40% reduction in pension plans: limit per contingency
The tax treatment of pension plan withdrawals frequently generates doubts, especially when there are contributions made before the 2007 reform. The Dirección General de Tributos (DGT) has issued a relevant criterion regarding the application of the 40% reduction in cases of partial withdrawals.
What the DGT has ruled
The query concerned the possibility of making several partial lump-sum withdrawals in different tax years, applying the 40% reduction to each of them. The DGT has determined that pension plan benefits are considered earned income (rendimientos del trabajo).
The criterion establishes that the 40% reduction for contributions made up to December 31, 2006, can only be applied once if the benefits derived from the withdrawals stem from the same contingency. It is not possible to fragment the withdrawal to apply the tax benefit to each installment if the reason for the payment is the same.
What this means for you
If you are an individual with a pension plan that includes contributions made prior to 2007, this criterion limits your ability to optimize taxes through successive withdrawals. If you decide to withdraw your plan partially in different years, but all those withdrawals respond to the same contingency, you will only be able to benefit from the 40% reduction in a single tax year.
However, the regulations grant the beneficiary the power of choice. You have the possibility to decide in which tax year to apply said reduction, provided that the deadline established in the twelfth transitional provision of the Personal Income Tax (IRPF) Law is respected.
What is advisable to do
Given the existence of contributions prior to 2007, it is necessary to analyze the structure of the planned withdrawals. Since the reduction is unique per contingency, choosing the timing of the withdrawal is decisive for the final tax burden. It is recommended to assess the totality of the benefits and the contingency that originates them before proceeding with any movement of capital.
Frequently asked questions
- Can I apply the 40% reduction to each partial withdrawal from my plan?
- No, if the withdrawals derive from the same contingency, the reduction can only be applied once.
- Can I choose when to apply the reduction?
- Yes, the beneficiary can choose the tax year to apply it within the legal deadlines.