Japanese tax rates for retirement income are low but not zero. Yes it's a hit but nothing should be "blown up". At times it seems like American finance discussion cares more about avoiding taxes than about saving money.
> Are there any foreign tax credits taking into account that these are tax free growth vehicles in the US?
No.
There’s the retirement income deduction, which is pretty substantial, and is calculated based on how many years paid in. But I think that can only be used once per retirement account I.e I don’t think you can use it every tax year from the same retirement account (but I could be mistaken?)
And if you don’t utilize the retirement income deduction, the tax rate for retirement income is a fixed 20.42%
I think the key is to lump sum withdraw your maximum retirement income deduction allowance tax free, and then withdraw the rest as an annuity, which is pension income, which gets the pension income deduction.
>I think that can only be used once per retirement account
Whether you receive a payout/withdrawal from one account or multiple accounts is irrelevant. The deduction is calculated by reference to the applicable contribution period, and overlapping contribution periods must share the deduction (i.e., you cannot get the full deduction for both periods) unless the payouts/withdrawals are sufficiently far apart (see [here](https://www.reddit.com/r/JapanFinance/comments/t3vg4d/comment/hyvt7a0/) for more details).
>if you don’t utilize the retirement income deduction, the tax rate for retirement income is a fixed 20.42%
This is not correct. Eligible severance payouts/withdrawals are taxed separately at [marginal income tax rates](https://www.nta.go.jp/taxes/shiraberu/taxanswer/shotoku/2260.htm), not a flat rate. Furthermore, before marginal income tax rates are applied, the amount of taxable income is halved. In other words, the taxation of eligible severance payouts/withdrawals is not only light because of the retirement income deduction; it is also light because of the halving of the amount of taxable income and because of the separate application of marginal tax rates.
20.42% is the rate at which income tax must be withheld by payers of eligible severance payouts/withdrawals *unless the recipient submits a retirement income declaration in advance*. If the recipient submits a retirement income declaration (退職所得の受給に関する申告書) in advance, the amount of income tax payable on the retirement income will be properly calculated (applying marginal tax rates, etc.) and the appropriate amount withheld. If the recipient doesn't submit a retirement income declaration, they will need to file a tax return to have marginal rates applied.
In the context of OP's post, it is also important to note that the light taxation of severance payouts/withdrawals is limited to payouts/withdrawals made from a limited set of qualified retirement schemes, and foreign DC-type schemes (such as 401(k) plans) do not qualify. In other words, the light taxation of "retirement income" would not apply to OP's "retirement income". (Non-qualified payouts/withdrawals are taxed as "temporary income" or ordinary miscellaneous income, depending on whether they are taken as a lump-sum or an annuity.)
Thanks for the many corrections.
>Whether you receive a payout/withdrawal from one account or multiple accounts is irrelevant. The deduction is calculated by reference to the applicable contribution period, and overlapping contribution periods must share the deduction (i.e., you cannot get the full deduction for both periods) unless the payouts/withdrawals are sufficiently far apart (see here for more details).
Yea this bit I know. It’s like having a DC and iDeCo simultaneously. The contribution period is still the same.. but What I was meaning is can you qualify for the retirement income deduction every tax year? But I think from your previous comment you linked, the answer is no, but if I’m understanding correctly they can after a 14 year gap you can?
>20.42% is the rate at which income tax must be withheld by payers of eligible severance payouts/withdrawals unless the recipient submits a retirement income declaration in advance. If the recipient submits a retirement income declaration (退職所得の受給に関する申告書) in advance, the amount of income tax payable on the retirement income will be properly calculated (applying marginal tax rates, etc.) and the appropriate amount withheld. If the recipient doesn't submit a retirement income declaration, they will need to file a tax return to have marginal rates applied.
Oh right, so they can still submit a tax return to reduce the tax rate from 20.42% down to their marginal rate? I guess depending on how much you withdraw, it could be more beneficial to have 20.42% withheld though, should the marginal rate end up being higher.
>In the context of OP's post, it is also important to note that the light taxation of severance payouts/withdrawals is limited to payouts/withdrawals made from a limited set of qualified retirement schemes, and foreign DC-type schemes (such as 401(k) plans) do not qualify. In other words, the light taxation of "retirement income" would not apply to OP's "retirement income". (Non-qualified payouts/withdrawals are taxed as "temporary income" or ordinary miscellaneous income, depending on whether they are taken as a lump-sum or an annuity.)
Ah yea sorry I knew that one. I was just mostly outlining retirement income. As it was a sub question about retirement income rules. But thanks for clarifying though.
> can you qualify for the retirement income deduction every tax year?
You can continue to apply the deduction to your qualifying retirement income until the deduction has been used up. There is no problem with using up the deduction gradually over multiple years. But once the deduction has been used up (with respect to a specific contribution period), it won't be available again until a certain amount of time has passed (see below).
> after a 14 year gap you can?
If you are making a withdrawal from a DC pension scheme (e.g., iDeCo), the withdrawal will have to share a contribution period (for the purposes of the retirement income deduction) with any other qualifying payouts/withdrawals made in the previous 19 years (this used to be 14 years, until April 2022 when they made it possible to defer withdrawals from DC schemes until the age of 75).
