This is Murata General Tax and Accounting Office, a firm based in Miyakojima-ku, Osaka City, specializing in inheritance and international taxation.
In this article, we summarize the Japanese tax implications of receiving benefits from 401(k) and IRA accounts, which are frequently asked about by individuals who have returned to Japan from the United States.

 
1. Taxation on 401(k) and IRA Distributions

(1)
According to Article 17(1) of the Japan–U.S. Tax Treaty,

“Pensions and other similar remuneration paid to a resident of one Contracting State in consideration of past employment shall be taxable only in that State.”
Here, “one Contracting State” refers to Japan, if the recipient resides in Japan. Therefore, 401(k) and IRA distributions are taxable only in Japan.
(Note: U.S. citizens and U.S. green card holders remain subject to U.S. taxation under U.S. domestic law, even if they reside in Japan.)

In particular, many U.S. citizens who are treated as non-permanent residents in Japan mistakenly believe that taxation does not apply if they do not remit the funds to Japan. However, taxation arises at the time of receipt, regardless of whether the money is transferred to Japan. A Japanese income tax return must therefore be filed.

 
(2)
Such distributions fall under “pensions based on life insurance contracts, etc.” as described in Income Tax Basic Interpretation 35-1(8), and are therefore classified as miscellaneous income (zatsu shotoku).
The reason that 401(k) and IRA plans are treated as “life insurance contracts, etc.” is that they fall within the definition of retirement mutual benefit contracts under Article 183(3)(ii) of the Income Tax Enforcement Order, as referenced by Article 73(1)(i) of the same Order.

However, Income Tax Basic Interpretation 35-3 provides that:

“Payments made in substitution for the total future pension benefits may be treated as income from a lump-sum payment.”
Accordingly, depending on the payment structure, such distributions may alternatively be reported as “temporary income (ichiji shotoku)” rather than miscellaneous income.

 
2. Can Contributions to U.S. IRAs and 401(k) Plans Be Deducted from Taxable Income?

This is the main point of this article.

Under Article 183(1)(ii) of the Income Tax Enforcement Order, the amount of contributions (premiums paid) can be deducted from either miscellaneous income or temporary income.
Since 401(k) and IRA distributions qualify as “pensions based on life insurance contracts, etc.,” it is permitted to deduct the portion corresponding to total contributions (including employer contributions) from the taxable amount of the benefit received.

The deductible contribution amount is calculated using the following formula:

Benefit amount received during the year × (Total amount of contributions ÷ Total expected benefit payments)
Furthermore, as noted in Income Tax Basic Interpretations 34-4(2) and 35-4(2), the employer-paid portion of contributions is also deductible.

 
In this article, we have summarized the key Japanese tax considerations concerning 401(k) and IRA distributions, which are among the most frequently asked topics by returnees from the United States.
In particular, the deduction of contributions (the contribution portion) is often overlooked, so please take special care to include it when preparing your tax return.

If you have any questions or would like to discuss your specific situation, please feel free to contact us through our inquiry form.