Japan-U.S. Tax Plan: FTC + IRA deduction, thoughts?

[skyydaniel]

Hi all, I'm planning to shift my approach to investing and taxes this year, and I would love to hear anyone's thoughts on the following plan.

I'm a U.S. citizen, living in Japan for 10 years now. Prior, I was in the U.S. and had already started a ROTH IRA. Since being in Japan, I've always taken the foreign earned income exclusion, and haven't contributed to my IRA. But I've since kicked myself in the butt and am eager to get serious about my retirement savings again.

To do this, my plan is to take the foreign tax credit starting this year (for tax year 2020). I've ran the numbers and with the FTC my U.S. tax liability would still be about $500. But, I could eliminate that completely by contributing $2500 to a traditional IRA and using the IRA deduction. This would also give me the option to contribute to my ROTH IRA as well.

I understand that once the FEIE is "revoked", it cannot easily be taken again for 5 years. So, by going with the above strategy, I would have to hope that I could follow this strategy every year for the next 5 years. I don't anticipate my income situation changing drastically, and I hope that I'd still be able to contribute several thousand USD each year to my IRA/s and offset all or most of my U.S. tax liability. But admittedly, these are unknowns. So I suppose the risk is that if my situation changed, I could end up with high tax burdens in several or even all of the next 4 years (assuming I couldn't get back the FEIE in that time span).

The other option is to simply invest that money into a taxed investment account, and keep taking the FEIE. But this would be a fairly big compromise of what I was really hoping to do (contribute "aggressively" to my IRA's in these next few years). This could also lead to missing substantial tax savings coming from contributions to an ROTH IRA in these years.

Lastly, I understand that I do need to report and pay taxes on U.S. dividends and (potentially) realized capital gains on my Japan taxes. So some people have said "it's not worth it to go ahead with investing in a IRA while in Japan, especially if there is potential for paying significant U.S. taxes in order to contribute". But, I do see myself ultimately retiring in the U.S., which makes me feel like the upsides are far greater than the downsides.

I know that's a lot and I know people have asked similar questions before. So I really appreciate if anyone can share their perspectives on this. Thanks!

[captainspoke]

Not much to add--I'm in that group that thinks an IRA is not worth pursuing.

Separately, since you're thinking of retiring there, how are you dealing with (going to deal with) social security, and more importantly, healthcare/medicare?

[skyydaniel]

Not much to add--I'm in that group that thinks an IRA is not worth pursuing.

Thanks for the reply! If you don't mind me asking, what were the main factors that led you to this conclusion?

Separately, since you're thinking of retiring there, how are you dealing with (going to deal with) social security, and more importantly, healthcare/medicare?

I'm glad you asked about social security and medicare because honestly, it hadn't crossed my mind! Well, I just looked into it and the short answer is: I should be able to qualify for both social security and medicare in the U.S. by the time I retire. (it's hard to estimate how much the benefit would be though).

Anyway, I'll share more specifically what I found as this may help others in a similar position.

To be eligible for social security and medicare, an individual needs to have accumulated at least 40 "credits" (generally from at least 10 working years).

Conveniently, the government has a tool to check this ("My Social Security"). Upon checking this, my report shows that I currently have "over 35 credits" but not quite 40 yet (what a bummer!). However, there are some options available; notably:

(1) the U.S. and Japan have an agreement which allows for social security payments made to Japan carry over to the U.S. in order to reach the required 40 minimum credits. This would allow an expat to receive social security benefits, albeit possibly at a reduced amount it seems. Unfortunately, the agreement does not apply to medicare, though. Which brings me to another option...

(2) Another option would be to simply work at least one more year in the U.S. at some point before retirement. This seems like the best approach since I'm nearly at the qualifying amount already from my previous working years in the U.S. before coming to Japan.

*Sources:
https://www.ssa.gov/international/Agree ... /Japan.pdf
https://www.investopedia.com/retirement ... -countries

If anyone else has personal experience or any thoughts on this, please share as well. I'd love to hear any and all perspectives.