Starting retirement savings as a Japanese-American

[ltretjapan]

Hello, new user here (and fairly new to personal finance). I'm looking for some guidance as I start retirement savings in Japan.

Background:
* I have Japanese and US nationality and intend to keep both
* I’m a full-time company employee in Japan
* I’m undecided on where to live long-term and retire (US or Japan)
* I have a Vanguard Roth IRA, which I no longer add to since I don’t make US-taxable income
* I’m starting to sign up with Daiwa Securities for my employer's stock option plan
* I’ve read RetireJapan’s short article for US citizens saving for retirement in Japan, from which I gathered it’s likely best to skip NISA/Japanese retirement accounts and just join a US broker?

My goals/preferences:
* I want to grow my retirement savings minimizing taxes and fees
* I prefer to invest in big US index funds like VTI, so I can just buy and hold for many years
* If possible, I like to have less paperwork and less Japanese

Where should I build my retirement savings? At a US broker? or Japanese? Is there any specific firm or type of account that might suit me?

Also, to invest in a US broker and buy US funds, don’t I need to convert my JPY income to USD? Won’t that cost a ton of money over time for transfers and conversions?

If I ever move back to the US, what changes should I make to my strategy? Revert back to Roth IRA I guess?

Also, a lot of resources recommend talking to a tax advisor. Do you recommend this? If you have a recommended advisor who speaks English and can work with Americans or dual citizens please let me know.

[TokyoWart]

Welcome to the forum. Just a few thoughts to consider:

1. If you want to use index funds like VTI for your retirement savings you will need to maintain a US brokerage account. It is more reliably possible to do that if you also have some form of US address you can anchor that account to because even the US brokerage firms that allow US expats to maintain accounts with a foreign address have tended to make that more difficult over time and suddenly announce that the accounts will be closed.

2. You do not have to have US taxable income or US sourced income in order to fund an IRA account. You do have to have "earned" income and expats who use the FEIE to exclude their foreign earned income and do not make more than the upper limit of FEIE no longer have "earned" income. At higher income levels (e.g. well above the FEIE and even above the limit at which a direct Roth IRA contribution is allowed) a backdoor maneuver for funding a Roth is a great solution to this problem. My take on the consensus for Japan's approach to taxing IRA's is that they don't tax them until you start to withdraw but would probably consider a Roth IRA withdrawal a taxable distribution but this is an area of some doubt and debate.

3. You should educate yourself about PFIC's because they are a tax disaster for US persons and they are also the most common financial product available here. The excellent eMaxis slim funds you will see discussed here are all PFICs.

4. Be very careful to comply with the US foreign account reporting obligations because this is an area where the US government actively looks to find noncompliance and assesses very large penalties even when you have not done anything to actually avoid paying taxes. Look up the rules for FBAR reporting and form 8938 (which is similar to FBAR in that it reports foreign accounts but on your US tax return and similar has a large financial penalty for each year you fail to file it if your foreign account balances meet the reporting threshold).

Don't meant to sound too threatening because these are all solvable problems but especially #3 & 4 above are areas where even well-meaning ignorance can really hurt you financially.

[ltretjapan]

Thanks for the detailed response!

Yes I've heard PFICs are something to be very careful to avoid here as a US citizen. Is there no way to invest in safe big non-PFIC funds in a Japanese brokerage account? I figure it would be expensive to transfer my Japanese income to the US every time I want to invest. And then I'd have to transfer it back again if I retire here. Do you think it would still be worth doing that?

[TokyoWart]

Thanks for the detailed response!

Yes I've heard PFICs are something to be very careful to avoid here as a US citizen. Is there no way to invest in safe big non-PFIC funds in a Japanese brokerage account? I figure it would be expensive to transfer my Japanese income to the US every time I want to invest. And then I'd have to transfer it back again if I retire here. Do you think it would still be worth doing that?

There is almost no way to invest in non-PFIC funds using a Japanese broker. All mutual funds in Japan are PFICs. You can't directly buy a US mutual fund while living in Japan because they aren't licensed for sale here. If you find a Japanese broker that will let you buy US ETFs then that is one way to get a non-PFIC fund. The problem is none of the discount brokers will allow US citizens to buy US ETFs (I believe it is possible at Nomura but they apply a very unfavorable exchange rate to the transaction in addition to higher transaction fees.)

[ltretjapan]

I see, thanks.

If I keep my retirement savings in the US, it sounds like there a couple options and outcomes I have:

1. Stop using the FEIE so I can deposit in my Roth via backdoor maneuver, paying more tax now but less in the future

OR

2. Keep using the FEIE and deposit into a regular US brokerage account, paying less tax now but more in the future

Does this sound right?

And is one of these options clearly better than the other?