We are Murata Sogo Tax Accounting Office, specializing in inheritance and international taxation, with an office in Miyakojima-ku, Osaka.

In this issue, we would like to discuss the relationship between early withdrawal of U.S. 401k and Japanese tax return, which we have been receiving many questions about recently.

1. Case

I recently made an early withdrawal of retirement benefits related to my 401k from a U.S. company where I worked in the past. After returning from the U.S., I reside in Japan.
I filed a W-8BEN and no taxes were withheld on the U.S. side due to the U.S.-Japan tax treaty. Will I pay the penalty when I file my tax return in the U.S.?
I am a Japanese citizen and do not have citizenship or a green card at the time of withdrawal.

2. Treatment on the U.S. Side 

If you are a non-resident of the U.S., do not have citizenship or a green card, and have filed a W-8BEN and a Form 1042-S has been issued, we believe that you do not need to file a tax return.

The Form 1042-S is a tax form to report income paid to nonresidents in the U.S., which mainly includes U.S.-source income paid to non-U.S. citizens.

3. Treatment on the Japanese Side 

Under the Japan-U.S. tax treaty, annuities are taxed only in the country of residence, so they are taxed as domestic source income in Japan, the country of residence.

Lump-sum payments in lieu of a pension that are paid before the date of commencement of receipt of the pension are treated as temporary income and those paid after the date of commencement of receipt of the pension are treated as miscellaneous income. However, if a lump-sum payment is made after the same date but in lieu of the total amount of future pension benefits, the lump-sum payment shall be treated as a lump-sum payment of temporary income.

Therefore, the income classification is temporary income and subject to tax filing.

In this article, we have looked at the treatment in Japan and the U.S. in the case of early withdrawal of 401k. If you have any questions about similar cases, please contact us through the “Contact Us” form.