How much income tax will I actually be saving?

[Adamakin86]

Were I to start an iDeco next year I’d be in the 24,000 maximum band. Were I to pay the full 24,000 a month I’m wondering just how much less income tax I’d be paying. Does anyone have any resources or calculations for working this out? I’m assuming it’s not just a straight forward, income tax is reduced by 24,000 each month.

[adamu]

There's an official simulator here: https://www.ideco-koushiki.jp/simulation/

[beanhead]

Were I to start an iDeco next year I’d be in the 24,000 maximum band.

It is 23,000yen per month for most people on shakai hoken/kosei nenkin.
That is what I can pay anyway.

[Beaglehound]

You should save 10% of the sum in residents tax, so 2400 ( or 2300) yen per month, plus whatever your marginal rate is on national income tax. It's not the case that your actual tax bill will drop by 24 (or 23) thousand yen a month, it's done on a percentage basis.

[Tkydon]

You are paying your Marginal Rate of Income Tax on your current Taxable Income (see table below), and Residents' Taxes at 10% on the same Taxable Income, and the Income related portion of your Heath Insurance, probably close to another 10%.
(Check the Health Insurance Premium Calculation Method for your City or Ward.)

You pay the iDECO from Post Tax income, but you should be paying it from Pre-Tax Income, so...

At the end of the year, at the Year End Adjustment of Tax Withheld through the year - Nenmatsu Chosei, or when you file your Tax Return - Kakutei Shinkoku, you will be entitled to Refund of the National and Reconstruction Taxes already paid through withholding, and your Residents' Taxes and Health Insurance Premium in the following year will be reduced by the deducted amount from Taxable Income.

Your Marginal Tax Rate is as follows:

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 %
Under 1,949,000 = 5% + 0.105% + 10% = 15.105%
1,950,000 to 3,299,000 = 10% + 0.21% + 10% = 20.21%
3,300,000 to 6,949,000 = 20% + 0.42% + 10% = 30.42%
6,950,000 to 8,999,000 = 23% + 0.483% + 10% = 33.483%
9,000,000 to 17,999,000 = 33% + 0.693% + 10% = 43.693%
18,000,000 to 39,999,000 = 40% + 0.84% + 10% = 50.84%
Over 40,000,000 = 45% + 0.945% + 10% = 55.945%

So you will end up paying only (100% minus the Total % shown) and the Total % shown will actually be your saved tax that you would otherwise have had to pay on that income, so is actually paid by the government...

And then another nearly 10% saving on Health Insurance, unless you're already paying the maximum Health Insurance Premium in the upper tax brackets, in which case no saving there...

You will get a big tax refund at the end of the year, at

(1 / (1-Marginal Tax Rate)) -1 x Total Annual iDeCo Contributions refund.

And save Residents' Taxes in the following year (not a refund, but reduced bill, so would have had to be paid, so add it to the above)

(1 / (1-Marginal Tax Rate)) x Total Annual iDeCo Contributions x 10%.

and save about another 10% in Household Health Insurance Premium (depending on provider and whether you have reached the max household premium, etc.) in the following year (not a refund, but reduced bill, so would have had to be paid, so add it to the above)

(1 / (1-Marginal Tax Rate)) x Total Annual iDeCo Contributions x 10%.

[Adamakin86]

Thank you very much for all your extremely helpful responses!

And yup, I got the iDeco amount wrong! Apologies.

[Tkydon]

You will have paid the tax at your Marginal Income Tax Rate through withholding on the income before paying the iDECO Contributions through the year.

Then, you will receive the Tax Refund, either in December Payroll through the Year End Adjustment - Nenmatsu Chosei - or in April of the following year through the Tax Filing - Kakutei Shinkoku.

Then, it might be a good idea to immediately funnel that tax refund in to NISA to further grow tax free in the future.

[kingbean]

Isn’t there a problem that ideco is taxed when you withdraw it (the whole ideco counts into that years income if I’m not mistaken)? That just allows you to gain by investing your not paid taxes and only to post pone income tax?

[Mialou]

Yes and No.
I had the same question that got answered here

https://www.retirejapan.com/forum/viewtopic.php?t=3383

So yes it will be taxed later, when you retire, but at that time your income will virtually be 0, so you exchange not paying tax right now at a high rate with paying tax later at a lower rate, or potentially none at all.

[captainspoke]

Yes and No.
I had the same question that got answered here

https://www.retirejapan.com/forum/viewtopic.php?t=3383

So yes it will be taxed later, when you retire, but at that time your income will virtually be 0, so you exchange not paying tax right now at a high rate with paying tax later at a lower rate, or potentially none at all.

Isn't it also taxed (at least possibly so) as a one-time payout? I think it's comparable to severance, which under the right conditions can be tax very lightly.