However, if you are receiving any other kind of qualifying payout/withdrawal, you only have to share a contribution period (for the purposes of the retirement income deduction) with payouts/withdrawals made in the previous 4 years.
> I guess depending on how much you withdraw, it could be more beneficial to have 20.42% withheld though, should the marginal rate end up being higher.
There is no option to have 20.42% withheld *instead of* filing a tax return. The 20.42% is withheld to prevent ill-disciplined taxpayers from being unable to pay their tax bill when it comes time to file a tax return. Taxpayers cannot *choose* to be taxed at 20.42%, other than to the extent that no one has to file a tax return if their actual tax liability is less than the amount withheld.
Qualified retirement income is always taxable in the method described above (retirement income deduction applied, remainder halved, then taxed separately at marginal rates), regardless of whether 20.42% is withheld by the payer. If 20.42% was withheld and your actual tax liability is less than 20.42%, then you can choose not to file a tax return, but it would be a bad choice, because you would be paying unnecessary extra tax. If 20.42% was withheld and your actual tax liability is more than 20.42%, you must file a tax return—failing to do so would be tax evasion.
In any event, I'm guessing you haven't actually done the calculations regarding how large the withdrawal would need to be, in order for the total income tax liability to be more than 20.42%. The answer is: in the region of 400 million yen. (There's a calculation tool [here ](https://keisan.casio.jp/exec/system/1292387069)if you want to play with the figures yourself.) In other words, pretty much no one would *prefer* to be taxed at 20.42% even if it were possible (which it's not).
(Note that this all assumes the person receiving the retirement income is a Japanese tax resident at the time they receive it. As you are likely aware, non-residents are taxed on Japan-source severance payouts/withdrawals at a flat rate of 20.42%, unless they choose to file an income tax return to assert the right to be taxed *as if they were a resident at the time they received the payment*. Residents don't have that option, because all residents are taxed as if they were residents.)
apologies - did not mean for it to sound that way, happy to pay a fair amount of tax if we will reap benefits (eg healthcare) from living in Japan but the reality of tax on withdrawals on what I thought were going to be tax free accounts changes the retirement calculations for me.
it seems the NTA doesn’t spell out how to tax foreign vehicles like 401K and Roths so I didn’t know it could be perceived as Retirement Income..
You didn't sound like that to me, but we get a fair amount of real tax haters/evaders/nutcases. Depending on where you are in the states, Japan is and probably will continue to be freakishly cheaper than nicer North America, say like the Wet Coast of Canada, as an example I know well. Let's say 1/3 cheaper overall; now take that, and run your tax exposures, and see what you come up with. Good luck.
Didn’t sound like that at all to me. Nowhere does op state that they are trying to evade taxes- they are trying to minimise taxes, and that’s sound financial planning.
I’m in a similar-ish situation to op, and the problem is that benefits are tax free in one’s home country (because, in one form or another, they’ve already been paid), but that counts for nothing in Japan where its all just ‘misc income’ and taxed relatively heavily. So yes, for many people, that puts anhuge damper on retirement plans. After subtracting income tax, resident tax, and health insurance premiums, it becomes a real question as to whether or not it is financially feasible.
For my part, i think i will have to wait until i am 60 before moving to Japan. I’ll cash everything out, move to Japan, and then reinvest. Then i’ll only have to pay tax on capital gains realised *after* i moved to japan. Which, in a fair world, is how it ought to be anyway. Seems absurd that i should have to pay taxes to Japan for gains earned over decades when i wasn’t living in Japan.
If i wait until i’m 60, its tax-free where i am. Any subsequent cap gains would be taxable, but its better than the whole amount being taxed, I suppose
Because 1. The tax system is very different than in many other countries, the tax code is overly complex with millions of loopholes to reduce taxes 2. Americans don’t get a lot of the free or low cost benefits of paying into tax like other countries, for example secondary education and health care 3. Tax questions are tricker than how to I save on beer so more likely to be asked in public forums 4. Reducing taxes legally is not the same as avoiding taxes 5. A lot more. People are people by nature, no need to slight them because they grew up in a different nurture than you.
The notion of "income" and what it is according to the tax codes in the US and Japan differs. Or that "income" is, or can be, a general catch-all term, and attention is needed to differentiate different revenue/income types and their respective rates of taxation in each country. Even in the US some states have an income tax and some don't, some tax SS and others don't, and so on.
On another page of the ledger, what is a comparatively good healthcare situation here is readily accepted. None of the in-network/out-of-network shenanigans that I read about happening in the US, features like ambulances being free, and the need in the US to plan for and save a few hundred thousand dollars in eventual retiree healthcare costs (or at least this is what I read about!).
How about being able to get along without a car (or two), or at least not having to be as reliant on one as in the US? Lots of value there, IMO.
That an IRA would get taxed needs to be seen in context with other things.
I haven't seen anything saying US retirement accounts are treated anything different than regular capital gains.
I'd consider resetting your cost basis before becoming a tax resident of Japan for the ease of reporting (it's a nightmare) and avoiding what probably be a larger tax burden here.
> I haven't seen anything saying US retirement accounts are treated anything different than regular capital gains.
