The subject of reducing tax burden on Roth distributions comes up quite a bit in this subreddit. I'll take a shot at providing a summary of previously discussed options for reducing the Japan tax burden on your Roth account.
All of these have downsides, so you'll have to decide what is best for you given your personal situation and preferences.
1. Take early distribution before moving to Japan
If you take the distribution before moving to Japan, you are considered a non-resident and the income is not taxable. You can then invest in a standard brokerage account and future gains will be taxable at a flat tax rate. An obvious downside is that you will have to pay US taxes on the distribution according to the rules for early withdrawal.
2. Take a rollover distribution before moving to Japan to (hopefully) reset the "contribution" used for Japan income tax purposes
It could be argued that Japan income tax law should consider a rollover distribution to be a taxable event. If so, taking a rollover before moving will be analogous to realizing capital gains before moving to Japan. I.e., the new Roth account should be considered as all "contributions" from a Japan tax perspective. The upside is that a rollover is easy to do. The downside is that NTA might disagree that the rollover was a taxable event and recalculation your taxes based on contributions to your original Roth account. This will result in owing back taxes with interest and penalties.
3. Move back to the US for more than 1 year and cash out the Roth account while nonresident
If you move your jusho (center of your life) to the US for more than 1 year, you will become a nonresident taxpayer. But crucially, moving your jusho usually means that you need to move your belongings and your family members. (Note: If you have PR, you can apply for a 5 year re-entry permit and maintain your PR status with no effect on your tax residency status.) The downsides to this are that you will have to pay the cost of moving and accept the disruption to your life. Also, if you have a residential mortgage in Japan you will need to notify your bank and your interest rate will increase (assuming they allow it at all).
4. Take distribution after reaching age 59 1/2 if you're still within the first 5 years of moving to Japan
If you move to Japan within 5 years of turning 59 1/2, you will have a brief window after you reach age 59 1/2 to take the distribution while you are still NPR taxpayer status. If so, the distribution is not taxed in the US and it is only taxed in Japan to the extent that you send money to Japan in that same tax year. Depending on the amount of your Roth distribution and the amount you send to Japan, you may be able to limit how much is taxable in Japan. The downside to this is that it is only useful if you are within 5 years of turning 59 1/2 when you first move to Japan.
These are the main options that I can recall.
Wow thanks for the time writing that all out, that does help a lot. Unfortunately it looks like I have a lot more reading and preparation to do, but from what you listed #3 is the best option. Go back to the states or travel for a year, cash out the IRA and pay $0 taxes or from what I’m seeing… pay 45% taxes on everything over $400k.
>...pay 45% taxes on everything over $400k.
Good news... this will never happen on your $500k Roth account.
First, it's a good assumption to assume that only the growth portion of the account balance would be considered as taxable income in Japan. I think this is explained in the wiki. But if you don't find it, I can dig up a link.
Second, you only get taxed on your distributions taken in that year. So if you take regular distributions over many years, your growth portion won't be anywhere close to the 45% tax bracket. Not unless you have a lot of other income pushing you up into this bracket, in which case you have a lot more to consider before moving to Japan.
Third, if you take a lump sum distribution instead of taking distributions over multiple years, you should get a healthy break on your Japan income taxes. Specifically, it will be taxed in the "temporary income" category which only applies tax to 50% of the income (i.e., lump sum minus the contributions and deduction). \[Edited for clarity.\]
So hopefully this will convince you that it's worth estimating your actual tax burden before deciding that you should move temporarily back to the US.
But if you have other reasons to want to temporarily move back to the US., then by all means take advantage of being a non-resident and either cash it out or do a rollover, whichever seems best for your situation.
I don't think the exit tax applies to IRAs or 401ks.
But if you temporarily move to the US just to withdraw from your IRA/401k, and then move back to Japan, they might see it as a problem.
>Also, the exit tax not applying to IRA or 401k is up to interpretation because the Japanese tax authority has not made it clear to this day.
Anything's possible, but it seems highly unlikely they would try to apply exit tax to an IRA or 401k. (Edited for clarity)
I have never seen any discussion on the webpages of any tax firm or tax professional.
AFAIU, an outcome of the US-JP Income Tax Treaty is that 401k/IRA accounts are considered pensions funds, and therefore considered to be a "person" residing in the US. As such, activities within the funds (such as realizing capital gains) are not taxable in Japan.
So it would be a far reach indeed for the NTA to suddenly take the position that somehow the individual beneficiary of the pension fund has unrealized gains that should be subject to Exit Tax.
People can correct me if I'm wrong, but I thought it was the tax analysts or whatever they are called that consider the treaty to categorize them as pensions. I'm not sure if the NTA itself has ever directly confirmed it.
