US Citizen, Long term in Japan, Foreign Company

[hoshimo]

I scoured the website (and internet) for articles, but nothing seemed to quite fit my situation... maybe I'm not looking hard enough. I am a US Citizen, been living in Japan since 2010, am married to a Japanese wife who works full time as a teacher in a private school, and have 2 kids in preschool. I have no intention of leaving Japan. I work for a US-based religious organization and my paycheck goes to a US bank, so I wire whatever I need to my Japan bank. I make about $40k a year, and I'm putting $1000/mo (maxed out) into a 403b retirement account. Any extra money sits in a US savings account with a 1.64% APR, and I have an emergency fund of $40k (400k yen) sitting in my Japan bank for quick access. For the most part, I leave as much of my paycheck in my US savings account to grow, and live off of my wife's paycheck so I don't have to wire money over as often.

This is where I start to get confused. Right now, I'm paying taxes in Japan and excluding it on my US taxes. I'm also getting reimbursed by my org for any work-related expenses, so I was told not to make any tax deductions on my Japan taxes. I'm also paying into the Japan Pension and Health Care system, and not into US Social Security or my org's choice of health care (Aetna).

In many articles for expats in Japan, it seems like their finances (income, expenses, investing, retirement) are entirely Japan-based, but for me, I'm working for a US-based org and paying into US-based retirement account. Most financial advisors I've talked to (understandably) weren't very helpful because they had no understanding of the Japan side of things. Any advice would be much appreciated!

[RetireJapan]

What's your question? It seems you have your side of things pretty figured out.

Your wife probably has some options with iDeCo to reduce her income taxes and NISA for tax-free investing.

[hoshimo]

Thanks for getting back so quickly. I guess I just have no clue if what I'm doing is correct, let alone wise.
- If I want to retire in Japan, should I be paying into IDeCo instead of a US-based 403b? Is that even possible when my pay is coming from a US-based org?
- Should I pay US taxes and have it excluded in Japan (instead of paying Japan taxes and excluding it from my US taxes)... is that even possible?
- Should my wife and I continue using most of her paycheck to pay for things in Japan while growing our savings using my US banks, or should we adjust things so that she can be putting money into something like IDeCo?
- Since my employer is US-based, can I invest using Robinhood, Betterment, or Vanguard... or does being a resident of Japan mean I should be thinking about NISA?

I guess I'm confused about how taxes, investing, and retirement are affected by the combination of 1) working for a US-based company while 2) living long-term in Japan.

[TokyoWart]

For what it's worth, here are my comments on 3/4 of your questions:

If I want to retire in Japan, should I be paying into IDeCo instead of a US-based 403b? Is that even possible when my pay is coming from a US-based org?

The advantage of the 403b is that it reduces your US taxable income and it reduces your income far more than IDeCo can. When it comes time to withdraw those funds, you'll potentially have to pay US taxes on them. The disadvantage of the 403b is that fund choices are often not as good as in 401K plans and I am not sure how it should be reported under Japanese taxes. You wrote that you are paying taxes in Japan and excluding on your US taxes. If you have a minimal US tax bill as a result, the 403b might not be helping you unless it's a (rare) Roth version of the 403b. The disadvantage to US citizens of the IDeCo is that the best investment choices are likely to count as "Passive Foreign Investment Company" accounts and trigger the very difficult Form 8621 reporting requirement. I have given up on doing the IDeCo for this reason.

Should I pay US taxes and have it excluded in Japan (instead of paying Japan taxes and excluding it from my US taxes)... is that even possible?

Japan does have a foreign tax credit if you paid the foreign taxes because of work you did in Japan. It is complicated and pro-rated (you only realize the credit for the proportion of your income to which the US taxes were applied) and it's hard to get the years to align (i.e. when I claim the credit for my 2019 Japanese tax filing next month, I will be basing it on money I paid to the US IRS in calendar year 2019 for tax year 2018) which generally causes confusion at the tax office. Potentially both tax credits can apply but you can only claim the net taxes you paid.

- Since my employer is US-based, can I invest using Robinhood, Betterment, or Vanguard... or does being a resident of Japan mean I should be thinking about NISA?

I like NISA accounts but when I recently assessed my longterm investment performance it's a lot better for US stocks and index funds compared to Japanese stocks. You can buy foreign ETF's and stocks in a NISA but trading commissions and fees are a little higher. Also, the US IRS will not allow you to treat NISA dividends and capital gains as tax-free so you have to do the extra step of tracking and reporting them. If I could go back in time, I would still use NISA but I would fill it with total world or US equity ETF's.

[hoshimo]

thanks for the help. you are a wealth of good info.

the account i have actually is a roth 403b. is this advantageous?

in general, would you recommend that i just keep doing things the way i've been doing them (Maxing Roth 403b, using US banks for savings, emergency fund in Japan bank, paying Japan taxes and health care and pension).... and then maybe begin looking into NISA as my next step?

[TokyoWart]

the account i have actually is a roth 403b. is this advantageous?

Chances are that you are in a relatively low US tax bracket and in that case the Roth option is ideal. I am hoping you have a good index fund choice in your 403b rather than an annuity. Because 403b plans are usually not covered by ERISA (private religious organizations have the option of making their 403b plans come under ERISA but they don't have to) they can get more junky choices than a 401K will have.

in general, would you recommend that i just keep doing things the way i've been doing them (Maxing Roth 403b, using US banks for savings, emergency fund in Japan bank, paying Japan taxes and health care and pension).... and then maybe begin looking into NISA as my next step?

That sounds good to me.

[hoshimo]

sorry, just to confirm.
when asking a financial advisor about investing, he had suggested i open an account with American Funds, but you're saying it'd be better to go with NISA? after reading some articles, i had thought if my income is earned in the US, NISA wouldn't be an option, and if my income is Japan-based, that US accounts like American Funds wasn't available. My tax preparer fills out a 2555-ez tax form for me, so i guess my income is foreign-earned...because the work I get paid for is based in Japan, right? So does that mean my financial advisor made a mistake?

[TokyoWart]

The NISA account has no requirement for income at all although of course you wouldn't be able to open a NISA account with a US-based brokerage firm like Schwab or Vanguard. You just have to live in Japan to qualify to have a NISA account. In addition for either a taxable or retirement (e.g. IRA) account in the US the source of the income does not matter. The 2555-ez form will exclude a certain amount of foreign income and if that exclusion means you have zero earned income then you don't qualify for contributing to an IRA but that's not really because of the source of the income, just that the FEIE exlcusion has eliminated all your earned income.

[hoshimo]

ah, gotcha. i have zero earned income then, haha. then i guess NISA it is
thanks!

[hoshimo]

tax question:
since my employer is us-based, i get a paycheck sent to my us bank and wire whatever i need to japan. when i pay for work related expenses here, i pay for them out of pocket, i fill out an expense report later, and am reimbursed for whatever amount i request (up until now, i have just requested the full amount). how does this work for taxes in japan?