Tax deductions at retirement time

[Mialou]

With my wife we are at a standstill about Ideco taxes at retirement.

There is a tax exemption of 40man per year of contribution for the first 20 years, then 70man per year for years 21 to 30.
And a maximum tax exemption of 1500mans.

Now, as a sole proprietor, I can invest 68000 yens monthly, started at 32, planning to continue until retirement or the funds are not available anymore.
At the rate of 68000 yens monthly, I would have invested about 1500man by age 50, 2300mans by age 60. For now I'll ignore any return, profits.

Now were we differ is about the tax exemption.
Let's say that I continue until 60, invest 2300mans in total, and get lump sum at 65.

1st method
I should now receive my contributions, 2300mans plus any profits, but I get a tax exemption of only 1500mans. I am now paying taxes on 800man of my own contributions, plus taxes on any profits.

2nd method
I receive my contributions of 2300mans tax free, and the first 1500mans of profits tax free, but get taxed on any profits after that.

If it is the 1st one, should I limit my contributions after 1500mans? Or are the taxes low enough that the income reduction is still worth it?

[Tkydon]

With my wife we are at a standstill about Ideco taxes at retirement.

There is a tax exemption of 40man per year of contribution for the first 20 years, then 70man per year for years 21 to 30.
And a maximum tax exemption of 1500mans.

This applies to the Lump Sum IF you take any portion of the iDECO as a Lump-Sum One Time Payment - deceptively called Retirement Income or 退職所得.

This Lump-Sum is taxed completely independently of all other income. I.e. it doesn't matter how much other income you earned in the same year, and it does not affect the taxation of that other income in any way.
1. You take the Amount of the Lump-Sum Payout Portion
2. Calculate the Special Deduction; 40man per year of contribution for the first 20 years, then 70man per year for years 21 to 30, max 1500mans.
3. Deduct 2. from 1.
4. Halve the amount calculated in 3.
5. Calculate Income Tax at Marginal Rates on the value calculated in 4.
6. Pay the Total Tax Amount calculated in 5.

There are no other allowances or deductions that can be claimed.

Tax Bands and Rates:
Income Tax Rates 総所得金額の合計、復興特別所得税、住民税の税率
Band (Taxable Income) - Marginal Tax rate (％) National + Reconstruction + Residents' Taxes = Total - Max National & Residents' Taxes in Band Yen
Under 1,949,000 - 5% + 0.105% + 10% = 15.105% = Y97,705 + Y195,000
1,950,000 to 3,299,000 - 10% + 0.21% 10% = 20.21% = Y135,284 + Y135,000
3,300,000 to 6,949,000 - 20% + 0.42% 10% = 30.42% = Y731,553 + Y365,000
6,950,000 to 8,999,000 - 23% + 0.483% 10% = 33.483% = Y472,490 + Y205,000
9,000,000 to 17,999,000 - 33% + 0.693% 10% = 43.693% = Y982,158 + Y900,000
18,000,000 to 39,999,000 - 40% + 0.84% 10% = 50.84% = Y8,818,480 + Y2,200,000
Over 40,000,000 - 45% + 0.945% 10% = 55.945% No Limit...


If you elect to take a portion as regular Pension Income (Annuity), then that income is taxed at your Marginal Income Tax Rate in Retirement after deduction of your Personal Allowance Y480,000, and if it correctly qualifies, the Public Pension Deduction (variable, but around Y1.2M), and any other deductions or credits you are entitled to. See Page 8 (page 12 of the PDF) here for an overview of Calculating the Public Pension Plan Deduction (Calculation Table).
https://www.tax.metro.tokyo.lg.jp/book/ ... k2023e.pdf
Your marginal income tax rate would be expected to be in the lower bands in retirement, so much lower tax rates than the taxes saved by investing in iDECO in your working years...

Now, as a sole proprietor, I can invest 68000 yens monthly, started at 32, planning to continue until retirement or the funds are not available anymore.
At the rate of 68000 yens monthly, I would have invested about 1500man by age 50, 2300mans by age 60. For now I'll ignore any return, profits.

You will be able to continue voluntary contributions until 65 for National Pension and iDECO if you wish to get your months up...

Calculate it as a annuity Contribution 68,000 per month, no. of months 216, or 336, or 386 months, and a conservative growth rate of 5%/12 = 0.875% per month...

Then take the 1500mans as a completely Tax Free Lump Sum, and the rest as a taxable lumpsum or a taxable annuity income stream, as you like...

Now were we differ is about the tax exemption.
Let's say that I continue until 60, invest 2300mans in total, and get lump sum at 65.

1st method
I should now receive my contributions, 2300mans plus any profits, but I get a tax exemption of only 1500mans. I am now paying taxes on 800man of my own contributions, plus taxes on any profits.

But your contributions were Pre-Tax - Tax Free...

and so, If you had not put that money into iDECO, you would have had to pay your Marginal Rate of Income Tax and Reconstruction Tax and 10% Residents Taxes on those contributions, so you would have only the net left; say between 60% and 40% of the 68000.
Therefore, you pay only between 60% and 40% of the 68000, and the government pays the rest from your saved tax... If you paid Withholding Tax on the 68000 throughout the year, you would receive the tax back in a Refund...
Tax Free on the way in - Taxable on the way out, but at very advantageous tax rates.
You are arbitraging your Current Marginal Tax Rate against the Retirement Marginal Tax Rate in a lower band...

2nd method
I receive my contributions of 2300mans tax free, and the first 1500mans of profits tax free, but get taxed on any profits after that.

See the notes above about the split between Lump Sum and Pension Income payouts, and the taxation that applies to each...

If it is the 1st one, should I limit my contributions after 1500mans? Or are the taxes low enough that the income reduction is still worth it?

No, continue paying to 60, and then additional Voluntary Contributions to 65
and Yes, the taxes a very advantageous...


Your alternative would be NISA, and you will be able to invest upto Y1.2M per Year (or Y100,000 per month) in Tsumitate NISA AND upto Y2.4M per year into Regular Growth NISA.
The Money goes in Post Tax, after the Govt as taken their Marginal Income tax, between 40% and 60%, and the future gains will be completely Tax Free...

Best of Both Worlds:
Max Out iDECO - at the end of the year when you receive your Tax Refund from iDECO contributions, channel that directly into NISA...

[Mialou]

Thank you.

I will continue to fill it as much as possible, and then aim for a 1500man yens lumpsum then annuity, that will probably need to be calculated so that i can get all of it with as little taxes as possisble, before i pass away.

Or if at retirement time there is a need for another 500man, then a bigger lumpsum, that while beeing taxed, would stilll get most of it. But still annuity for that.

As for the NISA, i am not going to be able to max it every year but the plan is to max it eventually.

Still a long way to go, but the plan is slowly getting clearer. Thanks again for the clarification. And now i'll update my notes for future me.