RetireJapan

US citizen, living in Tokyo since 2017 and been using FEIE every year. When I was home in the States last year, I started getting my finances in order, and opened a Roth IRA. I had estimated that my tax rate for the US and Japan would be about the same with the FTC, so I was planning to switch from FEIE to FTC in order to contribute to the Roth IRA (I already put $6000 in last May). I also opened up a regular taxable brokerage account and have been steadily converting yen savings to dollars and contributing to that as a long term buy-and-hold retirement supplement.

Since then I got a new job, and now come tax season, it appears that with the exchange rate and my US tax rate, the FTC is less advantageous than I thought. If I take the FTC, I'll owe around $5000 (and I won't be able to switch back to FEIE easily in the next 5 years). If I stay with FEIE, I'll owe around $400, but if I do that I will have to withdraw the contributions for 2019 to avoid 6% penalty on ineligible contributions. With recent events, the $6000 I put into an index fund has fallen to around $5000, so I'm assuming I'd have to sell and withdraw all of it, taking a ~$1k loss.

I don't know that I'll be in Japan for the super-long term (and having a US tax-advantaged retirement account seems pretty desirable as a way to build wealth), but I will be here for the foreseeable future. Do you think it's worth switching to FTC and paying the extra $5000 in taxes just to "have" the IRA, or should I eat the $1k loss, keep FEIE, and continue to contribute to the regular brokerage account as my personal "retirement" account?

Also, I noticed that the exclusion limit with FEIE is ~$104,000. If I stick with FEIE, and if I were to earn more than that in a year, could I use FEIE on the first $104,000 , and then use FTC on the rest (which would be then be eligible to contribute to an IRA?)

Advice appreciated!

No, it is not "worth it" at all. Withdraw/back the funds out of the IRA.

I think if you've been using the FEIE every year, you should have been aware of the 'problem' with an IRA. With the FEIE, if you're making over the ~$105k (and change) that gets excluded, then with that surplus/extra income an IRA becomes possible

Since you haven't been here long enough to be a tax resident (first five yrs here), you don't need the IRA. Unless you're making a fortune, IRA level gains in a taxable acct in the US will go untaxed there, and here, too (assuming you don't bring any money into japan). That's the best of both worlds--no taxes here or there, along with no lockup like in an IRA. If you're that worried about distributions, find a low-turnover growth ETF, which pay among the lowest dividends.

I think the IRS makes it hard to jump back and forth between the FTC and FEIE so that people don't game the system. Reasonable, IMO.

And your last point: "Also, I noticed that the exclusion limit with FEIE is ~$104,000. If I stick with FEIE, and if I were to earn more than that in a year, could I use FEIE on the first $104,000 , and then use FTC on the rest (which would be then be eligible to contribute to an IRA?)"

I'm not in that salary ballpark (never was), so I'm not sure--you likely can get a tax credit for foreign taxes paid, but it may be called something other than the FTC. (to my knowledge, the FTC and FEIE are mutually exclusive, but I could easily be wrong)

If you are in fact making that much money, you should probably be shopping for a tax advisor/CPA than asking here.

I agree with captainspoke. The benefit of a Roth doesn't come close to justifying that much extra tax. You will also find that your taxable securities account isn't taxed very much by the US if you are on the borderline or below for the FEIE limit (and of course if you aren't yet a tax resident in Japan you don't yet get taxed on worldwide income).

Your result of the FEIE giving a better result than the FTC is also what I have found so far. The IRS makes switching very difficult and you essentially wind up needing to ask them for permission to switch back once you switch from FEIE to FTC.

Regarding what happens above the FEIE limits, yes you do get to use a pro-rated amount of your Japanese income taxes (basically you subtract out the tax that applied to the FEIE income) and claim some FTC. You also get to claim FTC in the US for capital gains taxes and dividends taxes you have paid in Japan even if you use FEIE and are below its upper limit although if you aren't paying any US taxes on that investment income the FTC is cancelled. You use Form 1116 (separate forms for salary and for investment foreign taxes paid) and the calculations get complicated but it should provide some benefit.

Just to update the FEIE numbers: the 2019 FEIE limit is $105,900 and the 2020 limit has already been announced as $107,600.

Finally, you need to get out of that IRA because there is a yearly penalty in addition to the penalty of the withdrawal if you don't. Because it was a post-tax (Roth) contribution you have a basis in the account that is probably higher than the amount you will withdraw so the withdrawal won't increase your taxable income. I am not sure if the 10% penalty still applies but if you have the Roth account at a large institution (Vanguard, Fidelity, etc.) they should have someone who understands the issue help you cash out the account.

https://www.investopedia.com/articles/r ... 042804.asp

Thanks for the information folks. I did think $5000 was a lot. I'll be sticking with FEIE for now.

Just realized I said "take a $1000 loss" earlier, but if I'm able to withdraw everything from the IRA and then immediately put it into the same fund in the taxable brokerage, then there shouldn't be much of a change. Looks like it might even be possible to transfer the funds in-kind, without going to cash.
About what to do if I exceed the limit of the FEIE... That would be a nice problem to have in the future

Thanks again!