Pension income deduction - Does US 401k qualify?

[picklerick]

Has anyone confirmed whether income from a US 401k retirement savings account is considered as pension income when calculating the pension deduction? The Japan 2020 Income Tax guide is not clear on this.

I have been researching this for a while now, and the only information I have found is in the US Treasury Department's technical explanation of the 2003 Tax Treaty convention between the US and Japan. It says that the defined term "pension fund" does include US 401k accounts. That sounds promising, but that's the US position and it really depends on how the Japanese government view it.

If anyone has crossed the bridge already with the Japanese tax authority, please share your experience.

[captainspoke]

I think withdrawals will be taxable, but...

You might ask at https://www.reddit.com/r/JapanFinance/ since I've seen some discussion of 401k over there, tho I think that was whether ongoing gains needed to be declared or not, rather than payouts.

[Tkydon]

Are you referring to a One-Time Lump Sum Retirement Payout?

Or a regular monthly Pension Income stream from an Annuity?

For a One-Time Lump-Sum Payout (like 退職金) there is a special taxation rate.
(the phrase 'Retirement Income' in English translations of Japanese docs usually refers to One-Time Lump-Sum Retirement Payout - Category 10.)

This Retirement Lump Sum is taxed entirely separately than all other income in the Tax Year in which it is received.

First, there is a Special Deduction for Retirement Income, calculated as follows:

i) When the number of years of service is 20 years or less, the Allowance is the greater of Y800,000 or Y400,000 x number of years of service.

ii) When the number of years of service is greater than 20 years, the Allowance is Y8,000,000 + Y700,000 x (number of years of service - 20)

If you retire due to being handicapped, then there is an additional Special Allowance of Y1,000,000.

You then take the remainder after deducting the Allowance(s) above, and divide the the remainder by 2.
This is the taxable 'Retirement Income Amount'

This 'Retirement Income Amount' is then taxable as Income according to the standard sliding Tax brackets:
Tax Bracket - National Tax Rate - Reconstruction Tax Rate (2.1% of National Tax Rate)
Y0 to Y1,950,000 - 5% - 0.105%
Y1,950,000 to Y3,300,000 - 10% - 0.21%
Y3,300,000 to Y6,950,000 - 20% - 0.42%
Y6,950,000 to Y9,000,000 - 23% - 0.483%
Y9,000,000 to Y18,000,000 - 33% - 0.693%
Y18,000,000 to Y40,000,000 - 40% - 0.84%
Greater than Y40,000,000 - 45% - 0.945%

and Residential Taxes, total 10%.
(Prefectural 4% and Municipal 6%)

[TokyoWart]

Are you referring to a One-Time Lump Sum Retirement Payout?

Or a regular monthly Pension Income stream from an Annuity?

I don't know the answer to the original question but a 401K is neither a form of lump-sum retirement payout nor (in most cases) set as an annuity. I'm not sure how anyone could even calculate a "years of service" tax treatment as assumed by Japanese pension payouts because you could work at a job for 30 years and only contribute to a 401K for one year or hold a 401K for 30 years after only working at that employer for one year.

[picklerick]

Are you referring to a One-Time Lump Sum Retirement Payout?

Or a regular monthly Pension Income stream from an Annuity?

Thanks for the reply. I think you are describing two options for a pension. A 401k is not a pension, rather it is a tax protected savings account. This is why I am seeking any experience from Americans retired in Japan with a US 401k.

[picklerick]

I think withdrawals will be taxable, but...

You might ask at https://www.reddit.com/r/JapanFinance/ since I've seen some discussion of 401k over there, tho I think that was whether ongoing gains needed to be declared or not, rather than payouts.

Thanks for letting me know about the reddit group. I never used reddit before, but I can see that it's a very active group with many members. I'll start with a search of the group postings and see what I can find.

[picklerick]

I think withdrawals will be taxable, but...

You might ask at https://www.reddit.com/r/JapanFinance/ since I've seen some discussion of 401k over there, tho I think that was whether ongoing gains needed to be declared or not, rather than payouts.

