IRAs are tax-advantaged investment vehicles designed to help individuals save for retirement. They can help U.S. citizens monetize their savings and secure their retirement income. But what about Americans who live in a foreign country? Can you still maintain and continue contributing to an IRA account if you live in Japan?
Retirement Planning Basics: What Is An IRA?
IRA stands for “Individual Retirement Account”. An IRA is a tax-advantaged investment account designed to help individuals save for retirement in the United States. There are different types of IRAs, each with unique features and tax implications. The main types of IRA are:
- -Traditional IRA: A Traditional IRA allows individuals to contribute pre-tax income to their retirement account. The contributions are often tax-deductible, which can lower the individual’s taxable income for the year.
The investment earnings within the account grow tax-deferred, meaning taxes are not due until withdrawals are made during retirement. When withdrawals are taken, they are taxed as ordinary income.
- -Roth IRA: A Roth IRA is funded with after-tax income, meaning contributions are not tax-deductible. However, the investment earnings within the account grow tax-free, and qualified withdrawals during retirement are not subject to income tax. This feature can be especially beneficial for those who expect to be in a higher tax bracket during retirement.
- -SEP (Simplified Employee Pension) IRA: A SEP IRA is designed for self-employed individuals and small business owners. It allows them to make tax-deductible contributions on behalf of themselves and their employees.
The contribution limits for SEP IRAs are typically higher than those for Traditional and Roth IRAs. Like a Traditional IRA, investment earnings grow tax-deferred, and withdrawals during retirement are taxed as ordinary income.
- -SIMPLE (Savings Incentive Match Plan for Employees) IRA: A SIMPLE IRA is a retirement plan for small businesses with 100 or fewer employees. Employers are required to make contributions to their employees’ accounts, either through a matching contribution or a non-elective contribution.
Employees can also make salary deferral contributions to SIMPLE IRAs. The investment earnings grow tax-deferred, and withdrawals during retirement are taxed as ordinary income.
Most people contribute to either a traditional IRA or a Roth IRA. Fortunately, if you have one of these, you can keep it even while living abroad. However, there may be restrictions on making new contributions.
Contributing To An IRA From Japan
Traditional and Roth IRA rules allow US-resident Americans to contribute up to $6,000 per year or $7,000 for those over 50 [these limits change from time to time so be sure to check with your advisor]. For US citizens living abroad, IRA distribution rules are the same as for those living stateside.
However, eligibility to contribute to an IRA while living abroad depends on foreign income, exclusions, and deductions, such as the foreign earned income exclusion (FEIE) or foreign housing exclusion.
To contribute to an IRA while abroad, one must have income remaining after deductions and exclusions. If all income is excluded using the “Foreign Earning Income Exemption” (FEIE), you won’t be able to contribute to an IRA. On the other hand, if only part of your income is excluded or you claim your “Foreign Tax Credit” (FTC), IRA contributions may still be possible.
Each situation varies due to compliance rules, tax laws, and country-specific stipulations, making it essential to consult a financial advisor for guidance. A cross-border financial advisor can help you navigate tax laws in both the United States and Japan and help you make the best financial decisions accordingly- whether this be opening a new IRA, maintaining an old IRA, or establishing something different altogether.
Starting An IRA Retirement Account While Living in Japan
There are several options for starting a new IRA from abroad. You could choose, for instance, a U.S.-based IRA or a foreign IRA. If you already have an IRA based in the U.S., you could keep this account while opening and contributing to a new, foreign IRA while you live abroad. You could even close out a current U.S. IRA, withdrawing the funds and using them to open a new account overseas (although there are suitability issues with some asset classes for overseas US tax payers, so make sure that you are deliberate with your investment decisions and know what you’re going).
The best decision, of course, depends on your individual situation and financial goals. It may be best to focus your efforts on an IRA based in the U.S., as foreign investments are taxed differently and are subject to strict reporting requirements. However, if you plan to retire while still in Japan, you may risk double taxation with your U.S. IRA.
This is why it is critical that your financial advisor be familiar with both American and Japanese tax laws. An experienced cross-border advisor will be able to assess your financial situation and your goals and ensure you are making the best investment decisions.