Ideco - Recommended point to switch focus to Nisa.

[RetireJapan]

It's a really interesting question. My wife's iDeCo account is almost at 20m now, so I'm guessing it will be more like 40m by the time she wants to cash it in.

At that point, 15m will be tax free. Of the remaining 25m, 12.5m will be tax free.

On the taxable 12.5m she will have to pay 2,589,000 in tax (so a 20.7% tax rate) if she takes the lump sum.

Taking it as pension would give it a different tax treatment, it would be income if over the pension tax deduction.

[TokyoWart]

Why wouldn't you want to max both iDeCo and NISA? For iDeCo you are getting income out of your current marginal tax bracket so it has advantages over investing in a regular taxable brokerage account once you have maxxed out the NISA limits. (I am not following the logic for stopping use of the iDeCo just because you face a 20%-ish tax bracket for part of what is in that account, given that it gets to grow tax-deferred for many years and 20% is lower than local and national taxes on earned income above around 3.3 million yen.)

[Tsumitate Wrestler]

Why wouldn't you want to max both iDeCo and NISA? For iDeCo you are getting income out of your current marginal tax bracket so it has advantages over investing in a regular taxable brokerage account once you have maxxed out the NISA limits. (I am not following the logic for stopping use of the iDeCo just because you face a 20%-ish tax bracket for part of what is in that account, given that it gets to grow tax-deferred for many years and 20% is lower than local and national taxes on earned income above around 3.3 million yen.)

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

[TunaSki]

Why wouldn't you want to max both iDeCo and NISA? For iDeCo you are getting income out of your current marginal tax bracket so it has advantages over investing in a regular taxable brokerage account once you have maxxed out the NISA limits. (I am not following the logic for stopping use of the iDeCo just because you face a 20%-ish tax bracket for part of what is in that account, given that it gets to grow tax-deferred for many years and 20% is lower than local and national taxes on earned income above around 3.3 million yen.)

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

But if you already have ¥11 million in your NISA, the majority of that will be in old NISA (ordinary or Tsumitate), which will eventually need to be migrated to New NISA. So you can essentially consider ¥11 million of your ¥18 million life time allowance is already allocated. Leaving ¥7 million purchasing left.

So at 45 to 60 (15 years) if you contribute ¥38,888 to NISA per month, you’d still be able to max out your life time allowance. So if you have say ¥110,000 spare a month to invest, I still think ¥68,000 iDeCo + ¥38,888 NISA is the best combo from 45 onwards

[Tsumitate Wrestler]

Why wouldn't you want to max both iDeCo and NISA? For iDeCo you are getting income out of your current marginal tax bracket so it has advantages over investing in a regular taxable brokerage account once you have maxxed out the NISA limits. (I am not following the logic for stopping use of the iDeCo just because you face a 20%-ish tax bracket for part of what is in that account, given that it gets to grow tax-deferred for many years and 20% is lower than local and national taxes on earned income above around 3.3 million yen.)

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

But if you already have ¥11 million in your NISA, the majority of that will be in old NISA (ordinary or Tsumitate), which will eventually need to be migrated to New NISA. So you can essentially consider ¥11 million of your ¥18 million life time allowance is already allocated. Leaving ¥7 million purchasing left.

No, I was just simplifying things from a 2025 context, as I plan to sell taxable and lumpsum the New Nisa in January 2025

IDeco ¥6,131,843
NISA Classic ¥2,816,035
NISA Tsumitate ¥1,364,344
Nisa Growth ¥3,081,323
Taxable ETF ¥3,392,520
Taxable Stock ¥15,180

So at 45 to 60 (15 years) if you contribute ¥38,888 to NISA per month, you’d still be able to max out your life time allowance. So if you have say ¥110,000 spare a month to invest, I still think ¥68,000 iDeCo + ¥38,888 NISA is the best combo from 45 onwards

I am already doing ¥68,000 iDeCo + ¥50,000. Down from ¥68,000 iDeCo + ¥100,000 NISA

The question is about what is most optimal.

[Tsumitate Wrestler]

It's a really interesting question. My wife's iDeCo account is almost at 20m now, so I'm guessing it will be more like 40m by the time she wants to cash it in.

At that point, 15m will be tax free. Of the remaining 25m, 12.5m will be tax free.

On the taxable 12.5m she will have to pay 2,589,000 in tax (so a 20.7% tax rate) if she takes the lump sum.

