By Dako
A 401(k) is an American object. It lives at an American custodian, follows American rules, and reports to the IRS on American forms. Ask most people in our position what happens to it after a move to Japan and you’d get a shrug. It’s a US account, so the US taxes it. Japan gets the money we spend there.
That’s roughly what I assumed until I started reading the Japanese side. Japan doesn’t tax the account. It never sees the account. What it sees is a person living in Japan who received some money, and it asks one question: what kind of income is this?
That question has no official answer for a 401(k). It has a mainstream one, a few places where the professionals disagree, and a treaty on top that helps one of us more than the other. We’ve promised this post twice, in the 401(k) post and in the account survival guide. Here it is.
Japan doesn’t tax the account. It taxes the withdrawal.
Japanese income tax sorts every yen you receive into one of ten categories, and the category decides the deductions and the rate. Salary goes in one box, pensions in another, a one-off windfall in a third. A withdrawal from a US retirement plan has to land in one of them, and the tax code was not written with a 401(k) in mind.
The practice that most Japanese tax firms follow, as far as I can find, splits it by shape. Take the money as a lump sum and it’s “occasional income,” the same box as a lottery prize or an insurance payout. Take it as periodic payments and it’s “miscellaneous income,” the catch-all box that also holds pensions.
Occasional income has a generous formula. Subtract what you spent to earn it, subtract a ¥500,000 special deduction, then cut the result in half before it joins your other income at ordinary progressive rates. For a lump-sum 401(k), “what you spent to earn it” is where the disagreement starts. Your own contributions count, on the firm reading I trust most, which cites a 2015 tax bulletin on the point. Whether the employer match counts is where I found professionals on both sides.
Miscellaneous income has no half-off. Periodic payments are taxed in full after expenses. Japan does have a public pension deduction that shelters a large slice of pension-type income, and it extends to foreign systems that resemble social insurance. US Social Security qualifies. A 401(k) or an IRA, on the mainstream reading, does not. It’s an employer plan or a brokerage product, not a social insurance scheme. I did find one report of a tax office treating 401(k) withdrawals as public-pension income, so the line isn’t as clean in practice as it is in the commentary.
Here’s the part that unsettled me. I went looking for the National Tax Agency’s own answer, the kind of published ruling it issues for questions that come up often enough. There isn’t one for a 401(k). Nothing for an IRA either. Every classification above is a practitioner’s opinion. A good one, but not the agency’s. Anyone telling you the Japanese treatment is settled is telling you something the agency itself hasn’t said.
What the treaty does, and who it doesn’t help
The tax treaty is the piece most articles reach for first. It does real work. Its pension article says that pensions and similar payments belong to the country where the recipient lives. A Japan resident’s pension is taxable only in Japan. The IRS’s own treaty table lists Japan at 0% withholding on pensions and annuities, and its note says that column covers periodic and lump-sum payments alike unless a treaty says otherwise. Japan’s entry doesn’t.
For me, in a future where I’ve given up the green card and become a nonresident alien, that’s the whole game. The default US withholding on a pension payment to a nonresident is 30%. A Form W-8BEN to the plan, claiming the treaty, brings it to zero. Some custodians withhold anyway, and the remedy is a 1040-NR to get it back, because Japan won’t give a credit for US tax the treaty says shouldn’t have been charged. We walked through that paperwork already.
For Jay, the treaty barely moves. The US taxes its citizens wherever they live, and the treaty’s saving clause preserves that. The pension article isn’t on the short list of exceptions. So a US citizen drawing a 401(k) in Japan files a US return on it as always, files a Japanese return on it as a resident, and untangles the overlap through foreign tax credits. Nobody pays twice on the same dollar by design. Somebody does file twice.
One more US-side wrinkle, flagged without resolving it. The 10% additional tax on early withdrawals is another open question. I couldn’t find a clear answer on whether Japan’s foreign tax credit would touch it. A question for a professional, and a reason not to draw early from Japan if you can help it.
Timing is a tax variable
The treaty and the categories describe what Japan taxes. When Japan starts taxing it depends on who you are.
Jay, as a foreign national, would spend roughly his first five years in Japan as a non-permanent resident. Foreign-source income is taxed in Japan only to the extent it’s paid into Japan or remitted there. A 401(k) distribution is foreign-source income. Paid to a US account and left in the US, it’s outside Japanese tax for those years. Wire money from the US to Japan in the same year, though, and the remittance is treated as carrying foreign income with it, regardless of which account the money came from. Send in the amount of the distribution and you’ve taxed the distribution.
