iDeCo taxation

[RetireJapan]

Just a quick post/thread to confirm some things (mainly my own understanding) of how taxation on iDeCo works, and when an iDeCo account might not be the best choice to put investments in. This is preparatory work for a blog post, your contribution would be much appreciated, particularly if I get something wrong

So iDeCo is a wonderful account to save for investment in, because it gives you an income tax reduction on money you put in, and can also give a tax break when you take money out.

But it is not completely tax free in the way that NISA is.

So it is probably a good idea to be aware of how iDeCo works, and how that might affect your use of it.

Paying into an iDeCo account reduces your taxable income, either directly if your employer deducts the iDeCo payment from your salary, or retroactively if you pay it yourself (you submit the iDeCo receipt to your employer or the tax office at the end of the year).

When you cash out iDeCo, you have the choice of receiving a lump sum, or a pension income for a number of years.

The lump sum is taxed, but you can build up a tax free allowance (400,000 yen a year for the first twenty years, then 700,000 yen a year for the next ten years, for a maximum tax-free lump sum of 15 million yen after 30 years of contributions). This tax free allowance is shared with any retirement bonus you might get.

Pension income has a tax free allowance (up to 700,000 yen a year before age 65, and 1.2 million yen a year after age 65).

If your iDeCo lump sum is larger than the tax free allowance, half of it is tax free, and the remaining half is taxed as ordinary income.

One cautionary point: everything in your iDeCo account is taxed, not just capital gains.

[RetireJapan]

Questions:

Can you split your payments: take a partial lump sum and also pension installments?
How many years can/must you split your pension payments into?
How do the rules for retirement bonus tax allowance work? How long before it resets? (for example, I will use mine for my retirement bonus this year. I will then want to use it again in about 25 years time when I cash out my iDeCo accounts).

If your iDeCo account balance is larger than your tax-free allowance, can it be a negative to invest in it over a taxable account?

[Beaglehound]

I don’t have any answers, just another question…

If you get a retirement bonus which is less than the allowance you have built up, can you carry forward the unused portion for when you cash out Ideco, or does it go back to zero? My wife is likely to be in this position.

[Moneymatters]

I find it easiest to just think of iDeCo as defered income tax with some seriously hefty allowances.

"If your iDeCo lump sum is larger than the tax free allowance, half of it is tax free, and the remaining half is taxed as ordinary income."

I think this income is treated as seperate from any other income you might have in the year you cash out.
This means if you have net 4mil taxable income on the iDeCo the lump sum and you also earnt net 5mil from jobs/pensions, then they are handled seperately rather than the 4mil getting added on top of your 5mil taxable income.

Or I'm wrong.
No shame in that he said (preemptively.)

[Butterball]

Somewhere in my iDeco research I copied down this from somewhere:

You don’t have to pay income tax on your pension payments if they are your only source of income in Japan, or if you work fewer than six hours a day and fewer than 20 days in a month.

Looks like it’s from this page: https://allabout-japan.com/en/amp/article/7663/

This would be a quite different, and much more generous, system than the simple allowance described, but I suppose it’s... not true?

[JimNasium]

My Japanese isn’t great, but there does seem to be some good information here.

https://www.resonabank.co.jp/nenkin/ide ... ceive.html

https://www.mizuhobank.co.jp/retail/lea ... 10226.html

https://media.rakuten-sec.net/articles/amp/33289

[Tkydon]

When you cash out iDeCo, you have the choice of receiving a lump sum, or a pension income for a number of years.

The lump sum is taxed, but you can build up a tax free allowance (400,000 yen a year for the first twenty years, then 700,000 yen a year for the next ten years, for a maximum tax-free lump sum of 15 million yen after 30 years of contributions). This tax free allowance is shared with any retirement bonus you might get.

Pension income has a tax free allowance (up to 700,000 yen a year before age 65, and 1.2 million yen a year after age 65).

If your iDeCo lump sum is larger than the tax free allowance, half of it is tax free, and the remaining half is taxed as ordinary income.

One cautionary point: everything in your iDeCo account is taxed, not just capital gains.

I wrote this up before somewhere.

Lump Sum 'Retirement Income' 退職所得 is treated completely separately than Pension Income 年金収入.

The Special tax free allowance 退職所得控除 is as you stated based on 'length of service' 勤続年数, and is the only deduction permitted against the Lump Sum 'Retirement Income' 退職所得.
Y400,000 per year for years of service up to 20 years (or part thereof)
Y700,000 per year of service over 20 years (or part thereof)
I don't believe there is an upper limit.

