How to Save Your Tax in the U.S. Pension System


Do you have a solid life design plan after you retire?

In Japan, Financial Service Agency announced that you need to save 20 million yen in addition to public pension plan before your retirement, which made Japanese people really agitated. On the other hand, recently, early retirement planning such as FIRE (Financial Independent, Retire Early) has become a hot topic.

According to the announcement by Fidelity, an American securities company that maintains a “customer first” principle, it is recommended to save 10 times the annual income by the age of 67 when expecting general retirement.

It is also recommended that you save at least the same amount as your annual income by the age of 30, more than three times your annual income by age 40, more than six times your annual income by age 50, and eight times your annual income by age 60.

How much do I need to retire? | Fidelity
Here's a simple rule for calculating how much money you need to retire: at least 1x your salary at 30, 3x at 40, 6x at 50, 8x at 60, and 10x at 67.

However, in fact, it seems that the percentage of people who have achieved the goals by each age is very small.

I would like to introduce the U.S. pension system and tax saving methods for people who have been living in the U.S. for a long time and those who is planning to move into the U.S..

U.S. Pension System

In Japan, pension systems are complicated, but in the United States, including public and private pensions, it is even more complicated.

In this section, I will introduce such a complex pension system in the United States one by one.

Public Pension System

The first thing I want to introduce is social security, which is a public pension system in the United States.

Social security is a public pension system managed and provided by the U.S. federal government, and it is similar to the public pension system in Japan.

Social security is designed to cover 40% of the average family’s retirement costs.

Social security premiums are collected by the IRS (Internal Revenue Service) as social security tax, and benefits are provided by SSA (Social Security Administration).

While employed in the U.S., 6.2% of the salary is withheld as a social security tax, and the employer must also pay the same amount.

The maximum taxable salary for social security tax is $142,800 (as of 2021), or $8,854 for employee’s maximum tax payment.

You must be 62 years old or later to receive social security, and you must provide 40 credits of labor in the U.S. to be eligible.

If your Social Security taxes exceed a certain amount each quarter, you can get 1 credit and up to 4 credits per year. In other words, if you continue to work for 10 years in general, you will be eligible to receive the benefits.

If you work in the U.S. for less than 10 years, you will not be eligible for social security, but the Japan-U.S. Social Security Agreement enables Japanese people to add enrollment period in Japanese public pension system to your credit.


Please note that the number of credits does not affect the amount of social security you receive. It is used solely to determine eligibility.

The amount of social security you determine is the age at which you start receiving benefits and your average income when you work in the U.S.

If you were born after 1960, you will receive a full amount if you start receiving the social security after the age of 67. As for when you start receiving social security, you can set the starting age to 62 or procrastinate to 70.

However, if you start receiving the social security at the age of 62, the amount of social security you can receive will be reduced by 30% compared to what you receive after you reach the full age.

The amount of social security received is determined by the average income, but it doesn’t include all of the time you’ve worked in the U.S., but it’s calculated over the 35 years that you’ve earned the most.

If you move from Japan to the U.S., it could be that the number of years of work in the United States is less than 35 years. In that case, when there is no income, it is counted as zero for the calculation, and the amount received will decrease.

In addition, there is a cap on the amount of social security you can receive, and in 2021, it will be a limited to $3,113 per individual ($3,895 if you extend the start of the receiving until the age of 70).

The United States Social Security Administration | SSA
Official website of the U.S. Social Security Administration.

Types of Social Security

There are three main types of social security: Retirement Benefits, Survivors Benefits, and Disability Benefits.

Retirement Benefits

Typical social security pensions are retirement benefits.

At a certain age, money will be automatically paid monthly after application regardless of whether you are retired or not.

As mentioned earlier, you can start receiving the retirement benefits from the age of 62, but the earlier you apply, the less money you will be paid per month.

On the other hand, you can procrastinate your application up to 70 years old, and the longer you procrastinate, the more money you will be paid per month.

You can simulate the amount of social security received at the following site, so please try it.

Social Security Quick Calculator

Spousal Benefits

Retirement benefit is a system that is friendly to married people, and spouses can receive up to half the amount received by their partner even if they do not have their own income or the amount calculated by their income is small.

For example, if your entitlement is $500 and your partner’s is $2,000, your benefits can increase your benefits to $1,000.

If you divorce, this system will still apply if you have been married for more than 10 years.

The good thing about this system is that you can apply for a pension directly to the SSA without contacting your former partner.

The Application leaves no record or impact on your ex-partner’s social security.

Even if your ex-partner is remarried, the social security of the remarriage partner is not affected.