Taking it as pension would give it a different tax treatment, it would be income if over the pension tax deduction.

Yes, that is my plan the take the maximum lumpsum, and the rest as a pension. I will have more pension allowance, due to only having base nenkin.

So, there is an optimal point to switch strategies if funding is limited.

Stage 1 Ideco+Nisa (until iDeco is at 15-20 million)
Stage 2 Nisa (until the New Nisa is Full)
Stage 3 Ideco+Taxable (until retirement)

At stage 2 it seems the income tax reduction from ideco is less advantageous, versus the extra tax you will need to pay.

Thoughts?

[RetireJapan]

Stage 1 Ideco+Nisa (until iDeco is at 15-20 million)
Stage 2 Nisa (until the New Nisa is Full)
Stage 3 Ideco+Taxable (until retirement)

At stage 2 it seems the income tax reduction from ideco is less advantageous, versus the extra tax you will need to pay.

Thoughts?
[/quote]

You'll probably want to continue paying the minimum into iDeCo in order to accumulate the tax-free allowance at least?

[TokyoWart]

I can't be sure but I think you might be undervaluing the tax-free benefit from using the iDeCo. At one point you posted:

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?

This exercise is valuing the outcome of investing over several years. You have the competition between the NISA which has no tax deduction but grows tax-free and is then harvested tax-free. For the iDeCo you have the initial tax benefit, then tax-deferred growth after which some withdrawal is tax-free and some gets a 20% tax rate. But I think you need to consider the 163,200 in yearly tax savings from the iDeCo not as a one-time benefit of 163,200 yen but how it can grow (since it is money you otherwise wouldn't have if you choose NISA instead of iDeCo) over the same period of time. Saving 163,200 yen today is not at all equivalent to saving 163,200 yen in taxes in 20 or 30 years because of the time cost of money.

There is a similar dilemma for US investors in choosing to fund a pretax Roth IRA (which is not tax deductible but is completely tax free at withdrawal) or posttax Traditional IRA (which is tax deductible but is then taxed on withdrawal). For that simplified scenario the outcomes are identical if you are in the same tax bracket at the time of contribution as the time of harvesting the funds, but you miss that mathematical outcome if you fail to account for investing the tax deduction you get for the initial contribution.

I give that example just to emphasize that you need to consider the growth over time of the initial tax savings for iDeCo. The tax rate coming out of iDeCo is more complicated than the simple US IRA example so I am not sure how to model it. I know that you used Chat GPT but that tool will not necessarily consider things like opportunity cost (the reinvestment of tax savings from iDeCo is one opportunity cost of using NISA instead) unless you phrase the prompt very carefully.

I don't know your numbers in detail so I don't mean to say you are "wrong" to do as you proposed; I am just trying to raise a question you might not have considered.

[Tsumitate Wrestler]

This exercise is valuing the outcome of investing over several years. You have the competition between the NISA which has no tax deduction but grows tax-free and is then harvested tax-free. For the iDeCo you have the initial tax benefit, then tax-deferred growth after which some withdrawal is tax-free and some gets a 20% tax rate. But I think you need to consider the 163,200 in yearly tax savings from the iDeCo not as a one-time benefit of 163,200 yen but how it can grow (since it is money you otherwise wouldn't have if you choose NISA instead of iDeCo) over the same period of time. Saving 163,200 yen today is not at all equivalent to saving 163,200 yen in taxes in 20 or 30 years because of the time cost of money.

This calculation assumes that 163,200 yen savings will not be reinvested. We are seeking to find the breakeven point at which the tax-savings is equal to the tax payment. We have to assume an average market return. It seems that that number is around 15-20 million yen assuming the investment has 25+ years to grow.

However, to your point you can change the numbers with a bear market, bull market, etc.

But if your in your 40s, with a 20 million ideco, it does look like the numbers suggest NISA should be your focus.

[Tsumitate Wrestler]

Stage 1 Ideco+Nisa (until iDeco is at 15-20 million)
Stage 2 Nisa (until the New Nisa is Full)
Stage 3 Ideco+Taxable (until retirement)

At stage 2 it seems the income tax reduction from ideco is less advantageous, versus the extra tax you will need to pay.

Thoughts?
You'll probably want to continue paying the minimum into iDeCo in order to accumulate the tax-free allowance at least?

How exactly does that mechanism work, does a 5000 yen minimum payment entitle you to the full allotment?