A bit of our background. We are Puerto Ricans but we lived in the US mainland for many years hence our retirement accounts were saved in the US mainland.
The bottom line. If you withdraw money from your tax deferred accounts while living in Puerto Rico, you have to pay Federal and Puerto Rico taxes. You do get a credit in Puerto Rico for taxes paid to the Federal Government and at the end you pay the highest of both, which may or may not be higher than what you pay in state and federal in a given US state.
The stickler is with Roth 401k/IRA. Even though you paid federal and state taxes in a Roth and are considered "tax free" in the US when withdrawn, they are not tax free in Puerto Rico, you have to pay Puerto Rico taxes from your Roth withdrawals which can be sizable being that you do not get the tax credit.
This is what we discovered.
- There are really not tax advantages of converting Roth if your ultimate goal is to move to Puerto Rico, you end up paying taxes in three jurisdictions.
- Social security is not taxed in Puerto Rico, but pensions do with a exception up to 11,000 before the age of 65 and 15,000 after the age of 65 per pension plan (if you wife and you have a pension, then each pension gets the exception).
- You will pay federal taxes on your tax deferred accounts, pension and social security within IRS rules even if you live in Puerto Rico.
You have to look at your own personal situation, of course, but if there's any consolation, nursing homes and assisted living homes in Puerto Rico are far cheaper than in the US Mainland on average.
Best of lucks.
PS. The following comes from a website which explains this being that many retirees want to take advantage of Act 20/22, but in fact, they cannot. Source is listed at the bottom.
A NOTE ON RETIREMENT INCOME
Withdrawals from an IRA, 401(k), or other US tax-deferred retirement account would not be covered by Act 22. So moving to the island won’t lessen the tax on withdrawals. The situation is the same with Social Security and other pension income.
Puerto Rico has its own IRA system, with both traditional and Roth plans, but it is distinct from the US IRA system. Income from employment in Puerto Rico cannot be contributed to a US IRA and vice versa.
For a resident of Puerto Rico, a distribution from a US Roth IRA would be taxable by the Puerto Rican government. That is, unless the US Roth IRA is liquidated and the proceeds are used to contribute to a Puerto Rican Roth IRA (subject to contribution limits, which are similar to the US). The opposite is true as well.
A distribution from a US traditional IRA to a Puerto Rico resident would be taxable by both the US and the Puerto Rican government, unless it is liquidated and the proceeds are used to contribute (subject to contribution limits) to a Puerto Rican traditional IRA, in which case the distribution would only be taxable by the Puerto Rican government. Again, the opposite scenario is true as well. For taxable distributions, the availability of a credit from either government for tax paid to the other prevents double taxation, and you end up effectively only paying the higher rate.
Despite the many similarities to a US IRA (more details here), a critical difference makes a Puerto Rican IRA considerably less useful: Puerto Rican IRAs allow very little investment freedom-they must invest at least 34% of contributions into obligations of the Commonwealth of Puerto Rico.
Assuming that your investments are covered by Act 22 and that your business is covered by Act 20, there would be little current advantage in funding a Puerto Rican IRA.
We see no advantage to pouring your US IRA into a Puerto Rican IRA.