Treatment of US Retirement Plans under the US-Japan Tax Treaty

This issue was previously discussed in several posts:

Summary

While we would still like to see some guidance from the NTA, we are now personally convinced that the intention and effect of the US-Japan Tax Treaty is for gains realized within qualifying "pension funds" to be taxed only upon distribution.

Reasoning

Given the language used in the US-Japan Tax Treaty (and other similar treaties), the critical question is whether the taxable owner of the relevant assets (the "final investor", or "最終投資家" in Japanese) is the IRA operator or the account-holder. (One of the very few clear discussions of this issue can be found here.)

Most people's assumption is that the account-holder must be the taxable owner of the assets in a US-based IRA, because the account-holder is the one making purchase/sale decisions, etc. However, there are a variety of sources stating or implying that IRA operators are in fact the taxable owners of the assets they hold, at least for the purposes of the US's bilateral tax treaties.

Perhaps the best source for this assertion is the US Treasury's Technical Explanation of the Treaty (PDF), which expressly clarifies that traditional IRAs, Roth IRAs, and 401(k) plans, among other things, are taxable "pension funds" for the purposes of the treaty. In other words, those pension vehicles are able to benefit from the tax exemptions for "pension funds" contained in the treaty, and thus Japanese-resident holders of those types of US-based accounts should not be taxed on gains realized within the accounts.

I appreciate that it may be counter-intuitive to assert that the IRA operator is the taxable owner of the assets within an IRA account, but despite quite exhaustive research, I have not been able to find meaningful support in either English or Japanese for the view that the account-holder is the taxable owner prior to distribution. Furthermore, if the account-holder was the taxable owner, the relevant provisions of the US-Japan Tax Treaty (as well as many other bilateral tax treaties) would be rendered somewhat incoherent, which was presumably not the intention of either party.

So in light of the US Treasury's Technical Explanation, and in the interests of rendering the US-Japan Tax Treaty coherent, I think there is a good foundation for the view that US-based IRAs held by Japanese residents are generally taxable only upon distribution, from the perspective of Japanese tax law. And as noted previously, this position seems to align with those expressed publicly by licensed professionals here and here.

Q&A

Is the entire payment considered income, or is it just the increase over our contributions?

There may be some variation depending on how the payment is received (lump-sum vs. annuity), but in general it is only the increase in value that is taxable.

Are Roth and traditional treated different, as one has already been considered income once?

No, both types of contributions are treated as income from the perspective of Japanese tax law, so the treatment upon distribution is the same (increase in value compared to the contributions).

What about traditional to Roth rollovers?

My instinct is that a direct rollover would not be a taxable distribution while an indirect rollover would be a taxable distribution, though I don't have a source to support this position.

Is the government going to look at us weird if we are getting pension distributions before age 60?

I don't think so. It's not unusual in Japan for companies to pay "retirement income" to employees when they leave the company, even if the employee has not yet reached retirement age. There are no age thresholds associated with the relevant categories of income.

Aren't these retirement accounts not really pensions in a real sense?

As described above, both Roth and traditional IRAs expressly qualify as "pension funds" under the US-Japan Tax Treaty.