An additional allowance of Y1,000,000 will be allowed if the tax payer is retired as a result of becoming handicapped.

The remainder of the Lump Sum after deduction of the Special allowance is then divided by 2 before being assessed for Aggregate Tax at the standard National Marginal Tax Rates, 2.1% of the total National Tax as Reconstruction Tax, and 10% Residents' Taxes. No other allowances are applied.

Marginal Tax rate (％) National - Reconstruction - Residents' Taxes
Under 1,949,000 ― 5% ― 0.105% ― 10%
1,950,000 ― 3,299,000 ― 10% ― 0.21% ― 10%
3,300,000 ― 6,949,000 ― 20% ― 0.42% ― 10%
6,950,000 ― 8,999,000 ― 23% ― 0.483% ― 10%
9,000,000 ― 17,999,000 ― 33% ― 0.693% ― 10%
18,000,000 ― 39,999,000 ― 40% ― 0.84% ― 10%
Over 40,000,000 ― 45% ― 0.945% ― 10%


This is not aggregated with your other income in that year, but treated entirely stand-alone, so the total Tax rate is very low.

The Pension Income Allowance does not apply in the case of Lump Sum 'Retirement Income'.

If you have already received other retirement benefits in the requesting year, or within the past 14 years from the preceding year, the Special Tax Fee Allowance will be adjusted in consideration of the other retirement income allowances already received. I don't know the details...

You are required to file a final return only if you receive Lump Sum Taishokukin that have not had Japanese withholding tax deducted at source, such as Lump Sums from foreign companies or foreign countries.
(or I guess, if you are receiving a Lump Sum Taishokukin in Japan within the 14 year window... ??? )


Pension Income 年金収入.

Pension Income is treated as Miscellaneous Income and is aggregated with other Aggregate Tax Method income in the Tax Year.

Your standard deductions apply; Personal, Dependants', and other regular allowances.

Then, there is also the Public Pension Allowance, which applies to Public Servant Pensions, Approved Fund Pensions, National Pensions, or other Pensions paid under Social Insurance Schemes.

雑所得

公的年金等
国民年金、厚生年金、確定給付企業年金、確定拠出年金、恩給、一定の外国年金などの所得

but not

その他
生命保険の年金


Miscellaneous income
Public Pensions
Income of the National Pension, Employee Pensions, Defined Benefit Corporate Pensions, Defined-Contribution Pensions, other Public
Pensions and certain Foreign Pensions, etc.

Others (Not eligible for the Public Pension Allowance)
Other income, such as Annuities (pensions) under Life Insurance Contracts.

The amount of the Public Pension Allowance depends not only on age, but also on your Gross Income and Gross amount of Pensions received in the Tax Year.

https://www.nta.go.jp/taxes/shiraberu/s ... df/002.pdf
Pages 11-12

https://www.nta.go.jp/taxes/shiraberu/s ... df/050.pdf
Page 22

Non requirement of filing tax returns concerning pension recipients
You are not required to file a return for tax on pension income if:
(a) your amount of earnings from public pensions is 4,000,000 yen or less,
(b) all the pensions you received are subject to the Japanese withholding (excluding ones that are covered by the provision in Article 203-7 of the Income Tax Act (public pensions, etc. not subject to the Japanese withholding), and
(c) your amount of other income (excluding miscellaneous income from public pensions, etc.) is 200,000 yen or less.

* However, you are required to file a return for in order to receive refunds for casualty loss, medical expenses, life insurance premiums,
earthquake insurance premiums, or charitable donations, Furusato Nozei, etc..

This forum does not support Tabs so is very difficult to present tables... Table Columns separated by ---

Public Pension Deduction.

The amount is calculated based on Total Gross Pension off-set against the total Gross Income from all other sources in the year.
From 1 Jan 2020...

