How Italy Taxes Your Roth IRA: Why the Tax-Free Promise Stops at the Border

That gap is not a loophole or an oversight you can argue around. It is the predictable result of two tax systems that were never designed to talk to each other, joined by a treaty that, for a U.S. citizen, quietly preserves almost nothing. The cost of getting this wrong is measured in tens of thousands of dollars on a mid-sized account. The good news is that the most effective fix is also the simplest, and it is available to anyone who acts before establishing residency.

Two Systems, One Account, No Shared Definition

On the U.S. side, a qualified Roth distribution is exempt from federal income tax, and your original contributions can come back to you tax-free at any time as a return of what you already paid tax on.¹ None of that changes when you move. Through its saving clause, the income tax treaty lets the United States continue to tax its own citizens as if the treaty did not exist, so a U.S.-citizen retiree in Italy still reports to the IRS under ordinary U.S. rules, and a qualified Roth distribution stays tax-free on the American return.² This is the part that misleads people. Read the treaty’s pension provisions on their own and you may conclude the income is sheltered. Read the final clause, the one that carves U.S. citizens back in, and the shelter disappears for the people who most expect it.

Italy is the other taxing authority, and for a resident it is usually the primary one on retirement income. The treaty generally assigns the right to tax a private pension to the country where the recipient lives.³ Once you are resident, Italy may tax the income, and Italian law decides what the income is and how much of it is taxable. There is no Roth in Italian law. There is no domestic category that imports a foreign account’s tax-free status. So the account gets sorted into the nearest Italian box, and that box is “pension.”

What Italy’s Tax Authority Has Actually Said

For years the honest answer to “how will Italy tax my Roth” was “no one has asked the question on the record.” The Agenzia delle Entrate (the Italian Revenue Agency, hereafter AdE) had never ruled on a living taxpayer drawing down a Roth. That silence is why reputable firms reach different conclusions: each is predicting the same authority’s behavior from adjacent facts.

The adjacent facts have now grown specific enough to build on. Twice in the last two years AdE has examined money paid out of a U.S. individual retirement account and treated it, without hesitation, as pension income. In the more recent of the two, the sum paid out of a U.S. voluntary individual pension account was held taxable only in Italy and classified as a pension of the ordinary kind, taxed under Italy’s separate-taxation regime on the gross amount received.⁴ The earlier ruling reached the same classification for the liquidation of a foreign pension fund.⁵ A third recent ruling slotted supplementary pension money into the employment-income category when the recipient was not yet a pensioner, which tells you the instinct is always to find an Italian wage-or-pension box and use it.⁶

Two conclusions follow, and they point in different directions. First, Italy is comfortable treating a U.S. individual retirement account as a pension. That is helpful, because pension treatment is what makes the favorable regimes available. Second, in doing so AdE taxed the gross payout and showed no interest in whether the source country had already exempted it. That is the warning. Nothing in the published reasoning preserves a Roth’s tax-free character, and nothing distinguishes a Roth from a traditional IRA.

Our Position, and the Risk Inside It

Our working position, the one we apply and document for clients, splits the Roth into its two economic parts. The money you contributed was already taxed, so we treat its return as a tax-free return of capital, consistent with how Italy treats recovered basis generally. The growth above those contributions we treat like any other IRA distribution: pension income, taxable at ordinary Italian rates that climb to roughly 43 percent before regional and municipal surcharges, unless a special regime applies.

This is a defensible reading, not a settled rule, and the candor matters more than the comfort. The same rulings that help us by calling the account a pension also taxed the gross amount, which means a more aggressive examiner could decline to honor the contribution-versus-growth split and tax the whole distribution. The practical difficulty compounds the legal one: money inside the account is not segregated into “basis” and “earnings” compartments, so a position that depends on which dollars came out is a position you have to construct and defend rather than simply observe. No one has tested any of this through a formal ruling request, and there is a reason the profession has left the question alone. Filing to ask invites an answer, and the answer might be the bad one.