Application Procedure

The application procedures required for payment are as follows.

Apply online

If you enter the necessary information, the procedure will be completed in about 10 to 30 minutes.

Once you’ve completed the process, you will see a list of the documents you need to submit to the SSA.

If you are short of information, the SSA office will contact you.

<Main Necessary Information>

  • Basic information: Name, social security number, gender, date of birth
  • Employment information: Occupation, self-employment, military Services, government work, work experience
  • Benefit questions: The day you want to start receiving a retirement benefit, other benefits you already receive, and bank account information
  • Account creation information: Mobile phone, credit card, Form W-2, tax return

Apply by phone

  • Phone: 1-800-772-1213 (1-800-325-0778 for people with hearing difficulties)

Apply at the counter

First, call 1-800-772-1213 and make a reservation for the window application process.

On the day of booking, go to the nearest social security office and submit the required documents (original or copy).

This document will be returned to the applicant later.

Once the procedure is complete, you will stat receiving the retirement benefits.

<Main Required Documents>

  • Birth certificate or other proof that falls under it
  • Proof of U.S. citizen or lawful immigration (e.g. passport, green card)
  • Last year’s Form W-2 or Self-Employee Tax Return
  • If you would like to transfer money to your bank account, your bank name and account number (Account number and routing number)

For details, please visit the SSA website.

Survivors Benefits

Survivors benefit is a system that allows either the spouse, child, or parent to receive the pension if the deceased person meets the credit of the payment requirement.

If you are a spouse, you can start receiving benefits from the age of 60, but if you start receiving the benefits before the full retirement age, the amount received will be reduced.

In addition, if the spouse remarries by the age of 60, she will lose the eligibility to receive the survivors benefits, but if she is over 60 years old and remarry, she can receive the survivors benefits based on the income of the former partner.

Children under the age of 18 or 19 if they attend high school as a full-time student are eligible for 75% of the pension the deceased should have been able to receive.

In addition, spouses and children may receive a one-time death lump sum (Lump Sum Death Benefit) of $255.

If you are eligible for survivors benefits and have not yet received the pension, there are some cases where you will not be able to receive it retroactively, so it is recommended that you take the procedure as soon as possible.

Application Procedure

Apply by phone

  • Phone: 1-800-772-1213 (1-800-325-0778 for people with hearing difficulties)

Apply at the counter

Reservations are basically not required, but it is a good idea to call 1-800-772-1213 first to make a reservation for the application process.

On the day of booking, go to the nearest social security office and submit the required documents (original or copy).

This document will be returned to the applicant later.

Once the procedure is complete, you will start receving survivors benefits.

【Main Required Documents】

  • Proof of the deceased’s death (letter from funeral company or death certificate)
  • Birth certificate or other proof that falls under it
  • Proof of U.S. citizen or lawful immigration (e.g. passport, green card)
  • Last year’s Form W-2 or Self-Employee Tax Return
  • If you are a divorced ex-spouse, proof of divorce (original)
  • Marriage certificate (original) if you are a spouse
  • Social security numbers for bereaved families and deceased
  • If you would like to transfer money to your bank account, your bank name and account number (Account number and routing number)

For details, please visit the SSA website.

Disability Benefits

Disability benefits are provided if you have a disability due to an accident or illness, and they are operated under two programs: the Social Security Disability Insurance (SSDI) program and the Spatial Security Income (SSI) program.

One of the programs will be applied, but the amount of disability benefits will be determined by program basically on an approval basis.

The documents to be submitted are also fairly detailed and case-by-case, so we recommend that you contact the SSA first.

For details, please visit the SSA website.

Receiving an American Social Security in Japan

After returning to Japan, the application for the retirement benefits, survivor benefits, and disability benefits is processed with the SSA in the United States, but it can also be done by the Japan Pension Service.

The office operated by the Japan Pension Service is located all over Japan, and it is easy to understand and convenient because you can consult with the person in charge in Japanese.

However, the Japan Pension Service only accepts documents, and since the documents are actually processed at the U.S. Embassy, subsequent communications will be conducted directly with the U.S. Embassy.

On the other hand, if a person who has already received a pension changes his/her address or changes the account of the receiving financial institution, he/she can do it at the SSA, but it can also be done at the U.S. Embassy after returning home.

If you inform the Embassy’s Pension Division that you would like to proceed with the change, they will brief you about the necessary documents, so you will submit documents accordingly.
Technical Difficulties

Corporate Pension

Next, I would like to introduce corporate pensions in the United States.