Okay, I did some searching in the reddit and there are a couple of very good threads on the subject Japan taxation of 401k withdraws. It's a complicated subject and there's a lot of information to digest, but here is a particularly detailed thread if anyone reading this is interested.

https://www.reddit.com/r/JapanFinance/c ... atment_as/

[captainspoke]

...Okay, I did some searching in the reddit and there are a couple of very good threads on the subject Japan taxation of 401k withdraws. It's a complicated subject and there's a lot of information to digest, but here is a particularly detailed thread if anyone reading this is interested.

https://www.reddit.com/r/JapanFinance/c ... atment_as/

Glad that it helped. I don't have a 401k, but it does get discussed. I hope the searching was not too hard--reddit search itself is supposedly not good, using google with some tricks helps, using site: reddit and so on.

Also, one person who posts over there, and in that thread, starkimpossibility, is quite good/knowledgeable (IMNSHO).

[Tkydon]

At least for Japan 401k or iDECO (based on the tax regulations as of April 2021)
(I believe the same would be true for a Foreign 401k (Defined Contribution Plans - see below), with the exception that Japanese Taxes will not have been withheld at source.)

There are three ways to receive old-age benefits:
• lump-sum
• periodic payments (Pension or Annuity)
• Partial lump-sum and periodic payments.

For Lump-sum, you will receive a single lump-sum payment.

For periodic payments (like a pension or an annuity), payment period and frequency can be specified from the following:
Payment Period: Specify the period between 5 and 20 years.
Payment Frequency: Select from annually, semiannually, or quarterly.
(I believe that would be the same for a foreign 401k)

For Partial lump-sum and periodic payments is a combination of the two.

The 'number of years of service' in the case of lump-sum is the total contribution period in years or part there of (to the plan, 401k or iDECO),
If you change jobs and take the 401k with you, then the durations will be added together.
(If you only contributed 1 year and 9 months, then that would be rounded up to 2 years for calculation)

National Income tax, Reconstruction Tax, and Residential taxes are levied on lump-sum receipts as Retirement Income (Lump Sum), as I explained before. The Retirement (Lump Sum) Income Deduction is available (see caveat below).

Income tax is levied on periodic payments (Pension or Annuity) as miscellaneous income.

The Public Pension Income deduction is available.

Check with your local tax office or a tax accountant for tax details.

(1)
Taxation on lump sum (one time receipt) and periodic payment (pension) are different as shown below.

For Partial lump sum and periodic payment, taxation on each portion will apply.

Lump sum (one time receipt)
Subject to:
• national income tax, reconstruction tax, and residence taxes as retirement income (Lump Sum)
• withholding tax at the time of payment (in Japan)
• retirement income deduction (See caveat)
If a specified application form is submitted, only withholding tax is required.

(This is for Japanese 401k where tax is already withheld. However, a Foreign 401k will not have been subjected to Japanese Withholding Tax, so a Final Tax Return (kakutei Shinkoku) is required.)

Periodic Payments (pension or annuity)
Subject to:
• public pensions, annuities, etc. are subject to income tax, reconstruction tax and residential taxes as miscellaneous income
• withholding tax at the time of payment (in Japan)
• public pension deduction
Final tax return (kakutei Shinkoku) is required.
(Japanese 401k qualifies for the public pension deduction. You would have to check whether a Foreign 401k would also qualify for the Public Pension Deduction or not).

(2)
Calculation

For lump sum receipt
Taxable retirement income = (Payment amount - Retirement income deduction) × 1/2
The calculation for the amount of retirement income deduction
(The amount of retirement income deduction differs depending on the service period)
(Service period refers to the number of years of contribution to the plan, or part thereof)

Service period - Amount of retirement income deduction
20 years or less
The greater of: Service period × 400,000 or 800,000.
More than 20 years
¥8 million ＋(service period - 20 years) × 700,000

Caveat:
If you have already received other retirement benefits in the requesting year, or within the past 14 years from the preceding year, the retirement income deduction will be adjusted in consideration of the other retirement income deductions. i.e. not the full amount calculated above.

For Periodic payments
Amount of withholding tax as miscellaneous income related to public pensions, etc.
Payment amount × 7.6575%
(National 5%, Reconstruction 0.105% (2.1% x 5%) and Residential 2.5525%)

(Foreign 401k would not have been subjected to Japanese Withholding).


The 'Public Pension Deduction': You may be able to claim this deduction.

'Public Pensions' means: public servant pensions, approved fund pensions, national pensions, or other pensions paid under social insurance schemes.