What Other Countries’ Pensions Tell Us About the Roth

Where Italy is silent on the Roth specifically, the productive move is to study how AdE has handled the foreign retirement vehicles it has actually ruled on, because a consistent method emerges. Faced with a foreign individual or supplementary pension account, AdE asks one question: is this a pension scheme under the law of the country that created it? When the answer is yes, the payouts are pension income in Italy, taxable here under the ordinary pension rules, and the source country’s internal tax treatment is irrelevant to that conclusion.

The closest analog to a Roth that AdE has examined is the British self-invested personal pension. A SIPP is the United Kingdom’s version of a self-directed individual retirement account: the holder picks the investments and the wrapper defers tax. When an Italy-resident taxpayer drew benefits from a SIPP and a related international pension plan, AdE held the payments were pension income of the ordinary kind, reasoning simply that a SIPP is a form of supplementary pension scheme under UK law.⁷ The parallel to a Roth is direct. A Roth is a voluntary individual retirement arrangement under U.S. law, the same description AdE accepted for the SIPP, so the same outcome, pension income taxable in Italy, is the one to expect.

That ruling carries a second lesson, and this one favors the taxpayer. Because the SIPP was treated as a pension rather than as a generic portfolio of foreign financial products, AdE confirmed that Italy’s foreign-asset wealth tax did not fall due on its value.⁷ A Roth classified the same way should likewise sit outside that wealth tax, a meaningful and frequently overlooked benefit of the pension characterization. The Swiss cases point the same way: Italy treats mandatory and complementary Swiss occupational pensions as pension positions and relieves the sums paid into them from the foreign-asset monitoring that ordinary foreign accounts trigger.⁸

The pattern is consistent across jurisdictions, and it tells us two things about the Roth. The classification question is close to settled: Italy will treat the account as a foreign pension, which is what unlocks the favorable regimes and the wealth-tax relief. But it also marks the limit of our basis position. In none of these cases, the British SIPP, the U.S. individual pension account, the Swiss second pillar, did AdE carve out a tax-free slice for the after-tax money the holder had put in; it taxed the benefit as pension income on the gross amount. The return-of-capital treatment we apply to Roth contributions is a U.S.-law import the parallel Italian rulings do not endorse.

What to Do Before You Move

The clearest move is to deal with the Roth while you are still a U.S. resident and before Italy has any claim. Distributions taken before you establish Italian residency are governed by U.S. rules alone, which means a qualified Roth distribution comes out completely tax-free and never enters the Italian system. For many clients, emptying or substantially drawing down the Roth in the window before the move is the highest-value step in the entire relocation plan. On a $200,000 Roth, pre-move liquidation can avoid a six-figure Italian tax exposure that would otherwise accrue over years of resident distributions.

If liquidating in full is not realistic, sequence what remains. Withdraw the contribution basis first, where the tax-free return-of-capital position is strongest, and leave the growth for last. Do not run new Roth conversions once you are an Italian resident, because Italy will not honor the tax-free growth you are paying U.S. tax to create. And in the years you are resident, spend down taxable accounts before touching Roth or IRA growth, so the uncertain money stays sheltered as long as possible.

The 7 percent flat-tax regime for new foreign-resident pensioners changes the calculus more than any other single factor. For a qualifying retiree who settles in an eligible southern municipality, Italian tax on covered foreign income, the Roth growth included, is capped at 7 percent for up to ten years.⁹ The real prize is not only the rate. It is that the Roth-versus-traditional classification debate stops mattering: when everything covered is taxed at 7 percent, the position you took on the contribution-versus-growth split no longer changes the bill, and audit exposure and preparation cost fall with it. In many cases the cleanest move is to liquidate the Roth entirely inside the window and redeploy the proceeds into assets whose income is also covered at the 7 percent rate, so the full balance is taxed once, at 7 percent, and the classification question never has to be answered. This works precisely because AdE is willing to treat a U.S. individual retirement account as the kind of pension the regime covers, the same characterization it applied to a U.S. self-directed early-distribution arrangement when the question was put to it directly. You can read our analysis of that ruling in Your IRA and Italy’s 7% Regime, and the broader retirement sequencing in The Glide Slope.

