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How Is a 401(k) Taxed in Japan? A Guide for Americans Living in Japan

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Hello, my name is Taisei Koshida, and I am a certified public accountant and licensed tax accountant in Japan.

When I speak with Americans living in Japan, I often meet people who moved to Japan while leaving their 401(k) accounts in the United States.

First, let me make the basic Japanese tax treatment clear.

Distributions from a 401(k) are generally treated in Japan as miscellaneous income other than public pension income.

Income from a 401(k) is also foreign-source income — in this case, U.S.-source income.

Therefore, if you are a non-permanent resident of Japan, a 401(k) distribution received outside Japan is subject to Japan’s remittance-based taxation rules.

Once you are no longer a non-permanent resident, Japan taxes your worldwide income.

At that point, the distribution is taxable in Japan regardless of whether you remit the money to Japan.

This is the basic starting point.

For a broader explanation of the difference between non-permanent resident taxation and worldwide taxation, see What Happens to Your Japanese Taxes After Living in Japan for 5 Years? A Guide for Americans.

1. If You Receive a Traditional 401(k) Distribution While Living in Japan, Japan Taxes It

If you receive a distribution from a Traditional 401(k) while living in Japan, you need to consider Japanese taxation as well.

“It came from a U.S. retirement account, so it is not taxable in Japan” is not correct.

In Japan, the distribution is generally treated as miscellaneous income other than public pension income.

It is also U.S.-source income.

Therefore, for a non-permanent resident, Japanese taxation depends on the remittance rules. Once you are no longer a non-permanent resident, the distribution is taxable in Japan regardless of whether you remit the money to Japan.

2. Do You Report the Investment Income Inside a 401(k) Every Year in Japan?

This is a question I am often asked.

Inside a 401(k), stocks, ETFs, mutual funds and other investments may be bought and sold. Dividends and interest may also be generated.

Does that mean you need to report capital gains, dividend income and interest income in Japan every time they arise inside the account?

If we read the Japanese tax rules strictly, taxation in Japan needs to be considered.

The tax deferral provided to a 401(k) is a policy benefit under the U.S. tax system.

The fact that the United States defers taxation does not mean that the same tax deferral automatically applies under Japanese tax law.

Japanese tax law does not contain a clear provision that gives U.S. 401(k) accounts a blanket tax exemption or tax deferral for income generated inside the account.

In practice, however, the treatment generally seen to date has been not to tax each individual item of investment income inside a 401(k) every year, but instead to calculate Japanese taxation when an actual distribution is made.

Therefore, in practice, a 401(k) is generally considered separately from an ordinary brokerage account, and Japanese tax is calculated when a distribution is actually received.

3. Do Not Simply Use the Taxable Amount on Form 1099-R

When you receive a 401(k) distribution, Form 1099-R is generally issued in the United States.

It shows items such as:

However, the taxable amount for Japanese purposes is not necessarily the same as the taxable amount shown on Form 1099-R.

Form 1099-R is prepared under U.S. tax law.

In Japan, miscellaneous income other than public pension income is calculated under Japanese tax law.

Form 1099-R is an important document, but it is not the answer to your Japanese taxable income.

This is similar to U.S. stocks: you cannot simply take the capital gain shown on Form 1099-B and use it as the Japanese capital gain.

4. The Entire Distribution Is Not Necessarily Japanese Taxable Income

When you receive a 401(k) distribution, the entire amount received is not necessarily treated as miscellaneous income in Japan.

For miscellaneous income other than public pension income, Japan basically calculates income as:

Gross income − Amount spent to earn that income

Therefore, the cost associated with contributions accumulated in the 401(k) needs to be calculated for Japanese tax purposes.

This is an important difference from the U.S. calculation.

5. Employer Matching Contributions Are Generally Included in the Cost

A 401(k) may consist of:

When calculating miscellaneous income in Japan, not only employee contributions but also employer matching contributions are generally included in the cost of the 401(k).

For example, suppose a 401(k) has the following amounts:

The total balance is $400,000.

For Japanese tax purposes, we do not simply treat the entire $400,000 as income. Instead, we need to identify and calculate the historical contributions as cost.