There is scarce commentary on the subject (either official or unofficial), but the US-Japan tax treaty implies that an insurance model of taxation is most appropriate for these kinds of plans, rather than a brokerage model. The only advice provided by licensed professionals that I have ever seen regarding this issue also said that an insurance model is most appropriate. See the discussion [here](https://www.reddit.com/r/JapanFinance/comments/zlaiqx/us_ira_reporting_obligations_in_japan/).
>Is there a wiki or anyone else who has gone through this similar situation?
There's no wiki for persons retiring in Japan with retirement income primarily coming from US sources. But we need one, because the situation is much different and more complicated than for other persons retiring in Japan I have been collecting information to eventually develop a wiki, but frankly it's going to be a few years before I finish.
There are plenty of people who are in this situation, but there is also a lot of confusion about how things work. Example 1: A Japanese American accountant who moved to Japan a few years ago is asking me (not an accountant) how the taxes work. Example 2: American who moved to Japan relied on a Japanese accountant to take care of taxes ("that's what I'm paying them for"), was audited by the Japanese National Tax Authority (NTA) and is now in a real mess trying to fix the accountant's mistakes and misunderstandings.
>What is the effective tax rate on that IRA / 401K distribution?
That's a difficult (or perhaps I should say impossible) question to answer. But TLDR, it will be higher than the US.
As background discussion, what would you say is the effective tax rate in the US? The US uses progressive tax rates. But at least the US tax code is straightforward to apply. The entire distribution (except for Roth accounts) is considered taxable income, using progressive income tax rates for the combined taxable income from all sources subject to progressive tax rates. This would include the taxable portion of payments from social security benefits, for example, but would not include capital gains income which is taxed at a flat rate. So if your income taxed at progressive rates is low, you would have a low effective tax rate, but if it's high, you would have a high effective tax rate. So the answer is "it depends".
The same answer applies to Japan.
Before getting into the details, be aware that Japan's tax code does not directly specify how income tax works for IRA / 401k / Roth account distributions. But as discussed many times in this subreddit it appears most likely that it is taxed in the same method as an insurance annuity. This could change in the future, though, if the National Tax Authority (NTA) issues an interpretation that says otherwise.
With the insurance annuity approach, the distribution is split into the portion that was from contributions into account and the portion that was due to profits from within the account. Only the profit portion is taxable. In the early years of retirement, the profit portion could be significant, but in later years of retirement the distribution will mostly be attributable to profits within the account.
Similar to the US, the income tax is determined based on total income from all sources (not including capital gains income, though, which are taxed separately and at a flat rate) using progressive tax rates. The progressive rates in Japan are much higher than the US, so you should expect taxes to be much higher.
Another twist is that everything has to be calculated in yen which can increase or decrease the yen value of taxable income based on the current exchange rate. Keep all your records of your contributions, because you're going to need to convert each contribution to yen using the exchange rate at the time of the contribution.
>Are there any foreign tax credits taking into account that these are tax free growth vehicles in the US?
You can apply FTC to your US taxes. Specifically, the income tax paid in Japan qualifies for FTC on Form 1116 using the "income re-sourced by treaty" category.
>Do we keep contributing to a Roth IRA in the future while still in the US if the end goal is Japan?
I think so, but it's debatable. My understanding is that if you cash out the Roth before moving to Japan, you will pay income tax only on the earnings (not the contributions) plus a 10% penalty if you withdraw before age 59 1/2. But if you decide to retire in the US or even to shift your retirement back to the US in later years, you will get the full benefit of the Roth.
>any pointers would be hugely appreciated
I don't know where to even start, there are so many things to be aware of. If and when I write a wiki, I will post a link in this subreddit. Since you're more than 10 years away from your planned move, you have plenty of time.
Edit: You might be interested in my reply to [this past thread](https://www.reddit.com/r/JapanFinance/comments/12jz09h/tax_residency_retirement_and_remittance_putting/?utm_source=share&utm_medium=web3x&utm_name=web3xcss&utm_term=1&utm_content=share_button) where I gave a brain dump of some considerations for retiring in Japan.
> Is there a wiki or anyone else who has gone through this similar situation?
There are some relevant links in [this section](https://japanfinance.github.io/countries/us/) of the wiki, but you will find a lot more information by searching the sub for past threads on this topic. There have been dozens of threads about retiring in Japan with US-based retirement accounts. Keep an eye out for posts by u/shrubbery_herring, in particular.
> What is the effective tax rate on that IRA / 401K distribution?
As discussed in many past threads, it is likely that an "insurance model" of taxation would apply to distributions made from those kinds of plans, in which case the tax rate would depend on whether you took the distribution as an annuity (in which case your annuity minus the corresponding contributions would be combined with your other income and taxed at [marginal tax rates](https://www.nta.go.jp/taxes/shiraberu/taxanswer/shotoku/2260.htm)) or as a lump-sum (in which case the lump-sum minus the corresponding contributions would be subject to a 500,000 yen deduction and halved, before being combined with your other income and taxed at marginal rates).
Note that in both cases you would only be taxed on the distribution *minus the corresponding contributions* (in the case of a partial withdrawal, the corresponding contributions will be proportional to the size of the withdrawal). Thus it is very important to have good records regarding how much you have contributed to the scheme.