There are two main types of corporate pensions: defined contribution plan, which is called 401 (k) that employers and employees contribute each other, and defined benefit plan that are 100% contributed by employers.

401(k): Defined Contribution Plan

The official name of the 401 (k) is defined contribution plan, but it is called 401(k) because there is a provision in Section 401 (k) of the Internal Rescue Code established in 1978.

Whether or not to offer a 401 (k) is optional for each company, and there are many companies that do not have a 401 (k).

However, according to the March 2020 survey conducted by Bureau of Labor Statistics, about 60% of the U.S. working population is offered 401 (k), so it is a widely adopted in the United States.

How the 401 (k) Works

One of the characteristics of the 401 (k) is that employers can provide it only to their own employees.

If you want to change jobs, you can leave the funds in the original account as it is, or you can transfer the funds to the 401 (k) account provided by your new employer. You can also move the fund to an IRA, a personal pension, if your next job doesn’t offer a 401 (k).

The amount that can be deposited into a 401 (k) account is capped by the IRS, with a cap of $19,500 for those under 50 and $26,000 ($19,500 + $6,500 Catch-up) for those over 50 in 2021.

Benefits of the 401 (k)
Matching by Employer

A major feature of the 401 (k) is that the amount of money contributed by employees can be contributed by the company in equal or part of the amount.

The adoption of this contribution by the employer is determined by each employer, but the U.S. Bureau of Labor Statistics show that as many as 51% of companies are matching, and matching itself is common among companies offering 401 (k).

In 2021, companies can offer a matching up to $58,000 ($64,500 for those over 50), which also applies to the total amount of money contributed by employees and the amount contributed by companies.

Matching rate can be set by each company, but generally about 3% of salary tends to be common.

Tax Deferral of Contributions

If you contribute to a 401(k), you can defer taxation on contributions.

In other words, if you receive it as a salary, you will usually be taxed on that amount at that time, but the amount you contribute to the 401 (k) will not be taxed at the time of salary payment, and it will be taxed when you withdraw from 401(k) account after retirement.

Usually, after retirement, income decreases compared to the active age, and under the progressive taxation system, a lower tax rate is applied after retirement, so it is a big advantage to be able to defer your tax until then.

In addition, no tax is imposed on the capital gains until the funds are actually drawn out.

Contributions made by companies can be deducted on the company’s tax returns.

Professional Management

You can choose your own investment destination for the funds you contributed with your 401 (k), but you can also leave the investment to the professional you are investing in depending on your risk tolerance and target amount.

You Can Loan against Yourself

Many plans offer loans of up to 5 years (60 months) at a low interest fixed rate from your own 401(k) plan.

The interest you pay is returned to your own 401(k) account, so it’s advantageous compared to a loan that pays interest to others.

The loan limit is now $100,000, according to the CARES Act issued by former President Trump.

Please note that if you change jobs or are fired while paying a loan, you will have to pay off your balance in bulk during the due date. If you can’t repay it by the due date, your balance will be considered taxable income, and you’re going to be fined an additional 10%.

Disadvantages of 401 (k)
Weaknesses in Deferred Tax Accounts

Under current law, investment-related income is subject to a reduced tax rate called the capital gains tax rate.

The maximum tax rate of capital gains is 20%, so it is about half of the maximum 37% of the general tax rate.

If you manage your assets in a regular taxable investment account and pay taxes annually, this reduced tax rate is applicable. However, if you use a deferred tax account, all will be considered as general income at the time of the withdraw, and a tax rate of up to 37% will apply.

As I wrote in a separate article, there is a possibility that the capital gains tax rate will increase in the future, so it is necessary to pay close attention.


The 401(k) is an asset formation plan that assumes you receive when you become 59.5 years old or older, and if you withdraw funds before you reach 59.5 years old, you will automatically be penalized 10%.

In addition, if you make an early withdraw, you will be taxed on the amount you withdraw early (withholding tax of 20% applied).

The penalty can also be avoided under certain conditions.

Limited Investment Options

The 401(k) can only be used by securities company designated by your employer, and investment options can only be selected from the selected options in advance.

Therefore, even if you have your favorite investment destination, you cannot invest in your favorite investment destination unless your 401(k) security company offers it.

Defined Benefit Plan

Next, we will introduce defined benefit plans.

Unlike the 401(k), defined benefit plans are 100% built-up and operated by employers, and they are offered to employees as part of their benefits.

Mechanism of Defined Benefit Plan

The reason defined benefit plans are called Defined Benefit Plans is that both employers and employees are clearly informed how to calculate the benefits received after your retirement.