In other words, we distinguish the amounts originally accumulated in the 401(k) from the amounts generated through investment growth.

In practice, looking only at the distribution statement is not enough.

The historical contribution records are important.

6. Historical Contributions Must Be Converted into Japanese Yen

This is another important practical point.

Japanese taxable income is calculated in Japanese yen.

Therefore, when calculating historical contributions as cost, you cannot simply take the total dollar contributions and convert them into yen using the current exchange rate.

At a minimum, the contributions need to be converted into yen on a year-by-year basis to reconstruct the Japanese tax cost.

For example:

Each year’s contribution needs to be converted into yen using the relevant exchange rate for that year.

For someone who has contributed to a 401(k) for 20 or 30 years, this can become a substantial amount of work.

Finding the current 401(k) balance is easy.

Reconstructing the historical cost in Japanese yen is the difficult part.

7. Japan Allows the Cost of Contributions to Be Deducted

This is one favorable aspect of the Japanese treatment.

In the United States, distributions from a Traditional 401(k) are generally taxable as income.

In Japan, however, because the distribution is calculated as miscellaneous income other than public pension income, the historical contributions can be deducted as cost.

In simplified terms:

Distribution − Cost calculated in Japanese yen = Japanese miscellaneous income

Of course, if only part of the 401(k) is distributed, the corresponding cost needs to be allocated reasonably.

As a result, the Japanese taxable amount can be quite different from the taxable amount shown on Form 1099-R.

8. A 401(k) Distribution Is Miscellaneous Income Other Than Public Pension Income in Japan

For Japanese tax purposes, a 401(k) distribution is treated as miscellaneous income other than public pension income.

A 401(k) may look similar to a Japanese defined contribution pension plan, but that does not mean the Japanese tax treatment for a Japanese defined contribution pension automatically applies.

A 401(k) is a retirement plan established under U.S. law.

Therefore, the Japanese public pension deduction is not used to calculate the income.

The basic calculation is:

Gross income − Necessary expenses

9. Check the Japanese Tax Before Taking a Large Lump-Sum Distribution

Suppose you have $500,000 in a 401(k) and think:

“I moved to Japan, so I will just withdraw the whole amount.”

In Japan, the taxable portion is treated as miscellaneous income other than public pension income and is subject to aggregate taxation.

Therefore, a large distribution can create a large amount of income in a single year.

Japanese income tax is progressive, and resident tax also needs to be considered.

If you are planning a large lump-sum distribution, it is better to check the Japanese tax consequences before you take the distribution.

Once you receive it, you cannot make the distribution disappear for Japanese tax purposes.

10. Non-Permanent Residents Need to Check Remittances

A 401(k) distribution is U.S.-source income.

Therefore, if you are a non-permanent resident of Japan and receive the distribution outside Japan, Japan’s remittance-based taxation rules need to be considered.

For example:

That is not the end of the analysis.

We need to check whether you made any remittances to Japan during the same year.

A remittance is not limited to a bank transfer.

Using a U.S. credit card in Japan can also be treated as a remittance.

For more on this point, see Does Using a U.S. Credit Card in Japan Count as a Remittance?

11. Once You Are No Longer a Non-Permanent Resident, Remittance Does Not Matter

This part is simple.

Once you are no longer a non-permanent resident, Japan taxes your worldwide income.

If you receive a 401(k) distribution, it is taxable in Japan.

It does not matter if you leave the money in a U.S. bank account.

It does not matter if you leave it in the United States.

Whether you remit the money to Japan is no longer relevant.

Remittance-based taxation applies to foreign-source income only while you are a non-permanent resident.

12. U.S. Tax and Japanese Tax Need to Be Calculated Separately

A 401(k) is a U.S. retirement plan, so a distribution also has U.S. tax consequences.

However, the amount taxable in Japan is not determined by the amount taxable in the United States.

The United States applies U.S. tax rules.

Japan applies Japanese tax rules.

As a result, the U.S. taxable amount and the Japanese miscellaneous income from the same distribution can be different.