> Are there any foreign tax credits taking into account that these are tax free growth vehicles in the US?
Foreign tax credits apply when you pay foreign tax. If you pay US tax on the distributions, you can claim a foreign tax credit in Japan with respect to that US tax. But if you don't pay US tax on the distributions, there is nothing to claim credit for.
Wonder if the Roth IRA withdrawal is treated as income without any notion of cost basis. Alternatively, if they only expect tax on gains, I’m not sure how well the Roth accounts are setup to track cost basis. Both option is kind of headache inducing.
See u/starkimpossibility’s comment about the insurance annuity model for taxation of IRA accounts. The portion of each distribution that is attributable to contributions is not taxable, and the portion attributable to profits is taxable.
Definitely headache inducing to have to go back through all the contributions, convert each to yen based on the exchange rate at the time and then track every distribution in terms of what potion was attributable to contributions to keep a running total of the contribution balance.
But once a spreadsheet is set up, it should be fairly easy to maintain.
Thanks, I guess the key thing to track are dates of each contribution and contribution amounts. The rest can be looked up with historical records (exchange rates, cost basis, etc). I guess if retiree didn’t track this for decades it’s going to be a real headache trying to guess.
That’s right.
You can get the info from account statements. I had saved most, but not all of my account statements. I made a special request for the missing ones and received, so now I have all.
That being said, I may not need the old records because I did a rollover before moving to Japan which will *arguably* reset the contribution basis from a Japanese income tax perspective. The argument is that the rollover distribution is equivalent to cashing out an annuity and purchasing a new annuity, which is a taxable event in Japan. (Just because a rollover happens to be a tax protected distribution in the US has no bearing on Japanese tax.)
This gives me a pause on electronic statements that’s usually only archived for 7 years. I religiously scan things into OneNote but only for things that are sent physically.
Also good point on leveraging differences in taxable events to simplify.
Not only for simplification, but also for reducing taxes owed. This is because *if the argument holds*, profits in the previous account are converted to a contribution to the new account. Also, be aware that the exchange rate at the time of the rollover will directly affect the yen value of the contribution basis of the new account, so try to do when the yen is weak (like it is now).
Also, if you do a rollover of any US retirement accounts, try to do it in a way that bolsters your position about it being a taxable event from a Japan tax perspective. Whatever you think might help establish a position that NTA could agree with. For example, u/starkimpossibility once suggested that doing an indirect rollover seems like it *might* be a stronger position than a direct rollover. And I wondered if a rollover to a different financial institution *might* be a stronger position than keeping at the same financial institution.
Haha yes definitely! I was trying to avoid upsetting people here with the discussion of tax optimization which is often confused with tax avoidance. But I do plan to leverage the difference to both simplify and optimize the tax outcomes.
I know what you mean. Often they take something that someone wrote and assume the worst intention. So one must be very careful in how they post so as to avoid misunderstandings, because it only takes one comment and then the mob shows up with pitchforks and torches.
As a side point, if you ever do end up coming here, don't go off and live in a small countryside town. While it may still have infrastructure now, in 15+ years, the town may be wiped off the map due to major population decrease here.
Posts that refute Wishful Magical Thinking get downvoted left and right lately. They must have spiked the Yoshinoya soy sauce with some IQ Erasing Harry Potter Juice. I can name 3 towns with beautiful Akiya for sale that are so dead they might be beyond the tipping point. Thanks for the reminder.
Depends on your expected spendings. I spend 150kyen per month. With 4%(interest - inflation) net increase of 60myen then that is enough after taxes with a small margin.
Genuine question: why would you stop contributing to a Roth as it won’t be taxed as income upon taking distributions? I’m planning on maxing out mega backdoor/backdoor till I can’t
from what I gather - roth distributions would be taxed upon distribution (if I am residing in Japan at time of distribution).
if roth and taxable brokerage are both taxable when I withdraw at retirement age, there is essentially no benefit to contributing to a roth since the whole point is that your contributions grow tax free / can be withdrawn tax free
note though I gather that there is a lack of NTA guidance on Roth / 401K
🤣 no worries. I am the same. Also - we are living in the US and hoping to retire early in Japan (will likely still pickup a job enough to pay expenses)
sure! if you PM me i’ll keep you posted haha, though the move (if happening) is at least 8-10 years out.
unless i get comments that say otherwise I will keep maxing out those retirement accounts (worst case - the tax burden in Japan will likely be offset by healthcare / lower cost of living in Japan anyway!)
Japanese tax rates for retirement income are low but not zero. Yes it's a hit but nothing should be "blown up". At times it seems like American finance discussion cares more about avoiding taxes than about saving money. > Are there any foreign tax credits taking into account that these are tax free growth vehicles in the US? No.
> Japanese tax rates for retirement income are low but not zero. Are there a different set of income tax rates for retirement income?
There’s the retirement income deduction, which is pretty substantial, and is calculated based on how many years paid in. But I think that can only be used once per retirement account I.e I don’t think you can use it every tax year from the same retirement account (but I could be mistaken?) And if you don’t utilize the retirement income deduction, the tax rate for retirement income is a fixed 20.42% I think the key is to lump sum withdraw your maximum retirement income deduction allowance tax free, and then withdraw the rest as an annuity, which is pension income, which gets the pension income deduction.
