iDeCo for Americans

[Tatsuwashi]

Hello all,

I'm an American living in Japan and have been considering iDeCo.
I read the bad news that the U.S. Internal Revenue Service (IRS) has a rule which charges an insane tax rate on "foreign domiciled mutual funds" also called PFICs.

I have a few questions, if anybody is kind enough to share some knowledge:

1. Would a Vanguard fund on Rakuten (楽天・全米株式インデックス・ファンド) be considered a PFIC?

2. Does any American have any direct experience with this?

3. Are any Americans out there willing to share what they are doing with their iDeCo investments if all mutual funds are indeed out of the question?

If I can't get into mutual funds through iDeCo because of the IRS rules, I am considering having my wife max out her iDeCo with those mutual funds and I am wondering what to do with my contribution.

Thanks for any help!

[gerdemb]

My understanding is that all iDeco investments are mutual funds. That means they will be treated as PFICs by the IRS. Your best strategy is probably to have your wife max out her contributions.

[Tatsuwashi]

Thanks for the reply.

Yeah, I thought that might be the case.

Well, first we will max out my wife's contribution and then think about what to do next.

[Merican]

Regarding what to do with your own money, for most Americans overseas the best option for an investment account is to open a taxable account with a US company. I have been very happy with WiseBanyan, a free robo-advisor. There are a couple other companies that allow US citizens residing overseas to open accounts such as Interactive Brokers. However, IB will charge you some fees. A taxable account really isn't as bad as it sounds. So far I've paid zero tax to the US, and only a small amount to Japan for dividends. There seems to be little benefit from iDeCo unless you are 50 or older and only contribute to cash funds as a way to reduce your taxable income. Most Americans abroad cannot contribute to US retire accounts such as a 401k or an IRA. Some high earners could contribute to an IRA if they exceed the foreign earned income exclusion threshold at roughly $100,000 annual earned income. Please let me know if you have any questions.

https://wisebanyan.com/r/UwIR6iN0X
https://www.interactivebrokers.co.jp/en/home.php

[stevendorrans]

My understanding is that all iDeco investments are mutual funds. That means they will be treated as PFICs by the IRS. Your best strategy is probably to have your wife max out her contributions.

I believe you can put the money in a cash savings account if you want.

[RetireJapan]

Yes, Americans can use iDeCo for cash savings (and get the tax benefit) but their money then gets locked up until they are 60 (or later if they start late) at risk of inflation, etc.

Might be worth considering for people in their late 40s who pay a lot of income tax.

[TokyoWart]

1. Would a Vanguard fund on Rakuten (楽天・全米株式インデックス・ファンド) be considered a PFIC?

If you look at the explanation at this link:
https://www.rakuten-toushin.co.jp/fund/ ... ivue_P.pdf

it looks like you are actually investing in a Japanese 【ベビーファンド】 which is investing in a Japanese 【マザーファンド】 which holds the American Vanguard ETF. That kind of looks like a PFIC. I have actually called Japanese brokers or investment companies (never worked with Rakuten) to ask if their funds were considered a PFIC by the US IRS and, of course, the Japanese staff had no idea.

[adamu]

I'm not familiar with US taxation, but if US citizens are subject to US taxation, what's the benefit of iDeCo, which offers shelter from Japanese taxation? Does lowering Japanese tax liability also lower your US liabilities?

[TokyoWart]

Many US expats face no taxes in the US on investment returns because FEIE has brought down their income. For those who do have a lot of tax liability, one problem is that the alternative minimum tax effectively limits the extent to which Japanese taxes can offset the US tax liability so at all income levels US expats will be sensitive to foreign tax rates.

[Merican]

Americans residing overseas have an obligation to file taxes, but most Americans won't actually pay the US anything unless their income is high or they are self-employed. I have paid $0.00 in tax to the US in the last ten years living in Japan. We are allowed to excluded $103,900 (2018) of earned income every year using the FEIE (Foreign Earned Income Exclusion). A US person can report their total earnings to the US and exclude all of it. Lowering the taxable income in Japan would not affect this, so some Americans might benefit from an iDeCo by reducing their taxable income in Japan and keeping it in cash in an iDeCo. That's assuming they are close enough to retirement that the opportunity cost of not using that money to invest in higher earning assets would not be too high. For example, if someone were 30 years from retirement, they would see much more benefit from opening a taxable brokerage account in the US.