For many Americans, retiring in Italy is a dream come true—rolling hills, historic towns, world-class cuisine, and a more relaxed pace of life. But before you sip that Tuscan wine with peace of mind, it's crucial to understand how your U.S. retirement income—including 401(k)s, IRAs, Roth IRAs, and Social Security—is taxed in Italy.

At Liberty Atlantic, we’ve helped countless U.S. expats make the move with confidence. Here's what you need to know.

How Are U.S. Retirement Accounts Taxed in Italy?

Italy taxes residents on their worldwide income, which means your retirement income from the U.S. does not automatically escape Italian taxation. Here's a breakdown:

Traditional IRA and 401(k) Distributions

Distributions from Traditional IRAs and 401(k) accounts are considered ordinary income in Italy and taxed at Italian progressive income tax rates—which can be significantly higher than capital gains rates. This applies even if the distributions are the result of long-term investments.

While the U.S.-Italy tax treaty helps prevent double taxation through the use of foreign tax credits, these distributions must still be reported and are subject to Italy’s income tax system.

Example:
Mary, a retired teacher from California, receives $40,000 annually from her 401(k). After moving to Florence, she learns this income is taxed in Italy at her marginal rate—which, depending on her total income, could be as high as 43%. With cross-border planning, she structures her withdrawals to stay within a lower tax bracket.

Roth IRA Distributions

Roth IRAs are tax-free in the U.S. under qualifying conditions, but Italy may not honor the same tax-free treatment. Unless properly structured and disclosed, Italy may treat Roth withdrawals as taxable income, leading to unnecessary tax burdens.

Common Mistake: Many Americans assume Roth IRA distributions are also tax-free abroad. Without proper planning, these assets can lose their key advantage once you become an Italian tax resident.

U.S. Social Security Benefits

U.S. Social Security benefits are taxable in Italy as part of your worldwide income. While the U.S. retains the right to tax these benefits under the tax treaty, Italy also taxes them—often at your marginal income tax rate.

Example:
John receives $18,000 a year in U.S. Social Security benefits. After retiring to Umbria, he learns these benefits are fully taxable under Italian law. By coordinating with tax professionals on both sides of the Atlantic, he manages to offset the U.S. tax with credits in Italy and avoid paying more than necessary.

Why the Type of Investment Matters

Beyond retirement accounts, the type of investments you hold plays a critical role in your overall tax exposure in Italy.

While Italy generally taxes capital gains on securities (like stocks) at a flat rate of 26%, certain investment vehicles—particularly foreign mutual funds and ETFs—can be taxed as ordinary income instead of capital gains. This significantly increases the tax burden.

Example:
Susan holds a U.S. mutual fund in a brokerage account. In the U.S., her gains might qualify for favorable long-term capital gains treatment. But after becoming a tax resident in Italy, those same gains could be taxed as ordinary income, at rates up to 43%.

Common Mistake: Holding U.S.-based mutual funds without understanding how they’re treated under Italian tax law. These investments often fall under Italian tax rules for “foreign collective investment schemes,” which carry less favorable treatment.

Strategic Tip: Rebalancing your investment portfolio before relocating can help avoid adverse tax consequences. Working with an advisor who understands both U.S. and Italian tax law is essential.

Why Financial Planning Before Moving to Italy Is Critical

Relocating without a tailored financial plan can result in:

• Double taxation on your retirement accounts
• Penalties for incorrect tax filings
• Higher-than-expected taxes on Roth IRAs and mutual fund gains
• Missed opportunities for favorable tax regimes (like Italy’s 7% pensioner tax scheme in southern regions)

Proper planning ensures your assets are structured to take full advantage of tax treaties, foreign tax credits, and any applicable Italian incentives.

FAQs: U.S. Retirement in Italy

Do I have to report my retirement accounts in Italy?
Yes. As a tax resident, you are required to report foreign-held financial assets over certain thresholds (including retirement accounts and brokerage accounts) using Italy’s IVAFE and RW filings.

Can I convert my IRA to a Roth before moving?
Possibly. Roth conversions completed before you establish Italian tax residency may help you lock in U.S. tax treatment and avoid future Italian taxation on those funds. Speaking with a financial advisor at least 2-years before your move to Italy is advisable.

Are there tax breaks for retirees in Italy?
Yes. Certain regions offer a flat 7% income tax on foreign pensions, available to retirees who relocate to qualifying southern municipalities.

Why Work With Liberty Atlantic?

At Liberty Atlantic, we specialize in cross-border financial planning for U.S. expats in Europe. Our team understands the nuances of U.S. retirement structures, Italian tax laws, and international tax treaties.

We help you:

• Strategically manage IRA and 401(k) withdrawals
• Avoid unexpected taxation on Roth IRAs and U.S. mutual funds
• Navigate Italy’s reporting requirements and optimize for the lowest global tax burden
• Maximize tax treaty benefits and avoid double taxation

Your dream of retiring in Italy should be as seamless as it is inspiring. Let Liberty Atlantic guide your financial future—so you can enjoy la dolce vita with clarity and confidence.

Considering retirement in Italy?
Get ahead with a personalized cross-border retirement plan. Drop us a line and visit libertyatlantic.com to connect with a specialist.