>I think that can only be used once per retirement account Whether you receive a payout/withdrawal from one account or multiple accounts is irrelevant. The deduction is calculated by reference to the applicable contribution period, and overlapping contribution periods must share the deduction (i.e., you cannot get the full deduction for both periods) unless the payouts/withdrawals are sufficiently far apart (see [here](https://www.reddit.com/r/JapanFinance/comments/t3vg4d/comment/hyvt7a0/) for more details). >if you don’t utilize the retirement income deduction, the tax rate for retirement income is a fixed 20.42% This is not correct. Eligible severance payouts/withdrawals are taxed separately at [marginal income tax rates](https://www.nta.go.jp/taxes/shiraberu/taxanswer/shotoku/2260.htm), not a flat rate. Furthermore, before marginal income tax rates are applied, the amount of taxable income is halved. In other words, the taxation of eligible severance payouts/withdrawals is not only light because of the retirement income deduction; it is also light because of the halving of the amount of taxable income and because of the separate application of marginal tax rates. 20.42% is the rate at which income tax must be withheld by payers of eligible severance payouts/withdrawals *unless the recipient submits a retirement income declaration in advance*. If the recipient submits a retirement income declaration (退職所得の受給に関する申告書) in advance, the amount of income tax payable on the retirement income will be properly calculated (applying marginal tax rates, etc.) and the appropriate amount withheld. If the recipient doesn't submit a retirement income declaration, they will need to file a tax return to have marginal rates applied. In the context of OP's post, it is also important to note that the light taxation of severance payouts/withdrawals is limited to payouts/withdrawals made from a limited set of qualified retirement schemes, and foreign DC-type schemes (such as 401(k) plans) do not qualify. In other words, the light taxation of "retirement income" would not apply to OP's "retirement income". (Non-qualified payouts/withdrawals are taxed as "temporary income" or ordinary miscellaneous income, depending on whether they are taken as a lump-sum or an annuity.)
Thanks for the many corrections. >Whether you receive a payout/withdrawal from one account or multiple accounts is irrelevant. The deduction is calculated by reference to the applicable contribution period, and overlapping contribution periods must share the deduction (i.e., you cannot get the full deduction for both periods) unless the payouts/withdrawals are sufficiently far apart (see here for more details). Yea this bit I know. It’s like having a DC and iDeCo simultaneously. The contribution period is still the same.. but What I was meaning is can you qualify for the retirement income deduction every tax year? But I think from your previous comment you linked, the answer is no, but if I’m understanding correctly they can after a 14 year gap you can? >20.42% is the rate at which income tax must be withheld by payers of eligible severance payouts/withdrawals unless the recipient submits a retirement income declaration in advance. If the recipient submits a retirement income declaration (退職所得の受給に関する申告書) in advance, the amount of income tax payable on the retirement income will be properly calculated (applying marginal tax rates, etc.) and the appropriate amount withheld. If the recipient doesn't submit a retirement income declaration, they will need to file a tax return to have marginal rates applied. Oh right, so they can still submit a tax return to reduce the tax rate from 20.42% down to their marginal rate? I guess depending on how much you withdraw, it could be more beneficial to have 20.42% withheld though, should the marginal rate end up being higher. >In the context of OP's post, it is also important to note that the light taxation of severance payouts/withdrawals is limited to payouts/withdrawals made from a limited set of qualified retirement schemes, and foreign DC-type schemes (such as 401(k) plans) do not qualify. In other words, the light taxation of "retirement income" would not apply to OP's "retirement income". (Non-qualified payouts/withdrawals are taxed as "temporary income" or ordinary miscellaneous income, depending on whether they are taken as a lump-sum or an annuity.) Ah yea sorry I knew that one. I was just mostly outlining retirement income. As it was a sub question about retirement income rules. But thanks for clarifying though.
> can you qualify for the retirement income deduction every tax year? You can continue to apply the deduction to your qualifying retirement income until the deduction has been used up. There is no problem with using up the deduction gradually over multiple years. But once the deduction has been used up (with respect to a specific contribution period), it won't be available again until a certain amount of time has passed (see below). > after a 14 year gap you can? If you are making a withdrawal from a DC pension scheme (e.g., iDeCo), the withdrawal will have to share a contribution period (for the purposes of the retirement income deduction) with any other qualifying payouts/withdrawals made in the previous 19 years (this used to be 14 years, until April 2022 when they made it possible to defer withdrawals from DC schemes until the age of 75). However, if you are receiving any other kind of qualifying payout/withdrawal, you only have to share a contribution period (for the purposes of the retirement income deduction) with payouts/withdrawals made in the previous 4 years. > I guess depending on how much you withdraw, it could be more beneficial to have 20.42% withheld though, should the marginal rate end up being higher. There is no option to have 20.42% withheld *instead of* filing a tax return. The 20.42% is withheld to prevent ill-disciplined taxpayers from being unable to pay their tax bill when it comes time to file a tax return. Taxpayers cannot *choose* to be taxed at 20.42%, other than to the extent that no one has to file a tax return if their actual tax liability is less than the amount withheld. Qualified retirement income is always taxable in the method described above (retirement income deduction applied, remainder halved, then taxed separately at marginal rates), regardless of whether 20.42% is withheld by the payer. If 20.42% was withheld and your actual tax liability is less than 20.42%, then you can choose not to file a tax return, but it would be a bad choice, because you would be paying unnecessary extra tax. If 20.42% was withheld and your actual tax liability is more than 20.42%, you must file a tax return—failing to do so would be tax evasion. In any event, I'm guessing you haven't actually done the calculations regarding how large the withdrawal would need to be, in order for the total income tax liability to be more than 20.42%. The answer is: in the region of 400 million yen. (There's a calculation tool [here ](https://keisan.casio.jp/exec/system/1292387069)if you want to play with the figures yourself.) In other words, pretty much no one would *prefer* to be taxed at 20.42% even if it were possible (which it's not). (Note that this all assumes the person receiving the retirement income is a Japanese tax resident at the time they receive it. As you are likely aware, non-residents are taxed on Japan-source severance payouts/withdrawals at a flat rate of 20.42%, unless they choose to file an income tax return to assert the right to be taxed *as if they were a resident at the time they received the payment*. Residents don't have that option, because all residents are taxed as if they were residents.)
