Simple Strategy for US Citizen

[expat2011]

Hey Retire Japan. New reader here and I'm so thankful I've found this site. Basically trying to salvage my plans for an early retirement :-/ It seems that US citizens have some cases that make things trickier for them.

My basic situation: I'm a saver, and back in the States I always maxed out my rIRA before putting the rest into a target-date retirement ETF. I've collectively lived in Japan for 5 years, got married 2 years ago, wife is Japanese. Right now I don't know what to do with my money so it's kind of just been stacking up. We don't know for sure if we'll be in Japan forever, but it's looking more and more likely so I've decided to get wise. (A bit about her: she has her own career and we both make enough that of the other lost their job, we'd still be able to live where we are and save. )

I am looking for a simple answer to the question: what do I do with money I don't need right now?

This question, though, is built on a bunch of smaller questions.

-What do I do with my rIRA? I heard I can't contribute to it because my income is all FEIE. But I also heard if I pay the tax on $5,500, I can put it in my rIRA. But my the time I transfer it to the US, pay the taxes and put it in, when I pull it out years from now I still have to pay Japan tax on it because I've just found out they tax income from abroad. So in the end it seems like a bunch of jumping through hoops for nothing. Is that accurate?

-I've heard Americans can have iDECOs as long as the iDECO is basically... Cash. So... I'd get to put in pre-tax yen and pull out untaxed yen, which is great, but... Without interest how badly am I screwing myself? If the fund gets interest, do I have to claim it on my us taxes? How? Or maybe this is still the best deal, even with low/no interest?

-Given that my wife and I live pretty lean, I thought about using all of my income for all of our expenses, so she can use all of her income for her own iDECO and other investments she's eligible for. Is this even remotely a smart idea?

-Finally, the question I'm dreading most... I love my country, but I only get one life and I want to retire. Should I consider naturalization in order to only pay taxes in one country? Even if I choose that, I know it takes years... What should I do with my money until then?

I know there's a lot here. If you can address any part, I would be grateful.

[RetireJapan]

-What do I do with my rIRA? I heard I can't contribute to it because my income is all FEIE. But I also heard if I pay the tax on $5,500, I can put it in my rIRA. But my the time I transfer it to the US, pay the taxes and put it in, when I pull it out years from now I still have to pay Japan tax on it because I've just found out they tax income from abroad. So in the end it seems like a bunch of jumping through hoops for nothing. Is that accurate?
-I've heard Americans can have iDECOs as long as the iDECO is basically... Cash. So... I'd get to put in pre-tax yen and pull out untaxed yen, which is great, but... Without interest how badly am I screwing myself? If the fund gets interest, do I have to claim it on my us taxes? How? Or maybe this is still the best deal, even with low/no interest?
-Given that my wife and I live pretty lean, I thought about using all of my income for all of our expenses, so she can use all of her income for her own iDECO and other investments she's eligible for. Is this even remotely a smart idea?
-Finally, the question I'm dreading most... I love my country, but I only get one life and I want to retire. Should I consider naturalization in order to only pay taxes in one country? Even if I choose that, I know it takes years... What should I do with my money until then?

Welcome to the forum! I'll try and put some ideas out below, but I am not a US citizen so probably worth taking with a pinch of salt.

1. Can't answer this I'm afraid.
2. The tax savings can be considerable (the higher your income the greater the saving) but inflation is a thing. This might be a good option if you are a high earner and in your 50s.
3. Sure, if you trust your wife: https://www.youtube.com/watch?v=cMuam1MObtI
Quite a few people do this. As long as your wife does not have a Green Card or US citizenship, it should be pretty easy for her to invest in iDeCo, NISA, etc.
4. I believe this should not be a monetary decision. Naturalising to Japan takes a year or two. The US puts a few obstacles in the way. It's expensive to renounce US citizenship, there may be some kind of exit tax, and you may be treated with suspicion subsequently. More info here: https://www.turning-japanese.info/ and here: https://www.americansabroad.org/

Our standard advice for US citizens is to use existing taxable accounts in the US to invest in low-cost index funds. Alternatively, open an Interactive Brokers account and do the same: http://www.retirejapan.info/blog/review ... ve-brokers

The benefit of these two approaches is that should you leave Japan you could keep your accounts. As long as you are not realising any capital gains or receiving dividends you won't need to declare or pay taxes in Japan.

Anyone else?

[expat2011]

RetireJapan, thanks very much for your reply and this information. Regarding using existing low-cost index funds in the US, that's pretty much what I'm doing, but I'm concerned Japan will tax that money a ton when I start withdrawing it. Is there anything I should take into consideration?

[captainspoke]

1. I think you can just leave it alone and not contribute.

2. see below

3. see Ben's answer

4. I think the US exit tax begins at $500k (tho knowing them, they could have adjusted this down). When you renounce, you cease to exist (like dying) for US tax purposes. So they want a piece of your estate. So your assets, or your likely assets in the future, might impact a decision whether/when to renounce.

2. again

Our standard advice for US citizens is to use existing taxable accounts in the US to invest in low-cost index funds.

This is what I've always done, still do, and so on. IMO, there are significant advantages with this strategy. You get very low cost ETFs, commission-free trades on quite a few of those, it's all in English, probably 24/7 phone support, orders can be submitted online, and if you want you can watch things happen.