Two compliance points round out the picture. The Roth account itself is a reportable foreign asset on your Italian return whether or not you draw on it. The foreign-asset wealth tax is the friendlier question: where AdE has treated a foreign individual pension scheme as a pension, it has held that wealth tax does not apply, so a Roth that holds its pension characterization should escape it, though the relief stands or falls with that characterization.¹⁰ Here again the 7 percent regime simplifies more than it seems, since it collapses most of the monitoring and wealth-tax friction into a single covered figure. For the mechanics of foreign retirement income generally, including how the treaty splits private pensions, government pensions, and Social Security, see our piece on whether U.S. Social Security is taxable in Italy.

The Bottom Line

The Roth IRA is one of the many U.S. accounts that becomes meaningfully worse the moment you cross into Italian residency, and the loss is structural rather than negotiable. Italy does not recognize the tax-free character the United States granted it, AdE treats U.S. retirement money as taxable pension income on the gross amount, and the treaty does nothing to stop this for the U.S. citizens most affected. The defensible position, returning contributions tax-free and taxing only the growth, is one we will take and document, but it is a position, not a guarantee, and it carries some risk. The decisive advantage belongs to whoever plans early: draw the account down while U.S. rules still govern it, or relocate into the 7 percent regime and retire the growth on favorable terms inside the window. The mistake is to carry an untouched Roth across the border on the assumption that tax-free means tax-free everywhere. It does not.

Sources

1. U.S. tax-free treatment of qualified Roth distributions and tax-free recovery of contributions: IRS Publication 590-B and IRS Publication 17 (2025), chapter on individual retirement arrangements, including the ordering rules under which contributions are deemed distributed first; IRS Publication 559 (2025) (“Qualified distributions from a Roth IRA aren’t subject to tax”).
2. Saving clause: Convention between the United States of America and the Italian Republic for the avoidance of double taxation, Article 1 (saving clause permitting the United States to tax its citizens as if the Convention had not entered into force); IRS Publication 519 (2025), discussion of saving clauses and their limited exceptions.
3. Allocation of taxing rights over private pensions to the state of residence: U.S.-Italy Convention, Article 18 (Pensions); government pensions are governed separately under Article 19.
4. Risposta a interpello, Agenzia delle Entrate, n. 290 of 12 November 2025: sums paid to an Italy-resident heir on liquidation of a U.S. voluntary individual pension account are taxable only in Italy, qualified as “pensions of all kinds and equivalent allowances” under Art. 49(2)(a) TUIR and subject to the separate-taxation regime under Art. 17(3) TUIR.
5. Risposta a interpello, Agenzia delle Entrate, n. 229 of 27 November 2024: amounts received by an Italy-resident heir on liquidation of a foreign pension fund qualify as “pensions of all kinds and equivalent allowances” under Art. 49(2)(a) TUIR, separate-taxation regime.
6. Risposta a interpello, Agenzia delle Entrate, n. 296 of 26 November 2025: early redemption of a supplementary pension fund by a non-pensioner constitutes income assimilated to employment income under Art. 50(1)(h-bis) TUIR.
7. Risposta a interpello, Agenzia delle Entrate, n. 5 of 11 January 2024: benefits received by an Italy-resident taxpayer from a UK Self-Invested Personal Pension (SIPP) and International Pension Plan (IPP) constitute “pension income” under Art. 49(2)(a) TUIR, on the reasoning that a SIPP is a form of supplementary pension scheme under UK law; the ruling further confirms that IVAFE is not due on the value of such a pension.
8. Treatment of Swiss occupational pensions (second-pillar / LPP) as mandatory-though-complementary pension positions, with exoneration from quadro RW monitoring for sums paid by legal obligation, as summarized in Agenzia delle Entrate monitoring guidance and standard quadro RW practice.
9. Flat 7 percent substitute tax for new-resident foreign pensioners settling in qualifying municipalities, for up to ten tax periods: Art. 24-ter TUIR. The substitute tax is an imposta sostitutiva and is not creditable against U.S. tax.
10. Foreign-asset monitoring obligation (quadro RW) under Art. 4 of Decree-Law 167/1990, and the foreign financial-asset wealth tax (IVAFE); on IVAFE, see the SIPP ruling at note 7, in which a foreign individual pension scheme was held outside the IVAFE base. The relief depends on the account being characterized as a pension rather than as a generic foreign financial product.