Gross Annual Pension --- Other Income < Y10M --- Y10M to Y20M --- > Y20M

Under 65.
Less than 1,300k --- 600k --- 500k --- 400k
1,300k to 4,100k --- 25% + 275k --- 25% + 175k --- 25% + 75k
4,100k to 7,700k --- 15% + 685k --- 15% + 585k --- 15% + 485k
7,700k to 10M --- 5% + 1,455k --- 5% + 1,355k --- 5% + 1,255k
Greater than 10M --- 1,955k --- 1,855k --- 1,755k


Over 65.
Less than 1,300k --- 1,100k --- 1,000k --- 900k
1,300k to 4,100k --- 25% + 275k --- 25% + 175k --- 25% + 75k
4,100k to 7,700k --- 15% + 685k --- 15% + 585k --- 15% + 485k
7,700k to 10M --- 5% + 1,455k --- 5% + 1,355k --- 5% + 1,255k
Greater than 10M --- 1,955k --- 1,855k --- 1,755k


Your iDECO provider will withhold tax at source.
Amount of withholding tax = Payment amount × 7.6575%

Questions:

Can you split your payments: take a partial lump sum and also pension installments?
How many years can/must you split your pension payments into?
How do the rules for retirement bonus tax allowance work? How long before it resets? (for example, I will use mine for my retirement bonus this year. I will then want to use it again in about 25 years time when I cash out my iDeCo accounts).

If your iDeCo account balance is larger than your tax-free allowance, can it be a negative to invest in it over a taxable account?

Can you split your payments: take a partial lump sum and also pension installments?
Yes

How many years can/must you split your pension payments into?
You should discuss with your iDECO provider.

How do the rules for retirement bonus tax allowance work?
See above.
(Total Lump Sum - Special Lump Sum Allowance) / 2 = Taxable Income
Taxed at Marginal Aggregate Tax Rates.
No other allowances.

How long before it resets? (for example, I will use mine for my retirement bonus this year. I will then want to use it again in about 25 years time when I cash out my iDeCo accounts).
Completely - 14 years.

If your iDeCo account balance is larger than your tax-free allowance, can it be a negative to invest in it over a taxable account?
I don't think so.

If you take a Lump Sum, even without the full Special Deduction (if less than 14 years apart), you only pay tax on Half of the taxable amount after deduction of any Special Deduction, so that brings the taxable amount down the tax bands, so the saving is well more than half...
e.g. Lump Sum Taxable income (<half) that would have fallen in to say the 33% (16.5%) tax bracket is brought down to the 23% (11.5%) tax bracket, or even the 10% (5%) tax bracket, depending on actual amounts, and less than half of the 10% Residents' Taxes, so less than 5%.

If you take a regular pension payment, then you get the Public Pension allowance on iDECO as well as your other allowances, which depends on total income, hence the total withholding of 7.6575% (National, Reconstruction, and Residents' Taxes). The actual tax will depend on your actual situation.

[Tkydon]

Somewhere in my iDeco research I copied down this from somewhere:

You don’t have to pay income tax on your pension payments if they are your only source of income in Japan, or if you work fewer than six hours a day and fewer than 20 days in a month.

Looks like it’s from this page: https://allabout-japan.com/en/amp/article/7663/

This would be a quite different, and much more generous, system than the simple allowance described, but I suppose it’s... not true?

That's only true if you were only living on the national pension, which would be under the minimal level. Any additional pension income would probably bring you into the taxable zone.
iDECO pension payments will have been subject to withholding at source at 7.6575%

[beanhead]

In almost all of the use-cases I have seem, lump sum results in lower tax than taking iDeCo as a pension.

I don't have another company/DC pension, so lump sum it will be, for me and my wife.
When is another question entirely. Presumably we will cash iDeCo in as late as we can.

[Tkydon]

I just ran a quick calculation.

If you received a Lump Sum after 23 years of service, the first Y10.1M would be completely tax free. i.e. the total taxes (National, Recontruction, and Residents' Taxes) would be Y0.
Anything over the Y10.1M would be taxed according to the following bands:

Band ― National ― Reconstruction ― Residents' Tax Rates = Total

Under 3,899,000 ― 2.5% ― 0.0525% ― 5% = 7.5525%
3,900,000 ― 6,599,000 ― 5% ― 0.105% ― 5% = 10.105%
6,600,000 ― 13,899,000 ― 10% ― 0.21% ― 5% = 15/21%
13,900,000 ― 17,999,000 ― 11.5% ― 0.242% ― 5% = 16.742%
18,000,000 ― 35,999,000 ― 16.5% ― 0.345% ― 5% = 21.845%
36,000,000 ― 79,999,000 ― 20% ― 0.42% ― 5% = 25.42%
Over 80,000,000 ― 22.5% ― 0.4725% ― 5% = 27.9725%

(the amount is halved and taxed at the standard marginal bands, which is the equivalent of twice the width of the band at half the band tax rates as shown above)