Also, with the FEIE, most US tax filers have zero income, so up to a certain level (15-20k, I think), your distributions (quarterly/yearly gains payouts from a fund, dividends, interest) and even your trading gains will not be taxed in the US. Of course, those will have to be declared and will be taxed in Japan, but on the US side if you can keep an eye on those levels you effectively have an IRA in disguise. (With taxes here in mind, you can choose ETFs/stocks with low turnover and low distributions to minimize your tax bite.) And versus an IRA, you can access that money any time--no early withdrawal penalties. Also, no RMDs at 70-1/2 (required minimum distributions--I have an older brother who swears at this since he is required to take money out that he doesn't need).

I hope this helps!

**

Gaming the system:

Okay, I don't do this, but I've read that it is possible to "play" this system a little to increase your basis. Let's say a person has 100k in an S&P index ETF, and that the price goes up 7% in a given tax year. Ordinarily, the typical investor would not sell and take that capital gain of 7k. But if you do sell, tho you'll be taxed in Japan, that 7k will not be taxed by the US--since all your income is excluded, the gain is below the level at which taxes begin. You can then turn around and buy a similar/identical S&P ETF (or wait a month and buy the same one if the wash rule applies). As they say, YMMV.

[jcc]

RetireJapan, thanks very much for your reply and this information. Regarding using existing low-cost index funds in the US, that's pretty much what I'm doing, but I'm concerned Japan will tax that money a ton when I start withdrawing it. Is there anything I should take into consideration?

Even if you were not american, so long as you're not investing in japanese stocks, you'd be getting taxed in the original country and japan. US stocks have historically provided the highest performance so as an american you should probably just stick to them since taxwise they're going to be the least messy investments for yourself. Perhaps as a couple you can diversify by you buying the US part of the portfolio and your wife covering the rest?

Ultimately it would be cheaper to naturalize but that seems like a pretty complex issue that would probably be worth at least seriously discussing with a professional.

[expat2011]

I just wanted to take a moment to thank all of you for your replies. I'm still trying to digest this information along with the rest of the information in this forum, and it has been very helpful.

[ricardo]

US stocks have historically provided the highest performance ... it would be cheaper to naturalize

Evidence for US stocks being the highest performing? Really??

Naturalising not necessary to get a good investment return?!!

Very confused by your logic here....

[jcc]

Evidence for US stocks being the highest performing? Really??

In the short term(say 20 years) you will find higher returns, I referred to the historically highest, and by that I mean 100+ years. In the short term you will find outliers such as sweden.

I'd have to find where that was from(I think it was from Bogle's common sense on mutual funds). US stocks have had the highest historic(over a 150 year period) returns. It's why Warren Buffett bets on America, and why even Jack Bogle, the big man behind index funds and vanguard has said that Americans should just invest in America(there's a sub-argument to this that US companies are already globalized and that the global market is so inter-related that future boom and bust cycles will mostly be international). This is of course compounded by taxation issues, which is why I don't think the same advice applies to non-americans. Bogle remains iffy about international investing for americans though he may be softening a bit https://www.cnbc.com/2017/10/17/vanguar ... -bias.html

Naturalising not necessary to get a good investment return?!!

What makes you claim I believe that when I said exactly the opposite?

Ultimately it would be cheaper to naturalize but that seems like a pretty complex issue that would probably be worth at least seriously discussing with a professional.

I do suspect naturalizing would work out cheaper. The main advantage of retaining US nationality would be in deferring taxation in japan on US stocks until money is repatriated here(possibly at retirement?). I don't believe that would be enough to offset the costs in US taxation. It really depends on the quantities we're talking and the way you handle it which is why I said they should talk to a professional.

[lowercasegains]

Also, with the FEIE, most US tax filers have zero income, so up to a certain level (15-20k, I think), your distributions (quarterly/yearly gains payouts from a fund, dividends, interest) and even your trading gains will not be taxed in the US.

Quick question on this. I'm an American citizen also living in Japan and wanting to start investing soon, and I've read everything I can find on the subject but I'm still not sure how I can get by with my gains not being taxed. I take the FEIE every year and my salary is (sadly? fortunately?) low enough that I'm well under the limit. How does this work exactly?

I've read that if your marginal tax rate is 15% or less then capital gains aren't taxed (taxed at 0% rate), but tax on anything that goes over the FEIE limit is calculated as if none of the income was excluded. So that makes me think that as long as my salary and capital gains/dividends/whatever were under the limit I wouldn't owe anything. At the same time, I understand that capital gains aren't considered "earned income" and as such can't be excluded by the FEIE. In this case, would I claim the FEIE on my salary, then apply the standard deduction to any gains, or is there something I'm really missing here.

I'm just concerned that I'll start investing and then have to start transferring money back to the US for payments to the IRS.

Sorry to piggyback off someone else's question!

[ichiokuen]

Howdy!
Thank you all for your helpful comments.
I have been shrubbing all of the boards here to find a confirmation of the tax filing requirements for US based capital gains and dividend income and have only come avross this: https://journal.accj.or.jp/tax-overseas-assets/ which states that you do not need to file if you hold less than 50million yen in the overseas account.(This seems to have been reduced to 20million yen in 2015)
It seems that most people on this forum are filing Japan taxes for their US based capital gains and dividend income, so does that suggest that they are holding huge accounts or that the above webpage is wrong about the filing requirements? Sorry for such a long winded question!

Ganbare!