Ideco - Recommended point to switch focus to Nisa.

[Tkydon]

There are three issues to consider:

1. Do you think you will need access to money before retirement?
Restated, you will probably need access to some money before retirement...
Solution - NISA - you put in post-tax money, so not tax advantaged on input, and no Tax Refund, and there is an Y18M lifetime cap on how much you can pay in to NISA, but completely Tax Free on Withdrawal.
Lifetime Input Limit = Y18M
Consisting of Tsumitate Lifetime Limit Y6M, and Growth Lifetime Limit Y18M minus Total Tsumitate Accumulation.
If you pay in regularly, there is a possibility that you will reach the Lifetime Limit. When you sell some NISA Assets, you receive back credit of the Original Purchase Cost of the Asset back to the Lifetime Limit, so that you can invest that original Purchase Cost amount again
e.g. Purchase Cost Y10M - Sell for Y15M Tax Free - Credit to Lifetime Limit of the original Purchase Cost Y10M, so available for reinvestment subject to the annual limits...
You can access the money anytime.

2. You do need to save for Retirement !!!, and want to leverage tax advantaged savings to grow your pension pot tax free.
Solution - Company Pension, Japan 401k, and/or iDeCo
It will be taxable in retirement, but at a much reduced Tax Band compared to employment income with increased Tax Deductions.
Your investment is tax free, so either your employer does not withhold Income Tax on the money invested (free of National Income Tax and Reconstruction Surtax) or you get a Tax Refund of excess tax withheld through the year (free of National Income Tax and Reconstruction Surtax), and your Residents' Tax Bill is reduced in the following year (free of Residents' Taxes)
But you can't access the money until retirement.
iDeCo is taxable in retirement, but it is eligible along with Japanese National Penshion, other National Pensions, and certain other pensions to be aggregated for calculation of the Public Pension Deduction, and as your income will be lower, your tax rate will be much lower.

3. It is probably good to always use both.
If you pay iDeCo from your bank account, instead of having it withdrawn from your paycheck, the money will have been subjected to Withholding you will accumulate a Tax Credit and you can expect a Tax Refund at the end of the year.
Other Deductions to generate an annual tax refund: Home Loan / Mortgage Tax Relief, Medical Bills over Y100,000 in the year, Furusato Nouzei.
Consider these as forced savings accumulation out of income over the year to provide Tax Free fund which you can then sweep into NISA.
If you pay iDeCo from your paycheck, then tax will not be withheld, and so you won't receive a tax refund, but you do receive the benefit of the tax saving through the year, and so you might want to positively accumulate that tax saving into NISA...
If you split the money you can invest say 2/3 to iDeco and 1/3 to NISA, Then you will receive the Tax Benefit on the iDeCo investment somewhere between 30% and 50%, so that can then supplement the NISA investment tax free.
If you include th residents' Tax saving, then you will be investing about 50% of the Gross Total before Tax in iDeCo and 50% in NISA...

So you get the benefit of both.
You will have access to half of the amount anytime whilst half will still be locked up until retirement.

Remember the Lifetime Limit on NISA is Y18M, so once you reach that limit, you will only be able to do iDeCo.

[Tkydon]

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.

It is the actual contributions you make in the year that are entitled to the tax deduction... No contributions - no tax deduction... You get the Postcard, the same as the National Pension Postcard, stating Contributions in the year. If you have paid those contributions out of Post-Tax income, then you can claim the refund of the excess Tax withheld on those contributions...

The '400,000 yen per year for the first twenty years + 700,000 yen per year for years over 20 years' taxation method is for Funds received as (a) LUMP SUM Retirement Bonus(es), and Not Pension Income from a Pension or Annuity.

You may receive a LUMP SUM Retirement Bonus when you leave your company, or you can take part of iDeCo as a Lump-Sum payout on retirement...
The rest has to be converted to an Annuity and is then taxed as Public Pension Income under Miscellaneous Income, under the Aggregate Taxation Method at your Marginal Rate of Income Tax.
You can aggregate it in with other Qualified Public Pension Income; Japan National Pension, overseas National Pensions, and certain other types of Pension or Annuity and eligible for calulation of the Public Pension Deduction on that income in the year.

See the table for calculation here - Page 8 (page 12 of the PDF:
Calculating the Public Pension Plan Deduction (Calculation Table)

https://www.tax.metro.tokyo.lg.jp/book/ ... k2024e.pdf

This is the same Deduction for both National and residents' Taxes.

[Tkydon]

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.

The Tax Benefit may be a reduction in Withholding Tax at the time of actual payment, or it may be in the form of a Refund of Excess Tax withheld from salary through the tax year, and a reduction in Residents' Taxes in the following year.

