Inherited IRA – Income tax in Germany

16.06.2025 von Peter Scheller (Kommentare: 3)

In the US, tax-beneficial retirement plans can be inherited. This is not the case with comparable tax-beneficial company or private pension plans in Germany. Nevertheless, income from a US plan is taxable in Germany if the beneficiary is resident in Germany.

How is an inherited IRA established?

In principle, all tax-beneficial US retirement plans can be inherited. This applies to both company and government plans such as 401(k) plans, Roth 401(k) plans, 403(b) plans, and governmental plans, as well as IRAs and Roth IRAs.

If the beneficiary is not the surviving spouse, the beneficiary must continue the plan as an inherited IRA. The beneficiary cannot contribute to the plan and must withdraw all assets from both traditional and Roth IRAs within 10 years. If the deceased had already begun required minimum distributions (RMDs), these must be continued, with all assets being withdrawn within 10 years.

Surviving spouses have other options. For example, they can transfer the plan assets to an own plan.

What are the taxation rules in the US?

The taxation rules for withdrawals and permissible rollovers in the US are as follows. Withdrawals from traditional IRAs are subject to regular income tax. Withdrawals from Roth IRAs are subject to the special rule that withdrawals are only tax-free if the plan existed for at least 5 years prior to the decedent's death.

What are the implications of the double taxation agreement between Germany and the US?

If the beneficiary is subject to unlimited tax liability in Germany, withdrawals must be taxed in Germany. If the beneficiary is a German citizen, the withdrawals are tax-free in the US. To avoid tax deduction in the US, Form W-8 BEN must be submitted to the relevant financial institution.

For beneficiaries with US citizenship, withdrawals must be reported on the US income tax return. Withdrawals from a Roth IRA are tax-free under the above described conditions. Withdrawals from a traditional IRA are taxable in the US. German income tax must be credited against US income tax. This also applies to persons with dual citizenship.

How is taxation handled in Germany?

Withdrawals from a traditional IRA are subject to full taxation in Germany. Payments from a Roth IRA are taxed at the difference between the withdrawals and attributable contributions made into the plan. If the beneficiary has reached the age of 60 or 62 and the contract has been in place for more than 12 years, only half of the difference is taxable.

For details, see here

Author: Peter Scheller, Tax adviser, Master of International Taxation

Bildquelle: www.fotalia.com

Kommentare

Kommentar von Chris R. | 29.10.2025

Thank you for this web page. Would you be able to comment on this question: Within an "inherited IRA," are transfers of funds from one investment to another considered taxable events by the German tax system? I mean transfers where nothing is paid out to the account holder.

For example, say that Joe is a U.S. citizen living in Germany. Joe has an inherited IRA with $100,000 in it. This money is invested in a mix of stock and bond funds. Joe transfers $10,000 from one fund, say it is an S&P 500 index fund, to another fund, say it is a U.S. bond index fund. Technically this is a sale followed by a purchase, but no money is paid out to Joe. In the American taxation system, this is a non-event. The sale is not taxable because the money remains under the "umbrella" of the inherited IRA. Gains are only taxed when they are distributed out of that shelter.

Does the German tax system see this sale in the same way, as non-taxable? What is the governing point of law in this case?

Antwort von Administrator

As long as no funds or money are withdrawn from the plan there are no tax implications in Germany.

Kommentar von Puzzled | 07.04.2026

After declaring the full value of an inherited IRA as a gift in Germany, do I report withdrawals or annual income earned within the inherited IRA, or both, on my Germany income tax return as well? I have dual US/German citizenship and am a full time German resident.

Antwort von Peter Scheller

After inherited an IRA you only have to declare withdrawals from the plan.

Kommentar von Norwegian Wood | 19.05.2026

Your website is extremely useful, thank you for the great information!

Following up on the above example, what if Joe is a U.S. citizen living in Germany and has an inherited Roth IRA from a U.S. parent worth $2,000,000 as of 2026. At the time of inheritance in 2022, the account was worth $800k and $200k was the total original contribution. The original Roth IRA had been open for more than five years and the inherited Roth IRA will be emptied by 2032 because of the 10 year rule. I have a few issues/questions about the entire setup:

1) Inheritance tax should have been paid on the original amount of $800k; with 400k EUR tax free as it's from a parent.

2) What if $600k is distributed (withdrawn) in 2027 while Joe is still a resident of Germany. Would only $400k be taxable because of the original $200k contribution? And at which tax rate - income or capital gains? In other words, how much tax would be paid in Germany?

3) What if Joe returns to the United States in 2028 to take care of his other parent and withdraws the rest of the Roth IRA. Will he have to pay tax in Germany?

4) If he returns to Germany in 2032, will he have to pay additional taxes on his now defunct Roth IRA?

Thank you so much for the information. There is no real comprehensive information about inherited Roth IRAs and how they are dealt with in Germany. It makes it very difficult for planning purposes.