US laws and IRS policy make it complicated for US citizens to maintain accounts and invest in other countries. This is because most countries only tax people who live there (citizen or non-citizen). The US requires that all citizens and green card holders submit a US tax return even if they are living abroad*
*the same filing requirements apply for US citizens who live inside and outside the US and there are many situations where you are not required to file taxes. You can play with the IRS online tool for determining if you need to file (https://www.irs.gov/help/ita/do-i-need- … tax-return)
This overlapping tax responsibility creates a number of issues for US citizens that are not faced by other nationalities.
This also applies to children who have both US and another nationality. The US nationality is the limiting factor, so parents should be aware of limitations that may apply to their children.
This is a great overview from the excellent Bogleheads forum.
Tax Reporting
Generally speaking US citizens living abroad need to file a tax return with the IRS. They might not need to pay taxes due to the Foreign Earned Income Exclusion or Foreign Tax Credit, but they still need to file.
People with more than $10,000 in foreign bank accounts need to file FBAR.
This video explains in more detail:
Investing
US citizens in Japan have very limited options to invest. One major issue is that most Japanese brokers have entered into agreements with the US government promising not to sell US shares or ETFs to American citizens.
Because of this US citizens can only buy Japanese stocks, ETFs, or mutual funds through most brokers (Nomura may be an exception).
This video provides an overview of investing for US citizens living outside the US:
Non-US listed mutual funds and ETFs
However, Americans are typically advised to avoid investing in foreign-domiciled mutual or index funds. These can be classified as PFICs and face punitive reporting and taxation. As such, individuals need to be very careful about inadvertently investing in them. So that means that in practice in practice the only products most US citizens would be interested in buying are individual Japanese shares through Japanese brokers (and even some of those can be classed as PFICs).
Company DB or DC schemes
Often, company DB or DC schemes qualify as “employees’ trusts” under US tax law, which allows US taxpayers to invest in them without needing to file PFIC reporting paperwork.
iDeCo
iDeCo accounts are a grey area for US citizens.
*there is a “pension fund” exception to PFIC reporting that may or may not apply to iDeCo accounts (see here and here). Whether it applies to iDeCo accounts depends on whether, under the US-Japan tax treaty, income generated within iDeCo accounts is exempt from taxation until and unless it is paid to account-holders.
There is a very technical discussion of this issue here.
Older US citizens may want to look at iDeCo as a way of reducing Japanese income tax by saving in cash, but for younger people this is unlikely to be a good strategy.
NISA
NISA accounts are a flexible way of reducing Japanese taxes on capital gains and dividends, but they are not tax-exempt in the eyes of the IRS.
The only investments allowed in the tsumitate portion of NISA are mutual funds, and US citizens probably want to avoid these because they are PFICs.
Americans can buy single Japanese stocks in the growth portion of NISA, being careful to avoid ones that may be deemed PFICs.
Kokumin nenkin kikin
US citizens in Japan paying into kokumin nenkin can use kokumin nenkin kikin to reduce their taxable income and increase the amount of nenkin they can receive in the future.
So what can Americans do?
The easiest option for US citizens might be to use an account with a US broker to invest normally in the US, which will make IRS reporting easier and just require a Japanese tax return in years you have a taxable event (receiving dividends or selling something for a capital gain).
There are two options that may simplify things for US citizens:
Interactive Brokers Japan is the Japan branch of a US broker that is willing to deal with US citizens living in Japan. As they are an American company, reporting and tax compliance is greatly simplified. Unfortunately they do not offer NISA accounts yet, but hopefully this will change in the future.
American Citizens Abroad has a range of services and advice for American expats.
If you have a spouse who is not a US citizen nor a green card holder, and as long as you are not filing taxes jointly, they can likely use NISA, iDeCo, and other investment options in Japan. If your spouse has their own income they can use that to invest while the US spouse pays the household expenses, or if you want to give them money to invest be aware of gift tax. Anyone in Japan can receive up to 1.1m yen before needing to declare and pay gift tax.
US citizens living abroad may be able to invest in an IRA account in the US provided they have earned income and meet other requirements. This will be taxable on withdrawal in Japan but might be useful if you end up moving back to the US.
Look into Medicare and whether you can get 40 quarters of credits.
You may be able to get mortgages in the US if you are interested in investing in real estate. More information in this video.
If you have further questions, or would like to share you experience, head on over to the RetireJapan Forum. Reddit’s r/JapanFinance board is also a great place to ask specific questions.