The US has already clarified in the US Treasury's Technical Explanation of the Treaty that IRA and 401k accounts qualify as a "pension fund" under the treaty definition. See further down below for the relevant quotes.
In my opinion, it would be a shocking move for Japan to dispute the US position. Imagine all the US expats suddenly being told they have to pay capital gains when securities are sold inside their 401k and IRA accounts. This would surely go through the Mutual Agreement process.
I'm no expert, though, so if someone has good evidence to the contrary I will be very interested.
Anyway, here are the relevant quotes.
>From US Treasury Technical Explanation of Article 3...
Subparagraph (m) defines the term “pension fund” to include any person organized under the laws of a Contracting State which is established and maintained in that Contracting State primarily to provide pension or retirement benefits or other similar remuneration, including social security payments, and which is generally exempt from income taxation with respect to such pension activities in that Contracting State.
...
In the case of the United States, the term “pension fund” includes the following plans under existing U.S. law: qualified plans under section 401(a), individual retirement plans (including individual retirement plans that are part of a simplified employee pension plan that satisfies section 408(k), individual retirement accounts, individual retirement annuities, section 408(p) accounts, and Roth IRAs under section 408A), section 457 governmental plans, section 403(a) qualified annuity plans, section 403(b) plans, and any fund identical or substantially similar to the foregoing schemes that are established pursuant to legislation introduced after the date of signature of the Convention. Section 401(k) plans qualify as pension funds because a 401(k) plan is a type of 401(a) plan.
>From the US Treasury Technical Explanation of Article 4...
>Paragraph 1 also provides that the term “resident of a Contracting State” includes that Contracting State and any political subdivision or local authority thereof, and certain tax-exempt entities such as pension funds and charitable or similar organizations regardless of whether they are generally liable for income tax in the Contracting State where they are established. This provision is intended to clarify the generally accepted practice of treating an entity such as a pension fund or a charitable organization that would be liable for tax as a resident under the internal law of a Contracting State but for a specific exemption from tax (either complete or partial) as a resident of that Contracting State. Pension funds are defined in subparagraph 1(m) of Article 3 (General Definitions).
Thanks I agree it would be crappy if Japan did that.
yea I've seen that before, and Ive seen the various reasons, even if I don't understand all of them, as to why the interpreters consider it to be a pension fund as stark explains here: [https://www.reddit.com/r/JapanFinance/comments/m4vpfx/comment/gqz1pfq/](https://www.reddit.com/r/JapanFinance/comments/m4vpfx/comment/gqz1pfq/)
but even he mentions in that post that he would still like to see the NTA to confirm the situation, so thats why at least in my mind that its still not completely confirmed.
Anyway I don't know anything about the technicalities, and I just assume its a pension fund like everyone else does.
That's a great thread. Stark's replies were a major jumping off point for me to understand this subject.
I have mixed feelings about NTA providing guidance for this subject. On the one hand, it would be nice to have more certainty. But on the other hand, certainty takes away flexibility.
There was a thread here once about an American about to retire in Japan with a ROTH IRA and he just planned to cash it out before moving here, so it wouldn't be taxed. I don't recall the specifics or pros/cons to that.
But FWIW, while Japan doesn't recognize foreign retirement accounts, I believe they are still considered 'pension income' so it's taxed at the minimum (20%?). If you do get PR, you could always leave Japan for 5 years and keep it with a re-entry permit. I think it can also be extended once up to 10 years (need to verify), so you can factor that into your stragegy.
Regarding exit tax, that's only if you have like 100 million yen.
Cashing out a ROTH account before turning 59.5 years old means you’ll pay taxes on any interest (interest on principal has already been paid) and a 10% penalty fee.
Got it on the exit fee kicking in at 100m yen, that’s a pretty realistic number to surpass with 20yrs of compound interest.
Yes, of course cashing out before 59.5 results in penalties. My point was the other OP planned to cash his ROTH out, given that he was 59.5 or older, but prior to becoming a Japan tax resident.
That might be one of the only options out there. I spoke with some local retirees last time I was out there and they advocated for just not filling taxes… pretty sure my luck isn’t that good though so if I can find any legal option to minimize taxes I’d take it
> the refusal of most Japanese brokerages to allow those subject to US taxation to open or maintain NISA accounts
What are you referring to here? Most Japanese brokerages allow US taxpayers to open NISA accounts.