I do not prepare a Japanese tax return simply by copying the numbers from Form 1099-R.

13. The Distribution Must Also Be Converted into Yen

If a 401(k) distribution is paid in U.S. dollars, the income needs to be calculated in Japanese yen.

For example, if you receive $30,000, you cannot simply enter the dollar amount shown on Form 1099-R on your Japanese tax return.

The yen value of the distribution needs to be compared with the yen-denominated cost calculated from your historical contributions.

This creates an important difference:

The distribution is valued in yen when it is received.

The cost comes from the historical yen value of the contributions.

If exchange rates have changed substantially over the years, this can have a significant effect on the Japanese taxable income.

14. Documents I Usually Check

For a 401(k) tax calculation, I usually check documents and information such as:

For someone who has held a 401(k) for many years, old contribution records may no longer be easy to find.

Finding the balance is easy.

The difficult part is reconstructing the cost of that balance in Japanese yen.

15. Frequently Asked Questions

Q. Is a 401(k) distribution taxable in Japan?

Yes. It is generally treated as miscellaneous income other than public pension income. If you are a non-permanent resident, the remittance rules need to be considered. If you are no longer a non-permanent resident, the distribution is taxable in Japan regardless of remittance.

Q. Do I report the investment income inside my 401(k) every year in Japan?

Strictly speaking, Japanese tax law does not contain a rule that automatically extends the U.S. 401(k) tax deferral to Japan. In practice, however, the treatment generally seen to date has been to calculate the Japanese tax when an actual distribution is received rather than taxing each individual item of income inside the account every year.

Q. Can I simply use the Taxable Amount on Form 1099-R for my Japanese tax return?

No. The taxable amount on Form 1099-R is calculated under U.S. tax law. Japan calculates miscellaneous income under Japanese tax law.

Q. Are employer matching contributions included in the Japanese tax cost?

Generally, yes. When calculating the Japanese cost of the 401(k), both employee contributions and employer matching contributions are considered.

Q. Can I convert all my historical contributions using today’s exchange rate?

No. At a minimum, the contributions need to be converted into Japanese yen on a year-by-year basis to calculate the Japanese tax cost. This becomes particularly important for someone who has contributed to a 401(k) for many years.

Q. Can I deduct my historical contributions in Japan?

Yes. Because the distribution is calculated as miscellaneous income other than public pension income, the corresponding historical cost can be deducted in calculating the Japanese taxable income. This differs from the general U.S. treatment of distributions from a Traditional 401(k).

Q. Is my 401(k) distribution tax-free in Japan if I do not remit it to Japan?

If you are a non-permanent resident, the remittance-based taxation rules need to be considered. Once you are no longer a non-permanent resident, remittance does not matter. The distribution is taxable in Japan even if the money remains in the United States.

Q. If I do not make a bank transfer to Japan, does that mean I made no remittance?

No. Using a U.S. credit card in Japan can also be treated as a remittance.

Q. Can I use Japan’s public pension deduction for a 401(k)?

No. A 401(k) distribution is generally calculated as miscellaneous income other than public pension income in Japan.

16. For a 401(k), I Look at the Cost, Not Just the Distribution

For a Japanese tax return involving a 401(k), Form 1099-R alone is not enough.

First, the distribution is generally treated as miscellaneous income other than public pension income.

If you are a non-permanent resident, the remittance rules need to be considered.

If you are no longer a non-permanent resident, Japan taxes your worldwide income.

Then, both the distribution and the historical contributions need to be calculated in Japanese yen.

For someone who has contributed to a 401(k) for many years, reconstructing the historical contributions in Japanese yen can be the most difficult part of the calculation.

In the United States, distributions from a Traditional 401(k) are generally taxable. In Japan, however, the historical contributions can be deducted as cost.

In that sense, this can be one favorable aspect of the Japanese calculation.

Contact

Koshida Accounting and Tax Office provides Japanese tax return preparation and international tax support for foreign residents, particularly Americans living in Japan.

If you have questions about the Japanese tax treatment of a 401(k), Traditional IRA, Roth IRA, or remittance-based taxation for non-permanent residents, please feel free to contact us.

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