Different tax treatments when redeeming them as capital or as an income.
Today at Ambit Assessor, SL we received an inquiry about a pension plan from a client who is approaching retirement, and we wanted to share it with everyone since it is a very common question that many people ask themselves when they decide to withdraw the amounts they have invested in their plan.
The question was: “I want to retire and I want to withdraw the money I have accumulated in my pension plan. I know I can receive all the money at once or in installments. My question is, does the way I receive it affect how much tax I pay?”
Well, before answering this question and to put things in context, let's remember that when contributions are made to a pension plan, there is a benefit in the income tax return, as the taxable base that is taxed in our personal income tax (IRPF)
Let us also remember that after the tax reform that the Government put into effect in January of this year, the limit for contributions is the lesser of 8,000 euros or 30% of the net income from work and economic activities, regardless of age, and not as it was before the reform when the limit was 10,000 euros for those under 50 years of age and 12,500 euros for those over 50.
However, pension plans are taxed when redeemed, as this is when the income from employment that was previously deducted from taxable income is considered to be received. And how is this taxed? At the tax rate corresponding to the income bracket you fall into, based on your total income.
Thus, getting to the point, there are differences in the tax treatment of amounts received when they are received as a lump sum (all at once), and when they are received as an annuity (partial and periodic payments that can be classified as temporary or lifetime).
When the withdrawal is made in a single lump sum, a tax benefit can be obtained consisting of a 40% reduction on the withdrawn amounts whose contributions were made before 2007. In this regard, we will differentiate three scenarios that are new to the tax reform:
- 1. That retirement is from 01/01/2015 onwards: this reduction will be applied provided that the redemption is made in the same year as retirement or in the following two years.
- 2. If retirement occurred between 2011 and 2014: they will have eight years from the date of their retirement to redeem the plan with the tax benefit.
- 3. Retirement before 2011: they can apply the 40% reduction if they recover the money before December 31, 2018.
When the redemption is received in the form of an annuity, there will not be the possibility of applying the tax benefit mentioned above, but by extending the collection of annuities over the years, the annual tax rate of the brackets in which you are located is reduced, since your total income will be lower.
Good advice in a timely manner can mean significant tax savings in the future, so from this post I encourage you to contact Ambit Assessor to meet their professionals and explain your situation.
Finally, I'd like to remind you of another new development: since the tax reform, there are new "windows" for redeeming pension plans older than 10 years without needing to justify the reason. If the contribution was made before January 1, 2015, redemption will be permitted from January 1, 2025.
Juan Ojea,
Tax Consultant
Àmbit Assesor
Do you have any questions about this topic?
Our team of expert advisors will help you resolve any issues related to our services.
Contact us now
A Àmbit Assessor, SL has 40 years dedicated to the tax, comptable and labor consultancy of the Pime.
Latest entries from MGI Àmbit
(see all)
Related
