), it does not apply to foreign arrangements structurally comparable to German Pensionsfonds, Pensionskassen or direct pension insurance.
If section 22 no. 5 does not apply at all, other relevant provisions must be examined in light of the specific arrangement.
Neither “everything is tax-free” nor “gains are always taxed at 25%” is a reliable general statement. Benefits taxed under section 22 no. 5 EStG are classified as other income and generally subject to ordinary personal income tax rates. The reference to section 20(1) no. 6 does not turn them into investment income subject to Germany’s flat investment income tax.
Legal sources: Section 22 no. 5 EStG and BFH case X R 23/22. Applying these principles to a Roth IRA requires a separate legal classification.
Distributions from 2025 onward
Foreign contribution relief is now expressly included
The Annual Tax Act 2024 expanded section 22 no. 5 sentence 2 EStG. From the 2025 assessment period, the provision also takes account of contributions to foreign pension institutions for which comparable exemption or relief was granted in Germany or another country.
To the extent that a benefit within section 22 no. 5 derives from these contributions, it may be fully taxable under sentence 1 when paid out. Earlier case law on 401(k) contributions receiving relief exclusively in the United States therefore cannot be applied unchanged to distributions from 2025 onward.
Regular nondeductible Roth contributions have a different starting point. A Roth IRA with a conversion or rollover history also requires analysis of how earlier relief and subsequent taxable events affect the German treatment.
Understanding the taxable amount
Example: distinguish a distribution from a return of contributions
Assume a Roth IRA is fully distributed. The distribution is equivalent to EUR 100,000. Contributions recognized under the applicable German rules and not previously returned amount to EUR 60,000.
| Calculation | Amount |
|---|---|
| Full distribution | EUR 100,000 |
| Less recognized contributions | EUR 60,000 |
| Difference | EUR 40,000 |
This example assumes that difference-based taxation actually applies to the specific benefit. It assumes no conversions, no contributions receiving qualifying relief and no additional tax concession. EUR 40,000 is a possible taxable amount, not the tax payable.
Can only half the earnings be taxable?
This may be possible under the corresponding German provisions. Relevant conditions include a twelve-year contract term, the applicable age threshold of 60 or 62, and the transitional rules.
The U.S. age threshold of 59½ and U.S. five-year period do not replace these requirements. For arrangements entered into before 2005, the opening date alone also does not establish exemption.
What about partial withdrawals?
For nonqualified distributions, U.S. ordering rules generally allocate withdrawals first to regular contributions, then to conversion and certain rollover amounts, and finally to earnings.
This U.S. sequence is not automatically a German calculation rule. For German purposes, the contributions attributable to each benefit must be determined and tracked under the relevant German provision. Contributions already returned cannot be counted again.
Further reading: Section 20(1) no. 6 EStG , transitional rules in section 52 EStG and IRS Publication 590-B .
Court decisions and unresolved issues
Which judgments are relevant to Roth IRAs?
The published decisions reviewed for this article do not include a definitive BFH ruling resolving the German taxation of all Roth IRA distributions or Roth conversions. There are, however, important decisions on related U.S. retirement arrangements.
BFH, October 28, 2020 – X R 29/18
Issue: A 401(k) distribution in the 2011 tax year.
Under the law then applicable, U.S. contribution relief was insufficient to trigger full German taxation on distribution. In the case decided, the difference between the distribution and contributions was taxed.
Significance: The actual contribution relief and statutory wording are decisive. This judgment did not concern a Roth IRA; the legislative amendment must be considered for benefits received from 2025 onward.
Read the Federal Fiscal Court judgmentBFH, June 25, 2025 – X R 23/22
Issue: A 401(k) distribution in the 2015 tax year.
The BFH classified the capital payments concerned under section 22 no. 5 sentence 2 letter (b) EStG. Section 20(1) no. 6 applies in the version governing the contract. The BFH set aside the lower court’s judgment and remanded the case.