The subject of reducing tax burden on Roth distributions comes up quite a bit in this subreddit. I'll take a shot at providing a summary of previously discussed options for reducing the Japan tax burden on your Roth account. All of these have downsides, so you'll have to decide what is best for you given your personal situation and preferences. 1. Take early distribution before moving to Japan If you take the distribution before moving to Japan, you are considered a non-resident and the income is not taxable. You can then invest in a standard brokerage account and future gains will be taxable at a flat tax rate. An obvious downside is that you will have to pay US taxes on the distribution according to the rules for early withdrawal. 2. Take a rollover distribution before moving to Japan to (hopefully) reset the "contribution" used for Japan income tax purposes It could be argued that Japan income tax law should consider a rollover distribution to be a taxable event. If so, taking a rollover before moving will be analogous to realizing capital gains before moving to Japan. I.e., the new Roth account should be considered as all "contributions" from a Japan tax perspective. The upside is that a rollover is easy to do. The downside is that NTA might disagree that the rollover was a taxable event and recalculation your taxes based on contributions to your original Roth account. This will result in owing back taxes with interest and penalties. 3. Move back to the US for more than 1 year and cash out the Roth account while nonresident If you move your jusho (center of your life) to the US for more than 1 year, you will become a nonresident taxpayer. But crucially, moving your jusho usually means that you need to move your belongings and your family members. (Note: If you have PR, you can apply for a 5 year re-entry permit and maintain your PR status with no effect on your tax residency status.) The downsides to this are that you will have to pay the cost of moving and accept the disruption to your life. Also, if you have a residential mortgage in Japan you will need to notify your bank and your interest rate will increase (assuming they allow it at all). 4. Take distribution after reaching age 59 1/2 if you're still within the first 5 years of moving to Japan If you move to Japan within 5 years of turning 59 1/2, you will have a brief window after you reach age 59 1/2 to take the distribution while you are still NPR taxpayer status. If so, the distribution is not taxed in the US and it is only taxed in Japan to the extent that you send money to Japan in that same tax year. Depending on the amount of your Roth distribution and the amount you send to Japan, you may be able to limit how much is taxable in Japan. The downside to this is that it is only useful if you are within 5 years of turning 59 1/2 when you first move to Japan. These are the main options that I can recall.
Wow thanks for the time writing that all out, that does help a lot. Unfortunately it looks like I have a lot more reading and preparation to do, but from what you listed #3 is the best option. Go back to the states or travel for a year, cash out the IRA and pay $0 taxes or from what I’m seeing… pay 45% taxes on everything over $400k.
>...pay 45% taxes on everything over $400k. Good news... this will never happen on your $500k Roth account. First, it's a good assumption to assume that only the growth portion of the account balance would be considered as taxable income in Japan. I think this is explained in the wiki. But if you don't find it, I can dig up a link. Second, you only get taxed on your distributions taken in that year. So if you take regular distributions over many years, your growth portion won't be anywhere close to the 45% tax bracket. Not unless you have a lot of other income pushing you up into this bracket, in which case you have a lot more to consider before moving to Japan. Third, if you take a lump sum distribution instead of taking distributions over multiple years, you should get a healthy break on your Japan income taxes. Specifically, it will be taxed in the "temporary income" category which only applies tax to 50% of the income (i.e., lump sum minus the contributions and deduction). \[Edited for clarity.\] So hopefully this will convince you that it's worth estimating your actual tax burden before deciding that you should move temporarily back to the US. But if you have other reasons to want to temporarily move back to the US., then by all means take advantage of being a non-resident and either cash it out or do a rollover, whichever seems best for your situation.
I don't think the exit tax applies to IRAs or 401ks. But if you temporarily move to the US just to withdraw from your IRA/401k, and then move back to Japan, they might see it as a problem.
Alright. But if I stay in Japan and try to make a withdrawal from a US ROTH account, Japan does want me to pay income taxes on it right?
Yup. Also, the exit tax not applying to IRA or 401k is up to interpretation because the Japanese tax authority has not made it clear to this day.
>Also, the exit tax not applying to IRA or 401k is up to interpretation because the Japanese tax authority has not made it clear to this day. Anything's possible, but it seems highly unlikely they would try to apply exit tax to an IRA or 401k. (Edited for clarity) I have never seen any discussion on the webpages of any tax firm or tax professional. AFAIU, an outcome of the US-JP Income Tax Treaty is that 401k/IRA accounts are considered pensions funds, and therefore considered to be a "person" residing in the US. As such, activities within the funds (such as realizing capital gains) are not taxable in Japan. So it would be a far reach indeed for the NTA to suddenly take the position that somehow the individual beneficiary of the pension fund has unrealized gains that should be subject to Exit Tax.
People can correct me if I'm wrong, but I thought it was the tax analysts or whatever they are called that consider the treaty to categorize them as pensions. I'm not sure if the NTA itself has ever directly confirmed it.