I don’t get that window. I’m a Japanese national, so I’m a full resident from the first day back, taxed on worldwide income. Our dual-residency post covers how a split year decides which country claims you at all. This post is about what happens after Japan does.
Put those two facts side by side and you get an odd result. The person the treaty helps least, Jay, has the five-year window. The person it helps most, me, has no window and no treaty relief until I’ve stopped being a US tax person. For a couple, that isn’t a problem. It’s a sequencing tool.
What this changes for a couple like us
We haven’t moved, and we may never fully move. What this reading changed is which questions we’re asking about the retirement accounts, which used to be none.
Whose account gets drawn first is now a tax decision, not a balance decision. Each 401(k) is in one name because the law insists, and the two names carry different rules on both sides of the ocean. Drawing from Jay’s during his non-permanent years, paid into a US account, keeps Japan out of it for that period. Drawing from mine in the same years pulls it into Japanese categories immediately.
The shape of the withdrawal matters more than it does in the US. At home, a lump sum and a series of payments are both ordinary income. In Japan they land in different boxes with different deductions, and the lump sum’s half-off rule is a real difference for a large balance. The green card decision sits underneath this too. If I hand it back as a covered expatriate, the IRA is treated as distributed the day before I leave, on the US side, before Japan has said a word. That’s a different post, and the cost of keeping the card is another.
The Roth is its own problem. Japan doesn’t recognize the tax-free qualified distribution. The practitioner view is that a Roth withdrawal falls into the same two boxes as everything else, with some arguing only the growth is taxable. What to do about that before a move, and whether to convert first, deserves a post of its own, and it’s on our calendar.
And sending money to Japan now has a tax meaning it didn’t have before. For a non-permanent resident, a wire isn’t just a wire. Which of us sends what, and in which year, changes what gets taxed, so the transfer schedule is now part of the tax plan.
Jay here. Here’s where I started. My 401(k) is a US account at a US company. I assumed that if we moved it would stay exactly that, same rules, viewed from farther away. The idea that Japan would look at a withdrawal and file it under “occasional income,” the lottery-winnings box, was news to me this week. So was the fact that the tax agency there hasn’t actually said what a 401(k) is. I can’t read the source material. What I can do is hold the decision that’s mine: whether the first money we draw in Japan comes from my account or Dako’s, and in which year. That turns out to be a real lever, and I’d rather pull it on purpose.
We’re not restructuring anything today. The accounts stay where they are and keep doing what they do. What we’d want before any distribution in Japan is a Japanese professional’s opinion, with shape, name, and remittance plan already decided. The categories are unsettled enough that we’d rather pay for an opinion than guess at one.
FAQ
Does Japan tax my 401(k) balance when I move there?
No. Japan taxes withdrawals, not balances. Growth inside the plan isn’t Japanese income until you take a distribution. A non-permanent resident who keeps distributions in the US and doesn’t remit funds to Japan can stay outside Japanese tax on them for the first five years.
Is a 401(k) lump sum “retirement income” in Japan?
The mainstream practitioner view treats a lump sum as occasional income, with half the net amount taxed at ordinary rates. I couldn’t find a published National Tax Agency ruling or a firm that applies the retirement-income category to a US 401(k). Ask a professional before assuming either.
Does the treaty mean I only pay Japan?
For a Japan resident who isn’t a US citizen, yes, once you’ve claimed it on Form W-8BEN with the plan. For a US citizen, the saving clause keeps the US in the picture, and relief comes through foreign tax credits rather than exemption.
Does Japan give me the public pension deduction on 401(k) or IRA payments?
Probably not. That deduction covers foreign systems that resemble social insurance, which fits Social Security but not an employer plan or an IRA in the usual practitioner view. Treatment at individual tax offices has varied, so confirm rather than assume.
What about my Roth IRA?
Japan doesn’t honor the US tax-free treatment. Withdrawals fall into the same categories as any other distribution, and views differ on whether only the growth is taxed. We’re writing about the Roth separately.
This article is general information about US and Japanese tax rules as we understand them, not tax advice. The Japanese classification of US retirement plan distributions is not settled by published guidance, and outcomes vary by facts and by tax office. Please consult qualified professionals in both countries before taking a distribution, and see our Disclaimer for details.