I'm a 35-year-old American living in Japan. How can I build long-term wealth without a 401(k) or Roth IRA?

By Aditi Shrikant

'Some financial institutions limit services for customers with foreign addresses'

"How should an American abroad balance U.S. and foreign accounts, manage currency and transfer costs?" (Photo subjects are models)

Dear Dollar Signs,

I am 35-year-old in Japan and seek a practical, tax-compliant strategy.

How can an American citizen living and working abroad - in my case, Japan - build long-term wealth when many of the usual U.S. financial tools are unavailable or impractical? Are there realistic substitutes for the 401(k) and Roth IRA?

Investing locally can be equally challenging. Foreign mutual funds may trigger burdensome U.S. tax and reporting requirements, and Japan's tax-advantaged NISA and iDeCo accounts may offer limited benefits if the U.S. does not recognize their preferential tax treatment.

In addition, worldwide income reporting, foreign account disclosures, currency fluctuations and transfer costs can make saving and investing more complicated and expensive. Some financial institutions limit services for customers with foreign addresses.

How should an American abroad balance U.S. and foreign accounts, manage currency and transfer costs, and avoid investments that create disproportionate tax or reporting burdens? Are there realistic alternatives to the retirement and investment advantages available in the U.S.?

An American Living Abroad

If you're just starting out on your money or career journey and have questions about how to navigate your finances, we want to hear from you. Write to Dollar Signs, MarketWatch's new advice column, at dollarsigns@marketwatch.com.

Dear American,

Just reading this letter, I can feel your anxiety. You've obviously done a lot of research and are frustrated with your options. And, to be honest, you are right to be: Retiring abroad isn't as dreamy as it seems. And using American tools when you're living in Japan is especially hard.

There are no exact replacements for a 401(k) or Roth IRA. Your best plan may be a combination of existing U.S. retirement accounts, taxable brokerage investing and diligent saving. The biggest mistake many Americans abroad make is chasing local tax-advantaged products that appear attractive, but require you to jump through U.S. tax and reporting hoops.

Plan ahead before moving, says Narumi Yoshida, a certified financial planner who specializes in cross-border financial planning with a specific focus on Japan. "For most Americans, the foundational rule is to keep your financial center of gravity in the U.S.," he says.

If you already have a 401(k) and IRA, let them continue to grow. Brokerage accounts are tricky though, Yoshida notes, as you'll need an American address to maintain one. Some expats navigate this hurdle by using the address of a family member or power of attorney.

However, using a U.S. address that is not in your actual country of residence to maintain a brokerage account can violate brokerage rules and regulatory requirements - leading to restrictions imposed on your account, and the closure or freezing of those assets.

You have a window as a nonpermanent resident that lasts about five years, during which foreign-sourced income - such as dividends and capital gains generated in your U.S. accounts - is not taxed by Japan if you keep those funds in the U.S. during the same calendar year.

"It takes discipline to keep that cash flow properly isolated, but it's a meaningful planning opportunity if it's done correctly," Yoshida says.

Similar Japanese retirement accounts

You ask if there are "realistic substitutes for the 401(k) and Roth IRA." Those would be the local Japanese retirement accounts, like NISA and iDeCo, that you mention. But - and it seems like you know this - "you need to exercise real caution," Yoshida says. These work well for Japanese residents, but the U.S. does not recognize their tax-exempt status.

"You take on extra reporting and compliance, without getting any of the tax relief that makes the account attractive in the first place," he says.

Many Japanese funds are designed to benefit Japanese residents only, and while they might look good on paper, they end up costing way more when you're filing U.S. taxes. Japanese mutual funds and domestic Japanese ETFs get classified as passive foreign investment companies, or PFICs, and can be taxed quite heavily.

"It isn't that these Japanese products are bad investments on their own terms," according to Yoshida. "It's that the U.S. tax treatment can erase most of their value once it's layered on top. A fund that looks attractive on paper in Japan can end up costing far more once it hits a U.S. tax return."

This said, there are other countries that are a bit more American-friendly than Japan when it comes to building wealth and preparing for retirement. Panama, for example, does not tax U.S. retirement income, and you can maintain a U.S. retirement account with a Panama address. Costa Rica is another popular retirement destination for Americans, as it does not tax foreign-sourced income.

I understand these places are very different from Japan - but if you are determined to retire somewhere outside of the U.S., you might want to keep your options open.

Keep short-term savings and day-to-day spending funds in yen (TICKER: USDJPY) if you expect to remain in Japan for the foreseeable future. Long-term retirement assets can stay invested in globally diversified securities, given that your future expenses are likely to be in both yen and U.S. dollars.

Write to Dollar Signs at dollarsigns@marketwatch.com.

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-Aditi Shrikant

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07-02-26 0849ET