Limitation: The 401(k) comparability analysis relies on recognition in the treaty Protocol. Roth IRAs are excluded from that particular recognition. Applying the result to a Roth IRA therefore requires additional reasoning.
Read the Federal Fiscal Court judgmentMunich Fiscal Court, October 14, 2022 – 11 K 1814/21
Issue: Deduction of personal contributions to Traditional IRAs after moving to Germany.
The Fiscal Court allowed a special-expense deduction in the case before it by reference to the treaty. Although Roth IRAs were also mentioned in the facts, the disputed contributions were expressly made to Traditional IRAs.
Significance: The judgment establishes neither the deductibility of regular Roth contributions nor exemption of Roth distributions.
Read the decision in BAYERN.RECHTAppeal I R 66/23
As of this article’s review date, the BFH lists the appeal against the Munich Fiscal Court decision as pending.
The case concerns the tax treatment of personal contributions to a Traditional IRA. It is not a case about a general exemption for Roth IRA distributions.
Before relying on the lower court’s decision, check the current status of the proceedings again.
Check the proceedings at the BFHTraditional IRA → Roth IRA
Roth conversions: transfers, taxation and subsequent basis
A conversion moves assets from a Traditional IRA into a Roth IRA. Under U.S. domestic law, the previously untaxed portion is generally included in income. This establishes neither automatic concurrent German taxation nor automatic German tax neutrality.
The treaty’s transfer provision
Article 18A(1) expressly excepts transfers to another pension plan in the other contracting state from the distribution rule described above. Both Traditional IRAs and Roth IRAs are listed in the Protocol’s definition.
Interpretation: This provides a significant argument for continued deferral on a qualifying plan-to-plan transfer. Whether a particular conversion qualifies, and which amounts are protected, must be assessed from its legal structure and actual implementation.
No blanket conclusion for every conversion
The wording of Article 18A(1) concerns income earned within the plan. It does not expressly answer every question about previously tax-favored contributions, U.S. conversion tax or German contribution basis after the transfer.
The decisions reviewed here do not support a general conclusion, established by the highest court, that every Roth conversion is tax-neutral in Germany.
Document the transfer route
A direct transfer between custodians, an amount first paid to the holder, and a subsequent redeposit require separate analysis.
Amounts paid out or withheld to settle tax do not become transferred retirement assets merely because the remaining amount reaches the Roth IRA.
Plan for subsequent distributions
U.S. taxation at conversion does not, without further analysis, establish an equal amount of German contribution basis. Earlier contribution relief, U.S. conversion taxation, German treatment of the transfer and the later benefit must be considered together.
Otherwise, taxes may arise in different years and on differently calculated taxable amounts.
It may change the later analysis but does not guarantee German exemption. Before implementation, assess the U.S. tax cost, the start of German tax liability, treaty residence, planned distributions and recognition of contribution basis together.
Articles 18, 21 and 23 of the treaty
Which country may tax the distribution?
Article 18A primarily addresses deferral within the plan. Other treaty provisions must be examined to allocate taxing rights over a distribution:
- Article 18(1): Pensions and similar remuneration for past employment are generally allocated to the residence state. The necessary employment connection must be assessed from the origin and structure of the benefit.
- Article 18(2): The treaty also allocates annuities within its specific definition to the residence state. A discretionary withdrawal arrangement does not become such an annuity merely because transfers occur regularly.
- Article 21(1): If no preceding allocation provision covers the income, the article on other income may apply. It also generally allocates taxing rights to the residence state.
German treaty residence can therefore result in German taxing rights without the treaty importing the U.S. exemption. The taxable amount is then determined under German domestic law.
U.S. citizens and the saving clause
Article 1(4) generally preserves the United States’ right to tax its citizens. The exceptions in paragraph 5 must each be considered separately. Article 18A(1) is among them; Article 18(1) and (2) and Article 21(1) are not.
Living in Germany therefore does not, by itself, end the U.S. tax analysis. A qualified Roth distribution under U.S. law may nevertheless remain exempt there.