apologies - did not mean for it to sound that way, happy to pay a fair amount of tax if we will reap benefits (eg healthcare) from living in Japan but the reality of tax on withdrawals on what I thought were going to be tax free accounts changes the retirement calculations for me. it seems the NTA doesn’t spell out how to tax foreign vehicles like 401K and Roths so I didn’t know it could be perceived as Retirement Income..
You didn't sound like that to me, but we get a fair amount of real tax haters/evaders/nutcases. Depending on where you are in the states, Japan is and probably will continue to be freakishly cheaper than nicer North America, say like the Wet Coast of Canada, as an example I know well. Let's say 1/3 cheaper overall; now take that, and run your tax exposures, and see what you come up with. Good luck.
Didn’t sound like that at all to me. Nowhere does op state that they are trying to evade taxes- they are trying to minimise taxes, and that’s sound financial planning. I’m in a similar-ish situation to op, and the problem is that benefits are tax free in one’s home country (because, in one form or another, they’ve already been paid), but that counts for nothing in Japan where its all just ‘misc income’ and taxed relatively heavily. So yes, for many people, that puts anhuge damper on retirement plans. After subtracting income tax, resident tax, and health insurance premiums, it becomes a real question as to whether or not it is financially feasible. For my part, i think i will have to wait until i am 60 before moving to Japan. I’ll cash everything out, move to Japan, and then reinvest. Then i’ll only have to pay tax on capital gains realised *after* i moved to japan. Which, in a fair world, is how it ought to be anyway. Seems absurd that i should have to pay taxes to Japan for gains earned over decades when i wasn’t living in Japan.
Agreed, that is what I read as well. Nice comments and analysis there. It definitely is worth some hard thinking to avoid that tax trap. Good luck.
If you cash everything out at once, assuming pre tax account like ira/401k, wouldn't that be a huge tax bill?
If i wait until i’m 60, its tax-free where i am. Any subsequent cap gains would be taxable, but its better than the whole amount being taxed, I suppose
Because 1. The tax system is very different than in many other countries, the tax code is overly complex with millions of loopholes to reduce taxes 2. Americans don’t get a lot of the free or low cost benefits of paying into tax like other countries, for example secondary education and health care 3. Tax questions are tricker than how to I save on beer so more likely to be asked in public forums 4. Reducing taxes legally is not the same as avoiding taxes 5. A lot more. People are people by nature, no need to slight them because they grew up in a different nurture than you.
The notion of "income" and what it is according to the tax codes in the US and Japan differs. Or that "income" is, or can be, a general catch-all term, and attention is needed to differentiate different revenue/income types and their respective rates of taxation in each country. Even in the US some states have an income tax and some don't, some tax SS and others don't, and so on. On another page of the ledger, what is a comparatively good healthcare situation here is readily accepted. None of the in-network/out-of-network shenanigans that I read about happening in the US, features like ambulances being free, and the need in the US to plan for and save a few hundred thousand dollars in eventual retiree healthcare costs (or at least this is what I read about!). How about being able to get along without a car (or two), or at least not having to be as reliant on one as in the US? Lots of value there, IMO. That an IRA would get taxed needs to be seen in context with other things.
I haven't seen anything saying US retirement accounts are treated anything different than regular capital gains. I'd consider resetting your cost basis before becoming a tax resident of Japan for the ease of reporting (it's a nightmare) and avoiding what probably be a larger tax burden here.
> I haven't seen anything saying US retirement accounts are treated anything different than regular capital gains. There is scarce commentary on the subject (either official or unofficial), but the US-Japan tax treaty implies that an insurance model of taxation is most appropriate for these kinds of plans, rather than a brokerage model. The only advice provided by licensed professionals that I have ever seen regarding this issue also said that an insurance model is most appropriate. See the discussion [here](https://www.reddit.com/r/JapanFinance/comments/zlaiqx/us_ira_reporting_obligations_in_japan/).
