Simple Q&A - iDeCo

[Tkydon]

When coming to Japan, tax is is paid on the previous year's income. So the tax for the first year is paid in the second year.

Does that mean that it only really makes sense to start with iDeCo in the first year? Or will starting in the first year reduce the tax that has to be paid in the second year?

For National Income Tax:
If you are a salaried employee:

If the employer pays your iDeCo Contributions directly out of Salary, then those iDeCo Contributions will not be subject to Withholding Tax, so will be paid out of Pre-Tax Income. You will not pay National Income Tax on those iDeCo Contribbutions

If you pay your iDeCo Contributions from your Bank Account, then the Income to pay those iDeCo Contributions will have been subject to Withholding Tax. You will be able to claim a Tax Refund for the National Income Tax paid on that Income in the year the Contributions were paid, either at the Year-End Adjustment - Nenmatsu Chousei, or by filing a Tax Return - Kakutei Shinkoku in the following March at the local office of the National Tax Authority.

Usually, the Year-End Adjustment - Nenmatsu Chousei is sufficient for most employee tax payers.

If you receive a Tax Refund, either in December Paycheck for the Year-End Adjustment - Nenmatsu Chousei, or in April for the Tax Return - Kakutei Shinkoku, then it would probably be a good idea to funnel those funds directly into NISA tax free

If you are not a salaried employee:
You will be able to claim the Tax Deduction against National Income Tax for your iDeCo Contributions paid in the previous year, along with other Social Insurance Contributions; National Pension, Health Insurance, and certain other types of Insurance, when filing your Tax Return - Kakutei Shinkoku in the following March at the local office of the National Tax Authority. You will not receive a refund, but you will not be charged Income Tax on those Contributions.

For Residents' Taxes:
When your National Income Taxes are filed, either through Year-End Adjustment - Nenmatsu Chousei, or by filing a Tax Return - Kakutei Shinkoku, the information will usually be passed through to the Prefectural and Municipal Tax Offices for your Residents' Tax Filing.
Residents' Taxes are calculated from that information, so the Tax Deduction is calculated and applied automatically, so the iDeCo and other Social Insurance Contributions are excluded for calculation of Residents' Taxes, which are then imposed from the following July.

In rare cases, it may be necessary to file a separate Resident's Tax Return at the local Municipal Tax Office, in which case you should also remember to claim the Tax Deduction against Residents' Taxes for your iDeCo Contributions paid in the previous year, along with other Social Insurance Contributions; National Pension, Health Insurance, and certain other types of Insurance.


Residents' Taxes Side Note:
If you are planning to leave Japan, you should remember that up to about 18 months of outstanding unpaid Residents' Taxes will be payable when you decide to leave Japan, and you should probably budget and squirrel away 10% of up to 18 months of your Gross Income to cover the Residents' Tax Bill when you decide to leave.

[Chizakura]

Thanks guys, but I'm still a bit confused. So when moving to Japan e.g. next month (December), does it make sense in terms of tax benefits to start ideco from January next year - or will the benefits be bigger when starting one year later?

(ofc even with "lower" benefits in the first year, it might still make sense to start early, but that's a different question)

Also, one more question: pre tax income means that only tax will be reduced or is it also reducing premiums for pension and health care? (I'm an employee) Even the retire wiki doesn't really make this clear.

[Beaglehound]

Thanks guys, but I'm still a bit confused. So when moving to Japan e.g. next month (December), does it make sense in terms of tax benefits to start ideco from January next year - or will the benefits be bigger when starting one year later?

(ofc even with "lower" benefits in the first year, it might still make sense to start early, but that's a different question)

Also, one more question: pre tax income means that only tax will be reduced or is it also reducing premiums for pension and health care? (I'm an employee) Even the retire wiki doesn't really make this clear.

For your second question, pension and healthcare premiums are separate. But both national income tax (at your marginal rate) and local residence tax (c.10%) will be reduced.

For the first question it would make sense to me to start IDECO asap next year if you will be starting work early next year as an employee. Whether you do IDECO through your company or not you will reap the benefits of contributions made next year against tax due next year. Can't see any reason to wait a year.

[Beaglehound]

Thanks guys, but I'm still a bit confused. So when moving to Japan e.g. next month (December), does it make sense in terms of tax benefits to start ideco from January next year - or will the benefits be bigger when starting one year later?

(ofc even with "lower" benefits in the first year, it might still make sense to start early, but that's a different question)

Also, one more question: pre tax income means that only tax will be reduced or is it also reducing premiums for pension and health care? (I'm an employee) Even the retire wiki doesn't really make this clear.

For your second question, pension and healthcare premiums are separate. But both national income tax (at your marginal rate) and local residence tax (c.10%) will be reduced.

For the first question it would make sense to me to start IDECO asap next year from a national income tax POV (assuming you are starting work early next year). But since no local tax will be assessed next year I guess you would not benefit from that.

[Chizakura]

Got it, thx!