Foreign tax credits are not automatic
For U.S. citizens resident in Germany under the treaty, Article 23(5) contains special credit and source rules. Tax imposed solely because of U.S. citizenship is not automatically creditable in Germany.
If the Roth distribution is exempt in the United States, there is no U.S. tax on that distribution to credit. U.S. tax previously paid on a conversion cannot simply be offset against German tax on a later distribution.
The relevant starting points are the treaty text and the particular facts. The U.S. Technical Explanation is guidance on interpretation from the U.S. Treasury, not a German court judgment or an independent German tax exemption.
Moving to Germany and filing returns
Documents needed for the German analysis
Contract and account history
- Custodial agreement and evidence of the statutory plan type
- Opening date and complete annual statements
- Regular contributions, earlier distributions and transfers
- Origin of rollover and conversion amounts
Tax documentation
- Forms 5498, 8606 and 1099-R, where available and relevant
- U.S. tax returns showing the contribution relief actually received
- Documents showing how conversions were taxed
- Previous German classifications and tax assessments
Calculation in euros
Distributions and recognized contribution amounts must be determined in euros for German tax purposes. This requires the relevant dates and exchange rates.
The current dollar account value or a U.S. statement of basis does not replace a German calculation. Exchange-rate changes may produce a different result from a calculation conducted entirely in dollars.
Value on arrival
Document the account value when German tax liability begins. Moving to Germany does not, by itself, make this value the new contribution basis for tax purposes.
The rules discussed here do not establish a general automatic step-up for Roth IRAs that removes all previously accrued earnings from later German taxation.
Keep the U.S. rules separate
Qualified distributions and five-year periods
A qualified Roth IRA distribution under U.S. law generally requires completion of the applicable five-year period and satisfaction of an additional condition, such as reaching age 59½. Other qualifying cases include certain distributions on disability, after death or for an eligible first-time home purchase.
Separate five-year rules also apply to certain withdrawals following conversions and rollovers. These concern, in particular, potential additional U.S. tax on early distributions and should not be confused with the general qualification period.
These U.S. conditions inform the U.S. calculation. They do not directly determine the German income category, German contribution deduction or German exemption.
Official guidance: IRS Publication 590-B
The U.S. tax perspective on taxrep.usFrequently asked questions
Roth IRAs for German residents
Does the Germany–U.S. treaty cover a Roth IRA?
Must I pay German tax on Roth IRA earnings every year?
Are my original contributions tax-free when distributed?
Are Roth distributions always subject to Germany’s flat investment income tax?
Has the BFH ruled that Roth IRAs are tax-free?
Is a Roth conversion tax-neutral in Germany?
Does the account value when I move replace my historical contributions?
What if I inherit a Roth IRA?
Legal provisions and primary sources
Legislation, treaty and decisions
- Germany–U.S. income tax treaty, consolidated German–English publication of June 4, 2008 (PDF) – particularly Articles 1, 4, 18, 18A, 21 and 23 and Protocol paragraph 16.
- U.S. Treasury Technical Explanation of the 2006 amending Protocol (PDF, 2007) – particularly the explanation of Article 18A on document pages 25–28.
- Amending Protocol of June 1, 2006 (PDF) – Articles IX and XVI, paragraph 16.
- Section 22 EStG , section 20 EStG and section 52 EStG – taxation of benefits, statutory cross-references and transitional rules.
- BFH judgment of October 28, 2020 – X R 29/18 – 401(k) distribution under the law then applicable.
- BFH judgment of June 25, 2025 – X R 23/22 – classification of 401(k) capital payments and the statutory version applicable to the contract.
- Munich Fiscal Court judgment of October 14, 2022 – 11 K 1814/21 ; BFH proceedings I R 66/23 – contributions to Traditional IRAs.
- IRS Publication 590-B – U.S. rules for distributions, Roth IRAs and withdrawal ordering.
- Section 89 AO – requirements for a binding ruling.
Further insights
Related topics
Germany–U.S. tax advice
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