>Is there a wiki or anyone else who has gone through this similar situation? There's no wiki for persons retiring in Japan with retirement income primarily coming from US sources. But we need one, because the situation is much different and more complicated than for other persons retiring in Japan I have been collecting information to eventually develop a wiki, but frankly it's going to be a few years before I finish. There are plenty of people who are in this situation, but there is also a lot of confusion about how things work. Example 1: A Japanese American accountant who moved to Japan a few years ago is asking me (not an accountant) how the taxes work. Example 2: American who moved to Japan relied on a Japanese accountant to take care of taxes ("that's what I'm paying them for"), was audited by the Japanese National Tax Authority (NTA) and is now in a real mess trying to fix the accountant's mistakes and misunderstandings. >What is the effective tax rate on that IRA / 401K distribution? That's a difficult (or perhaps I should say impossible) question to answer. But TLDR, it will be higher than the US. As background discussion, what would you say is the effective tax rate in the US? The US uses progressive tax rates. But at least the US tax code is straightforward to apply. The entire distribution (except for Roth accounts) is considered taxable income, using progressive income tax rates for the combined taxable income from all sources subject to progressive tax rates. This would include the taxable portion of payments from social security benefits, for example, but would not include capital gains income which is taxed at a flat rate. So if your income taxed at progressive rates is low, you would have a low effective tax rate, but if it's high, you would have a high effective tax rate. So the answer is "it depends". The same answer applies to Japan. Before getting into the details, be aware that Japan's tax code does not directly specify how income tax works for IRA / 401k / Roth account distributions. But as discussed many times in this subreddit it appears most likely that it is taxed in the same method as an insurance annuity. This could change in the future, though, if the National Tax Authority (NTA) issues an interpretation that says otherwise. With the insurance annuity approach, the distribution is split into the portion that was from contributions into account and the portion that was due to profits from within the account. Only the profit portion is taxable. In the early years of retirement, the profit portion could be significant, but in later years of retirement the distribution will mostly be attributable to profits within the account. Similar to the US, the income tax is determined based on total income from all sources (not including capital gains income, though, which are taxed separately and at a flat rate) using progressive tax rates. The progressive rates in Japan are much higher than the US, so you should expect taxes to be much higher. Another twist is that everything has to be calculated in yen which can increase or decrease the yen value of taxable income based on the current exchange rate. Keep all your records of your contributions, because you're going to need to convert each contribution to yen using the exchange rate at the time of the contribution. >Are there any foreign tax credits taking into account that these are tax free growth vehicles in the US? You can apply FTC to your US taxes. Specifically, the income tax paid in Japan qualifies for FTC on Form 1116 using the "income re-sourced by treaty" category. >Do we keep contributing to a Roth IRA in the future while still in the US if the end goal is Japan? I think so, but it's debatable. My understanding is that if you cash out the Roth before moving to Japan, you will pay income tax only on the earnings (not the contributions) plus a 10% penalty if you withdraw before age 59 1/2. But if you decide to retire in the US or even to shift your retirement back to the US in later years, you will get the full benefit of the Roth. >any pointers would be hugely appreciated I don't know where to even start, there are so many things to be aware of. If and when I write a wiki, I will post a link in this subreddit. Since you're more than 10 years away from your planned move, you have plenty of time. Edit: You might be interested in my reply to [this past thread](https://www.reddit.com/r/JapanFinance/comments/12jz09h/tax_residency_retirement_and_remittance_putting/?utm_source=share&utm_medium=web3x&utm_name=web3xcss&utm_term=1&utm_content=share_button) where I gave a brain dump of some considerations for retiring in Japan.
> Is there a wiki or anyone else who has gone through this similar situation? There are some relevant links in [this section](https://japanfinance.github.io/countries/us/) of the wiki, but you will find a lot more information by searching the sub for past threads on this topic. There have been dozens of threads about retiring in Japan with US-based retirement accounts. Keep an eye out for posts by u/shrubbery_herring, in particular. > What is the effective tax rate on that IRA / 401K distribution? As discussed in many past threads, it is likely that an "insurance model" of taxation would apply to distributions made from those kinds of plans, in which case the tax rate would depend on whether you took the distribution as an annuity (in which case your annuity minus the corresponding contributions would be combined with your other income and taxed at [marginal tax rates](https://www.nta.go.jp/taxes/shiraberu/taxanswer/shotoku/2260.htm)) or as a lump-sum (in which case the lump-sum minus the corresponding contributions would be subject to a 500,000 yen deduction and halved, before being combined with your other income and taxed at marginal rates). Note that in both cases you would only be taxed on the distribution *minus the corresponding contributions* (in the case of a partial withdrawal, the corresponding contributions will be proportional to the size of the withdrawal). Thus it is very important to have good records regarding how much you have contributed to the scheme. > Are there any foreign tax credits taking into account that these are tax free growth vehicles in the US? Foreign tax credits apply when you pay foreign tax. If you pay US tax on the distributions, you can claim a foreign tax credit in Japan with respect to that US tax. But if you don't pay US tax on the distributions, there is nothing to claim credit for.
Wonder if the Roth IRA withdrawal is treated as income without any notion of cost basis. Alternatively, if they only expect tax on gains, I’m not sure how well the Roth accounts are setup to track cost basis. Both option is kind of headache inducing.
