Ideco - Recommended point to switch focus to Nisa.

[RetireJapan]

I'm not entirely sure. It may be that just having the account entitles you to the annual tax-free amount, or you may have to be actively paying in.

The tax free benefit accrues according to the formula below:

400,000 yen per year for the first twenty years + 700,000 yen per year for the next ten years, for a maximum of 15m yen in tax free allowance after 30 years.

[TunaSki]

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?

I think What RetireJapan is referring to is the total contribution period which is used to calculate your tax free retirement income tax allowance.

The more years you contribute, the higher that retirement income tax free allowance becomes, as it’s calculated based on amount of years enrolled and contributed to the iDeCo/DC.

So the minimum ¥5,000 per month, does still help increase your retirement income tax free allowance. Where as is you cease contributing, then your retirement income allowance also ceases
To increase.

Hence why it’s a good idea to continue iDeCo (which is what I outlined in my first comment)

[Tsumitate Wrestler]

I'm not entirely sure. It may be that just having the account entitles you to the annual tax-free amount, or you may have to be actively paying in.

The tax free benefit accrues according to the formula below:

400,000 yen per year for the first twenty years + 700,000 yen per year for the next ten years, for a maximum of 15m yen in tax free allowance after 30 years.

iDeCoの場合、控除額は、勤続年数ではなく加入者として掛金を拠出した月数により決められます（例：掛金拠出月数が150ヵ月の場合⇒12年6ヵ月　控除額年40万円×13年＝520万円）。
https://www.ideco-koushiki.jp/faq/

You are right. One would need to contribute the minimum of 5000 yen to get their full allotment. Still seems like a reasonable plan. Tax avoidance is the name of the game with these accounts.

I'll need to check the numbers again in 5 years time. It will depend on the markets as well.

Would you and your wife consider it? Let me know if your number crunching turns up anything,

[adamu]

Doesn't the amount you save with iDeCo depend on your tax rate when you put the money in, how much the extra money grew over the years, and also your tax rate when you take it out again? I don't think you can put a blanket numerical figure on it.

Personal note: the discussion about needing to be enrolled to build up the withdrawal deduction was timely, as I was actually planning to put my contributions on hold next year. Will have to plan to spend ¥60k to keep it going instead.

[TokyoWart]

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.

If you do the breakeven analysis without considering the different timing of the savings and payments (e.g. 163,200 yen saved in taxes in 2024 is equal in effect to 163,200 yen in taxes paid in 2054 when you are old like me) then you are ignoring the time value of money. The amounts we are discussing here are not enormous but as an intellectual exercise I don't think this is the way to do a breakeven analysis that spans decades. The way to value those two sums incorporating the time value of money would be to use a discount rate. For instance, if you even applied a very low discount rate like 2.4%, the money you receive or save today is worth twice the same nominal sum received in 30 years. If you chose an average stock market return as your discount rate the difference becomes much greater.

[Tsumitate Wrestler]

Doesn't the amount you save with iDeCo depend on your tax rate when you put the money in, how much the extra money grew over the years, and also your tax rate when you take it out again? I don't think you can put a blanket numerical figure on it.

But there same can be said for most retirement plans, they need to be individualized.

Based off the discourse I will seriously consider it in my 40s, depending on the size or my iDeco account.

However, the warning on keep the minimums going at the very least is an excellent one to keep in mind. What a strange function.

[Tsumitate Wrestler]

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.

If you do the breakeven analysis without considering the different timing of the savings and payments (e.g. 163,200 yen saved in taxes in 2024 is equal in effect to 163,200 yen in taxes paid in 2054 when you are old like me) then you are ignoring the time value of money. The amounts we are discussing here are not enormous but as an intellectual exercise I don't think this is the way to do a breakeven analysis that spans decades. The way to value those two sums incorporating the time value of money would be to use a discount rate. For instance, if you even applied a very low discount rate like 2.4%, the money you receive or save today is worth twice the same nominal sum received in 30 years. If you chose an average stock market return as your discount rate the difference becomes much greater.

This is a very good point, I'm sorry I passed it by the first time.

I am not quite sure how to run the math with NPV, but it seems that it favours tapering ideco contributions somewhat in ones mid 40s as ideco reaches around 20 million.

I think there something to the strategy, but I will probably need to make a proper worksheet to figure it out.

[RetireJapan]

I'm not entirely sure. It may be that just having the account entitles you to the annual tax-free amount, or you may have to be actively paying in.

The tax free benefit accrues according to the formula below:

400,000 yen per year for the first twenty years + 700,000 yen per year for the next ten years, for a maximum of 15m yen in tax free allowance after 30 years.

iDeCoの場合、控除額は、勤続年数ではなく加入者として掛金を拠出した月数により決められます（例：掛金拠出月数が150ヵ月の場合⇒12年6ヵ月　控除額年40万円×13年＝520万円）。
https://www.ideco-koushiki.jp/faq/

You are right. One would need to contribute the minimum of 5000 yen to get their full allotment. Still seems like a reasonable plan. Tax avoidance is the name of the game with these accounts.

I'll need to check the numbers again in 5 years time. It will depend on the markets as well.

Would you and your wife consider it? Let me know if your number crunching turns up anything,

My wife is likely to stop working in the next year or two. I'm not sure it makes sense to pay more than the minimum into iDeCo at that point.

Will probably make a blog post or video about it once we make the decision

[beanhead]

I think What RetireJapan is referring to is the total contribution period which is used to calculate your tax free retirement income tax allowance.

The more years you contribute, the higher that retirement income tax free allowance becomes, as it’s calculated based on amount of years enrolled and contributed to the iDeCo/DC.

So the minimum ¥5,000 per month, does still help increase your retirement income tax free allowance. Where as is you cease contributing, then your retirement income allowance also ceases to increase.

Hence why it’s a good idea to continue iDeCo (which is what I outlined in my first comment)

Excellent reminder. Good post.

[Tkydon]

Never.

Always do both.

Justification to follow...