RetireJapan

Hoping someone can advise based on experience or expertise...
I did a regular to Roth IRA conversion this year, which in the US will be taxed as ordinary income.
So far I haven't been able to determine if this would be a taxable event for Japanese income tax purposes.
The income the IRA dollars represent were earned/paid in prior years...so not current year income in that regard...but due to the conversion, the US of course taxes it as such.
Anyone dealt with this here in Japan...or know of a reference on the subject?
Thanks in advance.

10-7 wrote: ↑Fri Dec 03, 2021 10:30 am

I'm not an expert and I've never dealt with this situation in Japan but I'm American and I have some experience with IRAs. What you're describing is only relevant to the IRS. You are simply changing the tax designation of your brokerage account from one IRS classification to another. You are not changing your actual portfolio or selling any securities. Hence, you are not triggering any taxable event in Japan. The tax bill you owe on the IRA contributions is a quirk of US tax law and is not relevant in Japan which treats it as an ordinary brokerage account.

I'd advise getting some pro advice, you might also run this question by the folks at JapanFinance.

What one country says about taxable/tax free vs another may just be quirky, but that's also the situation in the US from state to state (eg, whether SS is taxed or not).

Since it's a conversion--one retirement account to another--it may not be subject to tax here. OTOH, a red flag pops up for me when you say that there, it is income, and "the US taxes it as such". I'd think that if the US classes it as income (subject to taxes), then that will also be the case here. And it would be laid out like that on your US tax return.

Good luck!

Thank you Teflon and captainspoke for your responses.

My preferred theory is the same as yours Teflon. It is reasonable, logical, and to my benefit:)...but that may not be enough.
The concern is exactly what captainspoke expressed...
My US tax return is going to show more 'income' than my Japanese tax return.
If ever the two are compared, I would prefer to be standing on firm ground (if possible) when explaining the difference.
I've searched what's publicly available from the 'pros', but didn't find this issue directly addressed (and one that I contacted wanted $250 to answer the question).
I may end up needing to pay for advice, but avoiding it for now...
Thank you, captainspoke, for the JapanFinance link...I've joined.

I'll post here if I find anything helpful on the matter.

10-7 wrote: ↑Fri Dec 03, 2021 10:30 am Hoping someone can advise based on experience or expertise...
I did a regular to Roth IRA conversion this year, which in the US will be taxed as ordinary income.
So far I haven't been able to determine if this would be a taxable event for Japanese income tax purposes.
The income the IRA dollars represent were earned/paid in prior years...so not current year income in that regard...but due to the conversion, the US of course taxes it as such.
Anyone dealt with this here in Japan...or know of a reference on the subject?
Thanks in advance.

I would argue that this is the correct way to think about that conversion. If you put pre-tax money in an IRA or 401K that has no affect on your reported taxable income in Japan even though it reduces taxable income on your US tax return. In the same way a taxable (from the US standpoint) conversion to a Roth account hasn’t generated taxable income (nothing earned, no capital gains and no dividends or interest generated) in Japan. For the same reason you don’t really have the assurance that withdrawals from a Roth account are considered tax-free in Japan even though they are in the US. There are a large number of reasons why your taxable income on your US return will not match the Japanese return (kakuteishinkoku).

Thank you TokyoWart. Appreciate your input.
You're right...my returns wouldn't match with/without the conversion.
I'm just aiming to file correctly and be able to explain/justify differences if necessary.

10-7 wrote: ↑Fri Dec 03, 2021 10:30 am ...
I did a regular to Roth IRA conversion this year, which in the US will be taxed as ordinary income.
So far I haven't been able to determine if this would be a taxable event for Japanese income tax purposes.
...

The responses you got so far seems sensible and intuitive but there's another viewpoint. While Japan may not treat Traditional IRA and Roth IRA any different from each other, a different perspective is that you took out money from one IRA then put the money into another IRA. The typical answer you will get in how an IRA gets treated is that if you withdrawal the money in Japan, the withdrawal amount minus the contribution is taxable (even if the contribution was a deductible contribution in the U.S.).

Assuming such is the case, if you take money out of the traditional IRA, Japan will tax the earning portion _in yen terms_ of it up to that point and the new cost basis in your Roth IRA is the converted amount. The issue is whom actually knows how much money was put into the IRA and whom actually knows how many yen a dollar was worth for each contribution? So it is harder to be in compliance if this is their viewpoint.

My guess is that if you seek a Japanese accountant, they'll give you different answers without any real world experience backing it. How many people do you think has that that issue within the client base they had no matter how long they were preparing Japanese tax returns? Audit rate is so low that even if they did 100 returns with certain assumption in mind, none of them may have been audited in part because the amount involved was too small to be worth bothering with for the limited number of auditors in Japan.

I kind of know why people want to do this. They work in Japan and exclude their Japanese work income from U.S. taxation by claiming foreign earned income exclusion. That allows the relatively larger U.S. standard deduction for anything else. If you can convert to a Roth IRA without any tax consequence on the Japanese side, then maybe the Roth conversion can be limited within the standard deduction or perhaps say the 10% or 12% tax bracket to minimize the cost. Then at some point in their career, they return to the U.S. with a Roth IRA that has been converted with minimal to no cost. I even see some U.S. Expat services recommend this strategy but not taking into account of specific treatment of the other country's tax treatment at all. It might be a dangerous assumption.