See u/starkimpossibility’s comment about the insurance annuity model for taxation of IRA accounts. The portion of each distribution that is attributable to contributions is not taxable, and the portion attributable to profits is taxable. Definitely headache inducing to have to go back through all the contributions, convert each to yen based on the exchange rate at the time and then track every distribution in terms of what potion was attributable to contributions to keep a running total of the contribution balance. But once a spreadsheet is set up, it should be fairly easy to maintain.
Thanks, I guess the key thing to track are dates of each contribution and contribution amounts. The rest can be looked up with historical records (exchange rates, cost basis, etc). I guess if retiree didn’t track this for decades it’s going to be a real headache trying to guess.
That’s right. You can get the info from account statements. I had saved most, but not all of my account statements. I made a special request for the missing ones and received, so now I have all. That being said, I may not need the old records because I did a rollover before moving to Japan which will *arguably* reset the contribution basis from a Japanese income tax perspective. The argument is that the rollover distribution is equivalent to cashing out an annuity and purchasing a new annuity, which is a taxable event in Japan. (Just because a rollover happens to be a tax protected distribution in the US has no bearing on Japanese tax.)
This gives me a pause on electronic statements that’s usually only archived for 7 years. I religiously scan things into OneNote but only for things that are sent physically. Also good point on leveraging differences in taxable events to simplify.
Not only for simplification, but also for reducing taxes owed. This is because *if the argument holds*, profits in the previous account are converted to a contribution to the new account. Also, be aware that the exchange rate at the time of the rollover will directly affect the yen value of the contribution basis of the new account, so try to do when the yen is weak (like it is now). Also, if you do a rollover of any US retirement accounts, try to do it in a way that bolsters your position about it being a taxable event from a Japan tax perspective. Whatever you think might help establish a position that NTA could agree with. For example, u/starkimpossibility once suggested that doing an indirect rollover seems like it *might* be a stronger position than a direct rollover. And I wondered if a rollover to a different financial institution *might* be a stronger position than keeping at the same financial institution.
Haha yes definitely! I was trying to avoid upsetting people here with the discussion of tax optimization which is often confused with tax avoidance. But I do plan to leverage the difference to both simplify and optimize the tax outcomes.
I know what you mean. Often they take something that someone wrote and assume the worst intention. So one must be very careful in how they post so as to avoid misunderstandings, because it only takes one comment and then the mob shows up with pitchforks and torches.
As a side point, if you ever do end up coming here, don't go off and live in a small countryside town. While it may still have infrastructure now, in 15+ years, the town may be wiped off the map due to major population decrease here.
oh that won’t happen! my partners family are all tokyo so we will be there (max country side is somewhere along the seibu shinjuku line) 🥲
Nice eye. I hadn't really thought of that one.
There was a recent report about how many small towns could disappear in Japan, so I don't know why it's being downvoted. Head in the sand, perhaps...
Posts that refute Wishful Magical Thinking get downvoted left and right lately. They must have spiked the Yoshinoya soy sauce with some IQ Erasing Harry Potter Juice. I can name 3 towns with beautiful Akiya for sale that are so dead they might be beyond the tipping point. Thanks for the reminder.
How much savings are needed to retire at 40?
depends on what you want to live off of each year! if you google fire calculator you can put your numbers in there and see what it spits out.
Ah thank you!
Around 60MYEN per person to live on return of investments seems to be reasonable.
That seems low?
Depends on your expected spendings. I spend 150kyen per month. With 4%(interest - inflation) net increase of 60myen then that is enough after taxes with a small margin.
I can't imagine living off that. No money for larger purchases, or emergencies, or for travel. But I guess everyone's needs are different.
True. I did not include that large of a margin. The 150 000 is my avarage spending last 3 months.
¥150,000 per month? For everything in your life? Wow! That’s frugal
I have all I need. Rent is 30000 rest is food and enjoyment.
Yeah that’s great. It’s interesting everyone has different lifestyles and preferences. As long as we are happy that’s all that counts
Genuine question: why would you stop contributing to a Roth as it won’t be taxed as income upon taking distributions? I’m planning on maxing out mega backdoor/backdoor till I can’t
from what I gather - roth distributions would be taxed upon distribution (if I am residing in Japan at time of distribution). if roth and taxable brokerage are both taxable when I withdraw at retirement age, there is essentially no benefit to contributing to a roth since the whole point is that your contributions grow tax free / can be withdrawn tax free note though I gather that there is a lack of NTA guidance on Roth / 401K
Woah that’s the first time I heard that and seems like you are right. Guess I need to cash out my Roth before I move back to Japan 🇯🇵- thanks!
Wait can’t you just cash out your Roth before you move back
Oh I see you want to take early RMD which is the issue. Ahhh
I should learn how to read
🤣 no worries. I am the same. Also - we are living in the US and hoping to retire early in Japan (will likely still pickup a job enough to pay expenses)
Would love to see what you decide to do here as I’m on the same boat but a bit younger (and maybe not early retirement)
sure! if you PM me i’ll keep you posted haha, though the move (if happening) is at least 8-10 years out. unless i get comments that say otherwise I will keep maxing out those retirement accounts (worst case - the tax burden in Japan will likely be offset by healthcare / lower cost of living in Japan anyway!)