iDeCo for Americans

[Merican]

Tokyo Wart, it is my understanding that the FEIE (Foreign Earned Income Exclusion) only applies to earned income (money from paid work) and it does not apply to unearned income (dividends, interest, capital gains). I also think that the FEIE doesn't really bring down your income because to find out which tax bracket you would fall under for something like long term capital gains, I believe you would use your income as if none of it were excluded with FEIE. However, the standard deduction of $12,000 (2018) can remove some tax burden. I think a single person would also fall in the 0% long term capital gain rate until their taxable income (total income - standard deduction of 12,000) goes over $38,700 (2018). I think there also are ways to avoid double taxation if you have to pay tax to Japan on capital gains / dividends. Is the AMT (Alternative Minimum Tax) really an issue for expats? I haven't heard that before.

[TokyoWart]

Good points. Thank you for the correction on how FEIE applies. I took the opportunity to look back at my 2017 return to see where I was getting double-taxed:
1) On regular Form 1116 when taking the foreign tax credit for passive income (i.e. the 20.315% Japan taxes on Japan dividends and the 10.315% they are adding to tax on dividends from my US brokerage accounts) a calculation around lines 16-21 limited the credit by 64%.
2) The AMT version of Form 1116 for passive income is even worse and reduced it by 75%.
3) The same thing happened on the AMT form for general (wage) income although the limitation was not as dramatic.

My own experience is that there is always a substantial foreign tax credit carryover and AMT tends to hit me most (but not all) years with extra taxes. The only deductions or credits I take are for taxes on salary or investment income.

[Tatsuwashi]

Great, informative replies from everybody, thank you all for your knowledge.

I do have a TDAmeritrade account that I occasionally put money into, but I was hoping for a way to invest from Japan that was easy to do without sending money overseas and would cut my tax bill.

I think my plan now is this:
1. max out my wife's iDeCo. She can contribute 68k a month since she is self-employed.
2. We will consider reducing her current contribution to 小規模企業共済 (small & medium enterprise mutual aid pension). This has the same tax benefits of iDeCo, but the money just sits there, not collecting any interest, as far as I know. Even if it is J-bank level interest, it might as well be 0.
3. Beyond iDeCo level investing, I will just have to send money to the US, to put in my TDAmeritrade account.

Any thought on Rakuten's 楽天ターゲットイヤー2040 (Target year 2040) offering? I am thinking of that and/or 楽天・全米株式インデックス・ファンド（楽天・バンガード・ファンド（全米株式））

We are both in our early 40s and will likely be working until at least 65. Our youngest is only 5, so we have education to pay for until 2035 or so.

[Merican]

This has shifted to a tax discussion, but I like it. It seems your tax returns are very different than ones I've filed. I assume you're a high earner or something TokyoWart? Or maybe you have a lot of passive income?

Thank you for pointing out that American expats have the option of FEIE(Foreign Earned Income Exclusion) or FTC(Foreign Tax Credit). I was under the impression that while you should never just assume one way is better before crunching the numbers, FTC generally works better for people living in countries with much higher income tax rates than the US, for example Norway. However, since Japan's income tax is actually not that high for people with average salaries, most expats would likely benefit more from FEIE. Even it one goes over the FEIE limit, I think they can then get another exclusion for housing expenses. Additionally, they may be able to contribute to a US IRA (Individual Retire Account) because they now have taxable earned income. What details or your situation made you go with FTC TokyoWart?

EDIT: After rereading you post TokyoWart, I take it you do FEIE for earned income and FTC for Japan unearned income?

[Merican]

Any thought on Rakuten's 楽天ターゲットイヤー2040 (Target year 2040) offering? I am thinking of that and/or 楽天・全米株式インデックス・ファンド（楽天・バンガード・ファンド（全米株式））

The expense ratio is higher than I would like on that target date fund at 0.56700%. The Vanguard fund is much cheaper at 0.12960%. Have you thought about what kind of asset allocation you want? Do you want bonds? Domestic or Foreign? Do you want non-US stocks too? What percentages of each fund do you want in your portfolio?

Out of curiosity, does TDAmeritrade let expats open accounts, or is that something you opened when you were living in the US? Are you happy with their services?

[Tatsuwashi]

Ben recommends 33/33/33 US stocks/non-US stocks/bonds if I am not mistaken.

I know that the mix should trend towards bonds/cash and away from stocks as retirement nears, so I thought that the target year 2040 would be an easy way to do that, but at over 4X the expense ratio, maybe I will just do that part myself. Thank you for pointing it out.

I opened my TDAmeritrade account from Japan more than 10 years ago, but using my parent's address in the US. Never had any issues, I just got my 1099 by email from them the other day. I only very occasionally put new money into it, so I don't think I'm a frequent enough user to have much of an opinion, but it was all easy to set and use for me, if that counts for anything.

I also used to invest in Prosper.com, but I got kicked off because my Pennsylvania address disqualified me. PA decided at some point that Prosper was not a qualified bank or something like that and so Prosper was forced to remove all of their PA listed users.

My parents are almost 70 now, so I should consider what to do for a US address someday... My brother is not trustworthy enough, so I might have to look into one of those address services.

[RetireJapan]

Ben recommends 33/33/33 US stocks/non-US stocks/bonds if I am not mistaken.

Ben does not recommend anything

Andrew Hallam has suggested similar portfolios for expats. My take on this is that people need to figure out a portfolio that will work for them and hopefully meet their goals. The best way to do this is to read a couple of books.

If they have no idea then just 'buying the world' might be a good place to start, maybe with 'your age in bonds'. That would be 80% developed ex-Japan, 12% developing, and 8% Japan in stocks, and the same in bonds (or just buy international bonds if you are feeling lazy).

[Tatsuwashi]

Didn't mean to put words in your mouth, Ben. Apologies.

[RetireJapan]

Didn't mean to put words in your mouth, Ben. Apologies.

Ha, ha, no worries

I have to be a bit careful though as I am not able to give people specific advice without getting to know them first.

[eslmedley]

I've read a few places that PFICs that are part of an IDECO through your employer do not need to be reported to the U.S. I started an IDECO through my university and now am wondering if I need to get out before it reaches the max $25K when I will need to report and (yikes!) be penalized brutally for it. Does anyone know if this employer IDECO exception is a real thing?