For many people, retirement is supposed to be the beginning of your freedom. But the truth is that achieving the financial freedom to support you in retirement requires careful planning, investment, and saving many years in advance. All the more so for foreign people living abroad in countries like Japan. American citizens, in particular, face extra challenges when it comes to planning their retirement in Japan. No one can rely on government pension plans to fully support them in retirement, so many foreign people invest in private retirement accounts like NISA to supplement their retirement income with the returns. Americans, however, must take extra measures when choosing private retirement accounts to account for tax laws in both countries and be aware of the IRS tax treatment of otherwise tax-free Japanese investment accounts like the NISA and iDeco.
Tax Free Investments In Japan – What Is a NISA Account?
Pension systems around the world are underfunded, and the payouts to their retirees are far less than the average annual income in their respective countries. This is why governments around the world have turned to encouraging their citizens to invest in private retirement accounts. The United States created 401Ks and IRAs, and other similar tax-efficient accounts. The United Kingdom offers ISA accounts and insurance wrappers. Canada has the TFSA. Following this lead, in 2014 Japan launched its own version, the NISA.
NISA (Nippon Individual Savings Account) is one of two commonly suggested retirement accounts for foreigners in Japan. It is an investment account that offers tax privileges to its contributors, allowing them to maximize returns on their savings and investments. NISA is split into two categories: regular and “Tsumitate”.
Regular NISA: A regular NISA account is a short-term investment account that allows the contributor to invest up to 1.2 million yen per year for up to 5 years at their discretion. At the end of the 5-year period, the contributor may reinvest his or her capital gains in a new NISA account without being taxed. (Recently, there have been some large developments that propose to extend NISA accounts. Until further notice, however, the current limit of the regular NISA remains at 5 years.)
Tsumitate NISA: This monthly investment version of the regular account allows much longer-term investing for contributors, although the total yearly investment limit is much lower than a regular NISA. Investors who choose a Tsumitate NISA may invest up to 400,000 yen per year for up to 20 years.
What Are the Benefits of Investing in a Retirement Account in Japan?
A private retirement account is one of multiple tools you should consider for ensuring your financial future. Such an investment comes with multiple benefits, including:
- -Flexible investing that allows you to make contributions according to your income level and expenses without government restrictions and limits
- -Compounding interest that allows your wealth to grow and maximizes your return on investment
- -Diversified investment portfolio options that allow you to choose investments according to your goals and needs as opposed to having to choose from a limited range of options
- -Peace of mind in knowing your financial future is secure
While NISA accounts in Japan may not offer all of these benefits, there are other international retirement options that do. There might be more appropriate English-language services available for US taxpayers outside of Japan. Particularly when considering the tax implications for a US taxpayer using a Japanese NISA account.
Are Japanese NISA Accounts Taxed for Americans?
The U.S. Internal Revenue Service (IRS) recognizes some investment accounts as non-taxable. Unfortunately, NISA accounts are not included in this consideration. Instead, they fall under the class of investments which can be treated as PFICs – or Passive Foreign Investment Companies. Thus, while Americans do have the option of investing in NISA, they must navigate complex rules and regulations in order to protect their investments and gain the same benefits as other non-American contributors.
Americans intending to invest in NISA may be able to protect their assets through trusts or companies. However, arranging these can be expensive and complicated. Most people will find greater benefit in choosing domestic investment accounts that are domiciled in the United States.
What Are Other Retirement Account Options for Americans in Japan?
Americans living in Japan have many options for investment and retirement accounts. Any of the following can help you avoid the tax troubles of trying to invest in NISA:
- American 401(k) Accounts – Many American companies allow their employees to contribute to 401(k) retirement accounts. 401(k) accounts usually offer tax incentives and long-term investment benefits, making them a great option for Americans. Even if you aren’t currently working for an American company, if you have an account with a previous company, they may continue to allow you to make investments. If you previously invested in a 401(k) account but can no longer make contributions, you may be able to use a rollover account to get many of the same benefits.
- American IRAs or Roth IRAs – IRAs are Individual Retirement Accounts. A Roth IRA allows you to contribute your after-tax income. The money you invest will grow free of tax, and you can make tax-free withdrawals after you reach 59 and ½ years of age. A Traditional IRA allows you to contribute before-tax income. The investments in a traditional IRA also grow tax-free, but you will be charged income tax upon withdrawal of the funds.
- American Domestic Brokerage Account – The simplest and most direct option is to open up a brokerage investment account in America. This ensures that you will not run into any tax issues with the IRS from accidentally investing into offshore PFIC investments and provides the peace of mind knowing exactly where your investments savings are. In addition, it makes year-end tax filing for Americans much easier. This is because US onshore brokerage accounts will provide you an automatically generated summary of all transactions, gains and losses, interest and dividends. Like IRAs, a US brokerage account could be self-managed, or managed by a licensed fiduciary registered investment advisor (RIA).
- A domestic partner’s Japanese or foreign accounts – If you are partnered with a non-American, you may be able to store your wealth in the accounts of your partner. This may be through contributions to a short-term NISA, allowing you to maximize the benefits of the accounts and then share or split the gains. Alternatively, you may be able to set up an international investment or retirement account under your partner’s name and take advantage of international investment opportunities.
While choosing and investing in the right accounts for Americans in Japan may seem complex, there are many resources that can aid you. An experienced financial advisor can help you navigate the available options according to your unique situation. An expert will also help you devise a comprehensive financial plan to set you up for ensured financial freedom in the future. Don’t leave your retirement to chance or wait until it’s too late to plan. Talking to an advisor today will best enable you to secure your quality of life after your career.