Would it be better to split his investments between iDeCo and NISA?

[Oliver170]

Does anyone have experience with this?

My son recently started working as a junior high school homeroom teacher in Japan. During his university years, he set up a NISA account with SBI and invested a small amount. Now that he has a steady paycheck, he won’t max out his NISA limit, but he plans to continue investing in a Tsumitate NISA.

A question came up:
Would it be better to split his investments between iDeCo and NISA?

He prefers NISA because he can withdraw the funds if needed. Right now, he’s investing aggressively while also paying off his student loans. He doesn’t have much in savings, and most of what he does save is going into NISA.

I suggested allocating some to iDeCo for the tax benefits. However, I’m unsure whether it would make a difference in his taxes since he’s a public school teacher, and his taxes are handled by the school.

Does anyone have insight, experience, or advice on this?

[RetireJapan]

It might be worth putting the minimum 5,000 yen a month into iDeCo to build up the tax allowance for cashing it out. The funds are also locked away until age 60, which is a benefit in my opinion.

Your son could put the rest of his available funds into NISA, and consider increasing the amount going into iDeCo in the future.

[Oliver170]

What does a cash allowance mean?
Will his taxes go down?

[RetireJapan]

Paying into iDeCo reduces your taxable income. The higher your income, the more valuable this is.

iDeCo is lightly taxed when you cash out. You accumulate a tax-free allowance for each year you pay in, so starting to pay in as early as possible is one way to maximise this.

[Tkydon]

iDeCo is Tax Advantaged on the Way In, but locked until 60
NISA is Tax Advantaged on the Way Out, but can be withdrawn any time.

If he doesn't have enough to max out the iDeCo or Tsumitate NISA

My view is Max out iDeCo first and take the Tax Refund and sweep that immediately into NISA every year.
Fully Tax Advantaged - the National Government pays the Tax Refund at the end of the year,
But, then he also gets reduction in Residents' Taxes in the following year, which he can then add to his Tsumitate NISA Payment...

If he pays the iDeCo from his bank account, and not directly from payroll, and was to split the amount he saves say 2/3 iDeCo, 1/3 NISA, depending on his Marginal National Income Tax Rate, he'd get a Tax Refund, which he can then sweep into NISA bringing the total NISA to 1/2 of his investible.

Actually, if he pays the iDeCo from his bank account, and not directly from payroll, the Tax Refund is from the Gross Salary earned out of which he paid the iDeCo 2/3 portion net after tax.
The Government gives him back the Tax paid on the Gross Before Tax, so say his marginal Tax Rate and reconstruction tax is 20.42% (income bracket between Y3,300,000 to Y6,950,000 after all other Allowances and Deductions) or 23.483% (income bracket between Y6,950,000 to Y9,000,000 after all other Allowances and Deductions)

Then, the iDeCo payment would have been paid out of Gross Salary equal to Net/ (1-0.2042) or Net/ (1-0.23483), and he should get the rebate of

(Net/Tax Rate - Net) / Net

For every Y1000 of Net Paid

((1000 / (1-0.2042)) - 1000) / 1000
= ((1000 / 0.7958) - 1000) / 1000
= (1,256.59 - 1000) / 1000
= Y256.59 / 1000
= 25.66% of his iDeCo Premium refunded = paid by the National Government Gratis
or
((1000 / (1-0.23483)) - 1000) / 1000
= ((1000 / 0.76517) - 1000) / 1000
= (1,306.9 - 1000) / 1000
= Y306.9 / 1000
= 30.69% of his iDeCo Premium refunded = paid by the National Government Gratis

But on top of that, in the following year, he would not pay Residents' Taxes on that Gross Amount, so would save a further 10%
Y125.66 or Y130.69 per 1000 Yen paid or 12.56% or 13.07% of his iDeCo Premium refunded = paid by the Prefectural and Municipal Governments Gratis

So, total of Y256.59 + Y125.66 = Y382.25 per Y1000 (38.225% of the iDeCo Premium) paid by the Governments Gratis
or total of Y306.9 + Y130.69 = Y437.59 per Y1000 (43.759% of the iDeCo Premium) paid by the Governments Gratis

Which he can then sweep into NISA Tax Free... And the same next year.... In addition to what he was already planning to invest in NISA...

[Oliver170]

Wow, that is a lot of info. Thank you very much!
I will have to study it closely.
How much can a civil servant ( Komuin) contribute to IDECO monthly? Or what is the yearly IDECO allowance for a public school teacher?

[Oliver170]

I bought the Retired Japan guide e-book to IDECO and NISA a few years ago.

Has Japanese IDECO policy changed a lot in recent years?
Should I reread this e-book?

I know that Retired Japan has sent me updated versions of their NISA book because of major changes in NISA (for free).
Thank you for that!

[RetireJapan]

I bought the Retired Japan guide e-book to IDECO
Has Japanese IDECO policy changed a lot in recent years?
Should I reread this e-book?

No major changes. Public servants can now pay in up to 20,000 yen a month (up from 12,000). We should have a new edition of the iDeCo Guide out soon-ish.

[adamu]

I will have to study it closely.

Also check out the wiki. It's kept up to date thanks to the efforts of our volunteers

https://retirewiki.jp/wiki/IDeCo