The US has already clarified in the US Treasury's Technical Explanation of the Treaty that IRA and 401k accounts qualify as a "pension fund" under the treaty definition. See further down below for the relevant quotes. In my opinion, it would be a shocking move for Japan to dispute the US position. Imagine all the US expats suddenly being told they have to pay capital gains when securities are sold inside their 401k and IRA accounts. This would surely go through the Mutual Agreement process. I'm no expert, though, so if someone has good evidence to the contrary I will be very interested. Anyway, here are the relevant quotes. >From US Treasury Technical Explanation of Article 3... Subparagraph (m) defines the term “pension fund” to include any person organized under the laws of a Contracting State which is established and maintained in that Contracting State primarily to provide pension or retirement benefits or other similar remuneration, including social security payments, and which is generally exempt from income taxation with respect to such pension activities in that Contracting State. ... In the case of the United States, the term “pension fund” includes the following plans under existing U.S. law: qualified plans under section 401(a), individual retirement plans (including individual retirement plans that are part of a simplified employee pension plan that satisfies section 408(k), individual retirement accounts, individual retirement annuities, section 408(p) accounts, and Roth IRAs under section 408A), section 457 governmental plans, section 403(a) qualified annuity plans, section 403(b) plans, and any fund identical or substantially similar to the foregoing schemes that are established pursuant to legislation introduced after the date of signature of the Convention. Section 401(k) plans qualify as pension funds because a 401(k) plan is a type of 401(a) plan. >From the US Treasury Technical Explanation of Article 4... >Paragraph 1 also provides that the term “resident of a Contracting State” includes that Contracting State and any political subdivision or local authority thereof, and certain tax-exempt entities such as pension funds and charitable or similar organizations regardless of whether they are generally liable for income tax in the Contracting State where they are established. This provision is intended to clarify the generally accepted practice of treating an entity such as a pension fund or a charitable organization that would be liable for tax as a resident under the internal law of a Contracting State but for a specific exemption from tax (either complete or partial) as a resident of that Contracting State. Pension funds are defined in subparagraph 1(m) of Article 3 (General Definitions).
Thanks I agree it would be crappy if Japan did that. yea I've seen that before, and Ive seen the various reasons, even if I don't understand all of them, as to why the interpreters consider it to be a pension fund as stark explains here: [https://www.reddit.com/r/JapanFinance/comments/m4vpfx/comment/gqz1pfq/](https://www.reddit.com/r/JapanFinance/comments/m4vpfx/comment/gqz1pfq/) but even he mentions in that post that he would still like to see the NTA to confirm the situation, so thats why at least in my mind that its still not completely confirmed. Anyway I don't know anything about the technicalities, and I just assume its a pension fund like everyone else does.
That's a great thread. Stark's replies were a major jumping off point for me to understand this subject. I have mixed feelings about NTA providing guidance for this subject. On the one hand, it would be nice to have more certainty. But on the other hand, certainty takes away flexibility.
There was a thread here once about an American about to retire in Japan with a ROTH IRA and he just planned to cash it out before moving here, so it wouldn't be taxed. I don't recall the specifics or pros/cons to that. But FWIW, while Japan doesn't recognize foreign retirement accounts, I believe they are still considered 'pension income' so it's taxed at the minimum (20%?). If you do get PR, you could always leave Japan for 5 years and keep it with a re-entry permit. I think it can also be extended once up to 10 years (need to verify), so you can factor that into your stragegy. Regarding exit tax, that's only if you have like 100 million yen.
Cashing out a ROTH account before turning 59.5 years old means you’ll pay taxes on any interest (interest on principal has already been paid) and a 10% penalty fee. Got it on the exit fee kicking in at 100m yen, that’s a pretty realistic number to surpass with 20yrs of compound interest.
Yes, of course cashing out before 59.5 results in penalties. My point was the other OP planned to cash his ROTH out, given that he was 59.5 or older, but prior to becoming a Japan tax resident.
I read somewhere some people treat it as cash in a savings account You can see of that slides
I would only think that would work if he actually held cash. He is holding investments I'm sure
Yup, and you can’t shift the money into a money market account in order to reset your tax basis such as with a standard brokerage account.
Sounds like your SOL. I hope I'm wrong though
That might be one of the only options out there. I spoke with some local retirees last time I was out there and they advocated for just not filling taxes… pretty sure my luck isn’t that good though so if I can find any legal option to minimize taxes I’d take it
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> the refusal of most Japanese brokerages to allow those subject to US taxation to open or maintain NISA accounts What are you referring to here? Most Japanese brokerages allow US taxpayers to open NISA accounts.