Ideco - Recommended point to switch focus to Nisa.

[Tsumitate Wrestler]

Facts:
A. Self employed
B. Base nenkin, hopefully 40 years by 65
C. IDeco: 6.1 million yen
D. Nisa 11 million (including 2025 lump sum)
E. Age mid 30s
F. ideco plan: lumpsum up to taxable fee amount, then the rest as a pension.

Retirement contributions will slow after 2025, due to a house purchase. (Rent was previously very low)

....

Question: After doing some simulations online, and using a bit of a.i, the recommendation seems to be to continue focusing on iDeco until 45.

However, after 45, the recommendation seems to be switching the focus to the remaining NISA space, due to the tax free retirement income limit.

Does this seem correct?

[RetireJapan]

Facts:
A. Self employed
B. Base nenkin, hopefully 40 years by 65
C. IDeco: 6.1 million yen
D. Nisa 11 million (including 2025 lump sum)
E. Age mid 30s
F. ideco plan: lumpsum up to taxable fee amount, then the rest as a pension.

Retirement contributions will slow after 2025, due to a house purchase. (Rent was previously very low)

....

Question: After doing some simulations online, and using a bit of a.i, the recommendation seems to be to continue focusing on iDeco until 45.

However, after 45, the recommendation seems to be switching the focus to the remaining NISA space, due to the tax free retirement income limit.

Does this seem correct?

Hmmm. My gut feeling is that filling NISA as soon as possible might be the better option, unless you are in a very high income tax bracket, in which case the iDeCo tax benefits become more attractive.

NISA is completely tax free unlike iDeCo, more flexible in terms of when you can access the money, and IMO should be left to grow as long as possible (using iDeCo first for retirement expenses).

Anyone else?

[Tsumitate Wrestler]

Facts:
A. Self employed
B. Base nenkin, hopefully 40 years by 65
C. IDeco: 6.1 million yen
D. Nisa 11 million (including 2025 lump sum)
E. Age mid 30s
F. ideco plan: lumpsum up to taxable fee amount, then the rest as a pension.

Retirement contributions will slow after 2025, due to a house purchase. (Rent was previously very low)

....

Question: After doing some simulations online, and using a bit of a.i, the recommendation seems to be to continue focusing on iDeco until 45.

However, after 45, the recommendation seems to be switching the focus to the remaining NISA space, due to the tax free retirement income limit.

Does this seem correct?

Hmmm. My gut feeling is that filling NISA as soon as possible might be the better option, unless you are in a very high income tax bracket, in which case the iDeCo tax benefits become more attractive.

NISA is completely tax free unlike iDeCo, more flexible in terms of when you can access the money, and IMO should be left to grow as long as possible (using iDeCo first for retirement expenses).

Anyone else?

Isn't the calculation simply the 163,200 yen yearly "tax savings" from IDeco, in comparison to the extra tax I would pay in tax with a larger IDeco pot?

The simulation seems to suggest at age 45 is the point at which these benefits break even, and Nisa is a better bet.

Assuming my rather simple inputs status, with only a basic pension, and no retirement bonus, I was wondering if I was missing something with the math.

[adamu]

I think you're trying to plan which account you'll be putting money into 10 years from now. We don't know how things will look by then, so it's probably not worth considering at the moment.

Example: everyone (me included) that likes this kind of thinking suggested the old Tsumitate over Regular NISA, because it allowed the higher tax free limit in the long term. Except they cancelled Tsumitate NISA, so in hindsight the people who went with regular NISA got a higher tax free allowance.

You could figure out how to earn more money so you can fill them both, removing the dilemma

[Tsumitate Wrestler]

I think you're trying to plan which account you'll be putting money into 10 years from now. We don't know how things will look by then, so it's probably not worth considering at the moment.

Example: everyone (me included) that likes this kind of thinking suggested the old Tsumitate over Regular NISA, because it allowed the higher tax free limit in the long term. Except they cancelled Tsumitate NISA, so in hindsight the people who went with regular NISA got a higher tax free allowance.

You could figure out how to earn more money so you can fill them both, removing the dilemma

I disagree. We are signing a 35 year mortgage, so planning for the future is very much top-of-the-mind.

Plans can be changed, but a simple note on what makes current sense mathematically, to be re examined at that time, is not a wasted effort.

Others have pensions and retirement bonuses, I need to plan everything deliberately if I am to have a comfortable retirement.

[Chizakura]

In general, ideco is better. The reason is that with ideco you save on income tax (even if you pay a little bit tax later on) AND largely on capital gains tax. If you put amount X into ideco instead of NISA this year and then fill your NISA later, you only "lose" out on the partial capital gain tax deduction *for the time until you fill NISA*.

That being said, you want to sign a mortgage. And in that case, I would personally switch focus to NISA completely. Reason is simple the flexibility (especially needed as a freelancer). If you lose out on income temporarily you want to be able to keep pay your mortgage as long as possible and hopefully without reducing your everyday expenses significantly - until you get new income. Also, if you sign a variable interest loan, you can often use NISA to pay back your loan quicker in case that interest rates go up really sharp.

But optimally of course you max out NISA AND also max out ideco. I would definitely keep paying ideco until your retire, especially as a freelancer - unless your income (not revenue) is very low (<4M per year).

[TunaSki]

Is your calculation assuming you wish to take 100% of the iDeCo as retirement income? Or is it able to factor in a hybrid mix of retirement income (lump-sum) and pension income (annuity¥ combo?

Because I’d say continuing ideco is better for you, if you were to withdraw as a retirement income/pension income hybrid:

1) you continue to reduce your taxable income with contributions

2) you continue to increase your contribution period, to increase your tax free retirement income allowance

3) your Kokumin Nenkin annuity will be pretty low, so you can withdraw the remaining of your iDeCo (after harvesting the retirement income tax free allowance) as a 20 year annuity, which, along with the Kokumin Nenkin annuity gets the pension income deduction applied to it. So you might find that the tax due on the Kokumin Nenkin + iDeCo annuity is low, if any at all too.

If you focus more on NISA then you:

1) don’t utilize the tax deduction from contributions
2) don’t continue to increase your retirement income allowance
3) don’t increase your iDeCo annuity to supplement your extremely low Kokumin Nenkin annuity in retirement

[Chizakura]

Agree with what TunaSki said. The question is basically: the flexibility of NISA or the financial advantages of ideco. That is what will make your decision.

[beanhead]

Hmmm. Neither is a bad choice.

If we agree that self-employed = slightly higher risk than a full-time company employee, I would go for maximizing NISA. Of course keep contributing to iDeCo as well, but at a lower rate than your current 67,000/68,000yen per month.

[Tsumitate Wrestler]

As I have 10 million in accessible investments, and 1.5 million in cash, I do not feel the iDeco being locked away is a danger.

My question is that there is a mathematical break even point where the IDeco will grow large enough upon retirement, where the extra tax I will need to pay does not makeup for the income tax savings.

The A.I simulation seemed to suggest that when I reach 45, and my IDeco is 15-20 million yen, at this point it is worth switching over completely to Nisa.

....

If I manage to fill Nisa, then, I should of course continue to contribute to iDeco if possible.

....

Plan

A. IDeco 68,000/Nisa 50,000 a month {From Now -----> 45 years old}
B. Nisa 120,000 a month {Until full by 52}
C. Continue iDeco and taxable {until retirement}