Japanese Tax on IRA Distribution...

[Tom.Portland]

There have been a few questions recently about how Japan taxes IRAs. I have some recent, unpleasant experience related to this. On March 15th, at the tax office, I was told that I owe tax not only on the gains (interest and dividends) in my IRA, but also a distribution I took from that same IRA. An advisor in this same tax office, a month earlier, told me that Japan would treat my IRA as a regular account. In other words, I would have to pay Japanese tax on the gains in the account (as I would for a normal brokerage account) but would not have to pay tax on the distribution (as with a regular brokerage account). Come tax day, they told me that person who advised me earlier was wrong. I'm not totally convinced that the tax office's last decision was the correct one. I'm going to take a look at the treaty, but not hopeful that it will shed any light on this. Does anyone have recommendations for a knowledgeable tax lawyer in Japan that I could consult? Or a tax accountant who would know what an IRA is?

[captainspoke]

My understanding is that eventual withdrawals/distributions would be taxed, but along the way anything that happens within the IRA would not be. But that's just my understanding from my reading on this, and I'm not in any way a tax expert.

This has come up over on the JapanFinance subreddit. Try reading this, or this. And then maybe searching there for other replies.

Good luck!

One other thing, if you are taxed here on withdrawals (as I think would happen), to be able to use that to claim a tax credit on your US taxes, I think you would need to be using the FTC (foreign tax credit) method for filing, and not the FEIE.

[Tom.Portland]

Thank you. I see that the prevailing wisdom is that IRA's should only be taxed on distribution by Japan. Now, having paid double tax, I wonder if there is any chance of me succeeding with a refund claim? I'm not hopeful, since there are no crystal clear statements of the policy with regard to tax on IRAs, just logical suppositions. I've been researching international tax just enough to question whether logic comes to play here. I will be talking to at least one Japanese tax accountant. I contacted a Japanese tax law firm through their Website and they replied that they were not interested in talking to me about this topic. It's a significant chunk of money for me, but probably insignificant for a central Tokyo tax law firm.

[underhill]

You said "A distribution" not "distributions". Is this a lump sum withdrawal?

I recently found out that New Zealand (where I currently live) taxes lump sum IRA withdrawals differently from regular periodic IRA withdrawals. Regular, periodic, withdrawals are taxed as income, lump sums are taxed using a wacky formula.

Is Japan the same?

[Tom.Portland]

My distributions would be periodic. When I reach a certain age, 73, I must take mandatory annual withdrawals from my traditional IRA. I think Japan has a different method of taxing mutual funds depending on whether the withdrawal is a lump sum, or partial. I don't know if it is applicable to IRAs. And, yes, the rule was complicated enough for me to not quite understand.

[TokyoWart]

One other thing, if you are taxed here on withdrawals (as I think would happen), to be able to use that to claim a tax credit on your US taxes, I think you would need to be using the FTC (foreign tax credit) method for filing, and not the FEIE.

Just to second this, for US taxes an IRA distribution is not foreign earned income and so cannot be excluded using FEIE.

[Tkydon]

IRAs are not treated as Tax Advantaged or Tax Free in Japan.

Trading withing the IRA is not taxable.

Distributions are taxable.

https://www.mof.go.jp/tax_policy/summar ... _ST_en.pdf

Under Article 21, If you were not a US Citizen or Green Card Holder, then the Capital Gains on Sale of Assets and Distribution would only be taxable in the country of residence.

However, as a US Citizen or Green Card Holder, you are also caught by Article 1-4(a), the US reserves the right to tax its Citizens.

As there is no % assigned to taxation of Capital Gains in the source country in the Agreement, you have to invoke Article 23-3(c).

You report the US Capital Gain as Japanese Sourced Capital Gain Income for the purpose of claiming the Foreign Tax Credit for taxes paid in Japan against your US Tax Return, and receive full credit for the 20.315% Japanese Taxes.