Roth contributions

[TJKansai]

Did the math on this today (please correct me if I am wrong on this):

Since the official IRS rate for 2023 is ¥140.511, that means anyone with a salary under ¥16,861,000 can not contribute anything to a Roth IRA since the Foreign Income Exclusion is up to $120,000. And to contribute the $7,500 limit, a salary of ¥18,000,000 is required.
edit: missing a couple zeros

[RetireJapan]

Well, you are not forced to take the FEIE, right?

[captainspoke]

Some folks take the FTC (foreign tax credit) instead of the FEIE, for this reason (among others). You will then have non-zero income, and can contribute to an IRA.

Note that you cannot jump back and forth year to year between the FEIE and the FTC. Once you switch to the FTC, you're supposed to stick with it for five years (IIRC).

Also, the US IRAs are a gray area for taxes in japan. I think they are treated as tax-free during the accumulation phase, but when you starting making withdrawals, taxes kick in. (I'm not a tax expert, so do your own research on this.)

Separately, there's something to be said for the FEIE zeroing out your US income and just investing in a taxable account. For long term holding, there are no taxes till you sell anyway (here or there), and tho dividends would be taxed here, with the basic deduction you can collect that level of dividends tax free there--and the level for qualified dividends is even higher, if that's your angle. Another difference is that for a regular taxable account there are no withdrawal conditions, so if you need the money (buying a house?) you can withdraw it all without penalties (only normal taxes). And never any worry about RMDs (trad IRA, not roth), you can leave it untouched as long as you want.

[TokyoWart]

There are two workarounds to the problem of FEIE essentially canceling out earned income up to the limits of deductible Traditional or direct Roth contributions.

The first workaround is to not take FEIE. For our kids, who had some earned income in Japan that was still below the standard deduction, we just didn't take FEIE and used their (very small) earnings to initiate their Roth IRAs. Our older boys were effectively kicked out of Japan while they studied in the US (their PR applications were rejected while the rest of the family's were approved) and their small Roth IRA accounts had no consequences on exit from Japan.

The second workaround is to do a backdoor Roth. There is no upper income limit for making a nondeductible contribution to a Traditional IRA so this is an easy way for those with foreign income above the FEIE limit to both use FEIE and still have earned income that qualifies for IRA contributions. The nondeductible (post-tax) Traditional IRA contribution is then converted to a Roth IRA. Because the post-tax "basis" is the same as the amount converted this doesn't generate US taxes. The problem is that you must have a 0 balance in all Traditional IRA accounts on December 31st or the conversion is subject to a pro-rata rule and becomes at least partially taxable.

One thing to consider if you are self-employed is that you could theoretically start a solo Roth 401K. For 401K contributions you need "compensation" not "earned income" and that means even income which has been excluded using FEIE can be used to fund a 401K. It is an ideal situation for a Roth 401K. The one problem might be finding a custodian who will allow you to open a solo 401K account using a foreign address.

[TJKansai]

Some folks take the FTC (foreign tax credit) instead of the FEIE, for this reason (among others). You will then have non-zero income, and can contribute to an IRA.

Note that you cannot jump back and forth year to year between the FEIE and the FTC. Once you switch to the FTC, you're supposed to stick with it for five years (IIRC).

Also, the US IRAs are a gray area for taxes in japan. I think they are treated as tax-free during the accumulation phase, but when you starting making withdrawals, taxes kick in. (I'm not a tax expert, so do your own research on this.)

Separately, there's something to be said for the FEIE zeroing out your US income and just investing in a taxable account. For long term holding, there are no taxes till you sell anyway (here or there), and tho dividends would be taxed here, with the basic deduction you can collect that level of dividends tax free there--and the level for qualified dividends is even higher, if that's your angle. Another difference is that for a regular taxable account there are no withdrawal conditions, so if you need the money (buying a house?) you can withdraw it all without penalties (only normal taxes). And never any worry about RMDs (trad IRA, not roth), you can leave it untouched as long as you want.

At this point the easiest path will be to stop contributing to the Roth. I only plan to work a couple more years anyway, so it won't have a big impact. The hassle is I already contributed to last year and this year, so I need to withdraw those now, something I haven't had to deal with in the past.