In general, the amount of benefits in defined benefit plans is calculated according to the number of working years and the amount of income equal to a certain percentage of wages.

Since the amount of benefits in defined benefit plans is calculated in advance, it is easier for employees to plan for retirement compared to other pensions.

Even if the employer’s investing performance of the asset in the defined benefit plan is poor, the employer must legally make up for the pre-determined amount of payment.

Employers can only give this plan to employees who meet the requirements, such as one year of service or more than 1,500 hours work per year.

Recently, with the adoption of 401(k), an increasing number of companies have frozen defined benefit plan by not accepting new pension participants.

Advantages of Defined Benefit Plan
  • Can be used in conjunction with other pension plans
  • Other pension plans have an annual contribution cap, but defined benefit plans do not have an annual contribution cap
  • The amount of benefits can be predicted in advance.
  • Benefit amounts are independent of operating performance
  • Employers can take deductions on their tax returns
Disadvantages of Defined Benefit Plan
  • Employers must continue to contribute annually according to their plans.
  • Employers cannot reduce the amount of payment they initially decide.
  • Even if the company’s accounting is in the red, it must be deposited.
  • It’s complicated and expensive for employers to manage.
  • There is a cap on the annual benefit amount.

Personal Pension

Finally, I would like to introduce personal pensions.

A personal pension is called an Individual Retirement Account (IRA) and is a type of investment account that can be opened by individuals.

You can open an account at your favorite financial institution, and there is an advantage that you can receive tax deductions for deposits up to a certain amount.

There are two main types of IRA plans: “Traditional IRA” and “Roth IRA”.

Traditional IRA

With a Tradition IRA, you can deposit a certain amount from your pre-tax income into your IRA account, for which you do not have to pay taxes at the time of deposit, and you can defer income tax until you withdraw the amount after retirement in the future.

For example, if you currently have $100,000 in income and want to use a Traditional IRA, depositing $5,000 into an IRA will result in a taxable income of $95,000.

If your income tax rate is 20%, you could save $1,000, which is $20% of $5,000.

Since the Tradition IRA is a personal pension, there is no contribution by an employer like the 401(k).

It is not deducted from your payroll, but you must personally contribute by bank transfer, check, etc.

The maximum contribution is $6,000 per year in 2021 and $7,000 for those over 50.

In general, contributions must be made by April 15, which is basically the date of tax return filing, but the deadline has been extended to May 17, 2021 due to the effects of the COVID-19 for tax year 2020, and the date of Traditional IRA contribution has been extended to the same day.

The Traditional IRA is automatically penalized 10% if you withdraw funds before you reach the age of 59.5, which is the same as your 401(k).

In addition, as an advantage, the IRA is a retirement account that you join individually, so you can choose your favorite security company and operate the funds as you wish.

On the other hand, since it is necessary to manage it by yourself, it is necessary for you to decide the security company after considering various factors, such as management and transaction fees and usability, as well as products.

Roth IRA

Next, I would like to introduce the Roth IRA.

The big difference with the Traditional IRA is that the Traditional IRA can contribute from pre-tax income, whereas the Roth IRA will contribute from the amount after tax.

It might be seemed that Roth IRA is the same as a regular bank account or securities account, but the good thing about Roth IRA is that capital gains from the money contributed is tax free.

The annual maximum contribution of the Roth IRA, like the Traditional IRA, will be $6,000 per year in 2021 and $7,000 for those over 50.

In addition, the deadline for contributions is usually April 15, as is the case with the Traditional IRA.

The Roth IRA has an annual income cap. You will not be able to use the Roth IRA if an annual income is over $140,000 for single and $208,000 for a married couple.

Furthermore, the great thing about Roth IRAs is that IRS allows you to withdraw up to contribution sum at any time without tax or penalty. Please note that you will be taxed and imposed penalty on withdrawals for interest income, dividends, and capital gains if you withdraw them before you reach the age of 59.5 like Traditional IRA.

However, this advantage will increase the liquidity of assets, and it could be an emergency fund that can be withdrawn in the unlikely event.

Where to Open an IRA

IRA can be opened at most financial institutions, such as local banks, credit unions, and securities companies.

There are so many choices, so it’s a good thing to check the following points before opening an account:

  • Management fees and transaction fees
  • Types of investment products that you can choose in an account
  • Presence or absence of investment advice and its costs

By the way, in my case, I use Vanguard, which offers my favorite investment products with relatively low fees and transaction fees compared to other securities companies.


How did you learn about the U.S. pension system and tax-saving methods?

The compounding effect of investments is greater than you can imagine, so it’s a good idea to manage your assets early in preparation for retirement!