If your pension falls into one of these categories, then you should be able to claim the Public Pension Deduction.

The amount is calculated based on the total gross pension receipts of the public pension(s) off-set against the total amount of all other sources of income in the same year.

See

https://www.nta.go.jp/english/taxes/ind ... 020/01.pdf

See Pages 22-23

The miscellaneous income includes the National Pension, the Employee Pension, defined-benefit corporate pensions,
defined-contribution corporate pensions (i.e. 401ks) , other public pensions and certain foreign pensions, ...,
as well as annuities under life insurance contracts (personal annuity insurance), mutual-aid insurance
annuities and any other income which does not fall into other categories of income.

STEP 3 Computation of the amount of deduction from public pensions, etc.
and
STEP 4 Computation of miscellaneous income from public pensions, etc.

and

https://www.tax.metro.tokyo.lg.jp/book/ ... k2021e.pdf

See Pages 8, 66-67

(Note 1) Public pension, etc. includes national pension, employees’ pension, mutual aid pension, governmental pension, approved retirement annuity, defined contribution pension (i.e. 401k), etc.

I try to reproduce here (but it may not be very clear...).

Gross Annual Pension --- Other Income < Y10M --- Y10M to Y20M --- > Y20M

Under 65.
Less than 1,300k --- 600k --- 500k --- 400k
1,300k to 4,100k --- 25% + 275k --- 25% + 175k --- 25% + 75k
4,100k to 7,700k --- 15% + 685k --- 15% + 585k --- 15% + 485k
7,700k to 10M --- 5% + 1,455k --- 5% + 1,355k --- 5% + 1,255k
Greater than 10M --- 1,955k --- 1,855k --- 1,755k


Over 65.
Less than 1,300k --- 1,100k --- 1,000k --- 900k
1,300k to 4,100k --- 25% + 275k --- 25% + 175k --- 25% + 75k
4,100k to 7,700k --- 15% + 685k --- 15% + 585k --- 15% + 485k
7,700k to 10M --- 5% + 1,455k --- 5% + 1,355k --- 5% + 1,255k
Greater than 10M --- 1,955k --- 1,855k --- 1,755k


The disclaimer at the bottom of page 23 of the NTA doc states:

“Non requirement of filing tax returns concerning pension recipients
You are not required to file a return for income tax etc. if
(a) your amount of earnings from public pensions is 4,000,000 yen or less,
(b) all the pensions you received are subject to the Japanese withholding (excluding ones that are covered by the provision in Article 203-7 of the Income Tax Act (public pensions, etc. not subject to the Japanese withholding), and
(c) your amount of income (excluding miscellaneous income from public pensions, etc.) is 200,000 yen or less.
* Even if you are not required to file a return for income tax etc., you are required to file a return for income tax etc. in order to receive refunds of income tax etc.
* For the inhabitant tax, see page 65.”

(Note: Provision (b) above excludes Foreign Pensions on which Japanese Taxes have not been withheld, so you are required to file a final return).

The disclaimer at the top of page 66 of the Metro Guidebook states
https://www.tax.metro.tokyo.lg.jp/book/ ... k2021e.pdf

(3) Pension Income Earners
Public pension income earners are not required to file final tax returns if their income from public pension, etc. is
¥4,000,000 or less, and if the entire public pension, etc. is subject to withholding taxes and their income other than
miscellaneous income pertaining to public pension, etc., is ¥200,000 or less.

Also, for individuals that fall under (3) above, those who take deduction for medical expenses and special
deduction for housing loan (first year of application) must file final returns.

(Again, Note: Foreign Pensions have not been subjected to Japanese Withholding Taxes, so you are required to file a final return).

Then, you can claim any taxes withheld in the US as a Foreign Tax Credit - Kakutei Shinkoku - Form B - Page 2 - Item 146.

[RetireJapan]

At least for Japan 401k or iDECO (based on the tax regulations as of April 2021)
(I believe the same would be true for a Foreign 401k (Defined Contribution Plans - see below), with the exception that Japanese Taxes will not have been withheld at source.)

Please stop copy and pasting large amounts of text (especially the same large amounts of text into multiple discussions). I do not think it helps and it is clogging up the forum.

Summarising and posting links is much more helpful.

In this case, why do you think foreign defined contribution plans would be treated the same as Japanese ones?