Lump sum never taxed due to deductions?

[Chizakura]

I was looking at https://retirewiki.jp/wiki/IDeCo and I wonder if I am misunderstanding something.

Let's assume I'm category 2 subscriber (company employee) and invest the maximum possible, which is ¥276,000/year for 20 years. Furthermore, when I choose a lumpsum, I get ¥400,000 per year for the first 20 years of contributions. Since ¥400,000 is higher than ¥276,000, does that mean that my lumpsum is totally not taxed?

In other words, I reduce my tax burden by ¥276,000 per year and that's it?

That would be awesome. I would not only delay the tax burden order reduce it because of my lower income when I'm retired, I would actually completely avoid tax on my contributions. This seems to be true for everyone except for category 1 subscribers.

[Beaglehound]

I think any growth would be included in the amount you are withdrawing, so the 400k a year allowance may or may not cover everything, depending on performance. There are ways to finesse it, for example by dropping your contribution to the minimum 5k per month for a year or two so that you still get the deduction but are not putting much in. Bear in mind also that any retirement payout you may receive complicates matters as it shares the same allowance as IDECO.

[adamu]

I was looking at https://retirewiki.jp/wiki/IDeCo

You have excellent taste, sir

I'm not sure if I understand the question though.

when I choose a lumpsum, I get ¥400,000 per year for the first 20 years of contributions

Let's assume a 7% annual gain.
Investing ¥23,000/mo for 20 years at 7% annual return results in ~¥11.3 million.
If taking that as a lump sum, the Retirement income allowance is ¥400k x 20 years = ¥8 million.
So you could get ¥8M tax free, the other ¥3.3 million would be taxable. More if your lump sum is more than ¥11.3 million.

[Tkydon]

I was looking at https://retirewiki.jp/wiki/IDeCo

You have excellent taste, sir

I'm not sure if I understand the question though.

when I choose a lumpsum, I get ¥400,000 per year for the first 20 years of contributions

Let's assume a 7% annual gain.
Investing ¥23,000/mo for 20 years at 7% annual return results in ~¥11.3 million.
If taking that as a lump sum, the Retirement income allowance is ¥400k x 20 years = ¥8 million.
So you could get ¥8M tax free, the other ¥3.3 million would be taxable. More if your lump sum is more than ¥11.3 million.

Actually, only half of the ¥3.3 million would be taxable at 15.105%

[Chizakura]

I think any growth would be included in the amount you are withdrawing, so the 400k a year allowance may or may not cover everything, depending on performance. There are ways to finesse it, for example by dropping your contribution to the minimum 5k per month for a year or two so that you still get the deduction but are not putting much in. Bear in mind also that any retirement payout you may receive complicates matters as it shares the same allowance as IDECO.

Yeah, good point. Since it's taxed rather high, I guess it makes sense to choose the most non-volatile/risk-free security then. Also, it might make sense to just start as early as possible and just pay the 5k minimum per month. The only drawback is that usually there are fixed fees in that case. I guess I have to calculate if the potential tax savings are worth the additional fees.

Bear in mind also that any retirement payout you may receive complicates matters as it shares the same allowance as IDECO.

Not sure I understand. Let's say I get 100k per month pension - does that mean 100k are "subtracted" from the tax free amount ? Or are even 12*100k subtracted because it's calculated for the year when the lump sum is being paid out?

That would also mean, it would be wise to choose a vendor that allows to do a lump sum that maxes out the "allowance" and then distribute the rest over the years to reduce tax. Correct?

EDIT: looks like for 20 years, 3% gain per year already makes the final amount reach the allowance. I was planning on investing in TOPIX which probably has lower gains than US or all-world, but 3% is still fairly easy to reach I think. So it probably makes sense to really start early with the 5k/month contributions to reduce the later tax burden.

[Beaglehound]

By retirement payout I mean taishokukin rather than any pension.

[RetireJapan]

Be careful it seems OP is talking about taking a pension, not the lump sum.

Pensions are taxed as income but have an extra tax free allowance.