The Total Tax Benefit:

Pretax Value of iDeCo Contribuions = Total iDeCo Contributions in the Year / (1 - (Marginal Tax Rate +Reconstruction Surtax Rate)
National Tax Benefit = Pretax Value of iDeCo Contribuions - the Total iDeCo Contributions in the Year
Residents' Tax Benefit = Pretax Value of iDeCo Contribuions x 10%

The government is therefore subsidizing your iDeCo investment.

The return of the iDeCo and NISA will both depend on the returns on the assets invested in.

[Tsumitate Wrestler]

Never.

Always do both.

Justification to follow...

I appreciate you engaging with the topic, but I cannot help but feel you ignored the main focus of the post, and wrote in length about the generalities of each plan.

The thought experiment was this:

I can contribute 68,000 yen monthly to iDeCo and an additional 50,000 yen to NISA from 2025, potentially less. Mathematically, there’s a market-dependent point where it makes sense to switch my focus from iDeCo to NISA. Once NISA is maxed out, I'd return to prioritizing iDeCo. I'm trying to determine that specific point.

[adamu]

you ignored the main focus of the post, and wrote in length about the generalities of each plan.

He should put that in his signature as his special ability

[Tkydon]

I can contribute 68,000 yen monthly to iDeCo and an additional 50,000 yen to NISA from 2025, potentially less.

I don't know what you mean by,

Mathematically, there’s a market-dependent point where it makes sense to switch my focus from iDeCo to NISA. Once NISA is maxed out, I'd return to prioritizing iDeCo. I'm trying to determine that specific point.

You need to know all this following detail and your specifics (age, gender, marital and dependent status, actual income level, marginal rate of Income Tax, Tax Residency Status, etc., etc., etc., ...), in order to make the comparison you are trying to make, and determine that specific cut-over point.

If you contribute 68,000 yen monthly to iDeCo (816,000 per year) (or whatever the max is for the particular investor's situation), you get a big tax break, so depending on your marginal rate of Income Tax (5.105% + 10%, 10.21% + 10%, 20.42% + 10%, 23.483% + 10%, 33.693% + 10%, 40.84% + 10%, or 45.945% + 10% National Income Tax plus Residents' Taxes) , you only actually contribute a fraction of that Y68,000, and the government contributes the rest in the form of tax rebates; either in a Refund of Tax Withheld, reduced rate of Withholding at source, or reduced final tax bill at the end of the year. I already covered the calculation...

If you contribute instead to NISA, you get no tax break. I guess that doesn't matter if you have no taxable income
A monthly contribution of 50,000 yen to NISA (600,000 per year) costs you 50,000 yen in Post Tax Income, and the government gets to keep their taxes at your marginal tax rate and 10% Residents' Taxes (5.105% + 10%, 10.21% + 10%, 20.42% + 10%, 23.483% + 10%, 33.693% + 10%, 40.84% + 10%, or 45.945% + 10% National Income Tax plus Residents' Taxes) on the Pre-Tax Income that produced that 50,000 yen in Post Tax Income. Work out for yourself the amount of tax at your marginal tax rate.

If you contribute the Tsumitate max, you get no tax break. A monthly contribution of 100,000 yen to NISA (Y1.2M per year) costs you 100,000 yen in Post Tax Income, and the government gets to keep their taxes at your marginal tax rate and 10% Residents' Taxes on the Pre-Tax Income that produced that 100,000 yen in Post Tax Income. Work out for yourself the amount of tax at your marginal tax rate.

If you contribute the NISA max, you get no tax break. Total nnual contributions of Y3.6M yen per year to NISA costs you Y3.6M yen in Post Tax Income, and the government gets to keep their taxes at your marginal tax rate and 10% Residents' Taxes on the Pre-Tax Income that produced that Y3.6M yen in Post Tax Income. Work out for yourself the amount of tax at your marginal tax rate.

So, you are not comparing apples to apples.

You have access to NISA funds anytime, should you ever need money. This may be a consideration...

You don't have access to iDeCo until retirement, when you can take some portion as a Lump Sum, taxable in a special way...
Special Deduction of Y400,000 per year for the first 20 years of membership, and Y700,000 per year for years greater than 20 (subject to certain restrictions if other lump sums have been received recently)...
Divide any excess over the Special Deduction by 2, and apply standard Marginal Tax Rate and 10% Residents' Tax to the value of the half. A very low Tax Rate... But you only paid maybe 50c on the dollar in the first place, and the government paid the rest in the form of the tax rebates.
If the Lump Sum is below the Special Deduction, the Lump Sum is completely Tax Free. (e.g. Y11.5M Tax Free after 25 years) (Just like NISA)

The remaining balance of your iDeCo will be used to purchase an Annuity that will produce a monthly income in retirement, and if that exceeds your Total Deductions and Allowances, including the Public Pension Deduction, will be taxed at your Marginal Tax Rate and 10% Residents' Tax rate.

If your total investible amount is less that the max limits for each, then

Max out iDeCo and ensure to invest the Tax Benefit into NISA... The Government will be paying your NISA Contribution Tax Free...

or if you think you will need access to funds before retirement, then

say, 2/3 iDeCo, 1/3 NISA split => Tax Rebates on iDeCo reinvested into NISA => Final Split about 50/50 (depending on your Marginal Rate of Income Tax) The Tax benefit today will not be so high, but that is the cost of greater access to NISA funds before retirement, and greater NISA balance tax free at the end.

If your total investible amount is less than the max limits for each, then max out iDeCo first for maximum tax benefit today, as that Pre-Tax money can deliver greater return than the equivalent amount invested post-tax in NISA, though there will be a tax bill to pay on that greater return in iDeCo in retirement, where NISA will be totally tax free on withdrawal. The higher your Income today, the greater the Tax Benefit of maxing out your iDeCo first.

Both iDeCo and NISA are Tax Arbitrage plays:
iDeCo - you are arbitraging a Tax Saving at your Marginal Tax Rate today (5.105%, 10.21%, 20.42%, 23.483%, 33.693%, 40.84% or 45.945% National Income Tax plus 10% Residents' Taxes) on the Pre-Tax Income vs. Tax at your Marginal Tax Rate in Retirement (5.105%, 10.21%, 20.42%, 23.483%, 33.693%, 40.84% or 45.945% National Income Tax plus 10% Residents' Taxes) (probably lower tax bands with bigger tax free allowances and deductions including the Public Pension Deduction).
vs.
NISA - you are arbitraging current Tax Paid at your Marginal Tax Rate today (5.105% + 10%, 10.21% + 10%, 20.42% + 10%, 23.483% + 10%, 33.693% + 10%, 40.84% + 10%, or 45.945% + 10% National Income Tax plus Residents' Taxes) vs. Tax Saving (Zero Tax) at the Flat Capital Gains Tax Rate of 20.315% (!5% National, 0.315% Reconstruction Surtax, and 5% Residents' Taxes) on the gain on the lower contribution amount when cashing out.

Assuming you invest both sets of funds in the same financial instruments with the same returns before taxes, then I think for the same amount of funds invested, the iDeCo will yield a greater final benefit after tax than the NISA which will be tax free. You can work out for yourself the amounts based on the taxes at your marginal tax rate.

If the Tax Rates were actually the same at the time of investment and at the time of disbursement, then there would be no difference in paying the tax now, or paying the tax later,

5 x 0.8 x 20 = 5 x 20 x 0.8... the same...

but this is most definitely not the case. The tax rates in retirement will most definitely be lower than the tax rates you are paying today due to the reduced income, greater allowances and deductions, and maybe even different method of taxation on different types of Income being taxed, hence the tax arbitrage opportunity...

If you were expecting a one line answer, then you asked the wrong question.


My responses try to achieve three goals at the same time:

1. Answer the question pointing out the devil in the detail to the OP, usually having to make lots of assumptions for information not provided (age, gender, marital and dependent status, actual income level, marginal rate of Income Tax, Tax Residency Status, etc., etc., etc., ...)
and
2. Provide a general answer that incorporates all the detail that I can remember for readers other than the OP who may gain something from the general response and may not know all the background or all the detail of a topic.
and
3. In thinking through and trying to present it in a meaningful logical way, along with feedback pointing out my many errors (thanks to those who take the time and make the effort to educate me. I sincerely appreciate it), I get to clarify my own understanding of the topic.

[Tsumitate Wrestler]

3. In thinking through and trying to present it in a meaningful logical way, along with feedback pointing out my many errors (thanks to those who take the time and make the effort to educate me. I sincerely appreciate it), I get to clarify my own understanding of the topic.

I appreciate anyone who's willing to to engage on this forum, I'm not trying to be dismissive.

Yes, variables can shift. However, for the sake of creating a more generalizable answer, it's worth engaging with the question based on those factors stated.

One cannot approach solving a physics question by highlighting the problem of friction and wind resistance, so in that ethos: neglect air resistance, ignore friction, assume quasi-equilibrium, ideal gas, and assume all fluid is laminar.