Re: iDeCo taxation
Posted: Sun Jan 09, 2022 12:58 am
To expand a bit on the information that already appears above concerning resets of the retirement-income deduction, the traditional rule is that any tax-favored retirement lump sum received in the preceding five years (technically, in the four years counting from the preceding year) may affect the deduction available to the retiring employee. This is often referred to as the "five-year rule" or the "four-year rule," but there is an important proviso, described below, concerning defined-contribution scheme lump sums that extends the period to 14 -- and very soon 19 -- years.
In a typical (traditional) case -- in which the lump sum is funded wholly by the company according to a formula based on salary and length of employment -- the retiring employee fills out the appropriate NTA tax form and basically lets the company do the rest. (Not submitting the form, called the "taishoku shotoku no jukyuu ni kansuru shinkokusho" or 退職所得の受給に関する申告書, results in automatic withholding at the rate of 20.42% and a troublesome wait to claim a refund.) This form has sections asking the employee about other lump-sum retirement payments being received, including any lump sums received within the preceding four years (or longer; see below). The company uses the information in these sections to calculate the applicable national and local tax according to the favorable rates described elsewhere, reducing the retirement-income deduction in conjunction with amounts previously applied or currently being applied to lump-sum payments received from other sources. Once a period of five years has passed, reporting is no longer required on these sections and the full lump-sum retirement deduction is again available for use. So, for example, if you take iDeCo as a lump sum and are able to wait at least five years before retiring, the deduction resets completely and you can make full use of it for your taishokukin.
For reference, here's the Japanese NTA page where the three currently available versions of the relevant form can be downloaded (one for up to 31 December 2021; one for 1 January to 31 March 2022; one for the period starting starting 1 April 2022):
https://www.nta.go.jp/taxes/tetsuzuki/s ... 648_37.htm
So far, so good. But now for the proviso, which applies to lump-sum payments received from defined-contribution pension schemes like iDeCo. Those eligible for such DC lump sums are required to submit the same NTA form mentioned above (apparently to the financial institution where the account is maintained). For DC lump sums, however, the NTA form notes -- in parentheses -- that the look-back period is 14 years rather than 4 years, a period that is set to be extended to 19 years as of April 1 of this year. In other words, if you have already used the deduction once for your taishokukin, when you're ready to cash in your iDeCo account up to 19 years later, you'll find that the deduction hasn't reset and the amount that can be applied to the iDeCo lump sum is subject to "adjustment" depending on the amounts involved, how long your iDeCo contributions overlapped with your period of employment, and whether the previous lump sum exhausted the deduction or left something on the table. Basically, if you hadn't used all of the deduction previously, the overlapping period of employment is deemed to be reduced by a corresponding period of time, resulting in a larger available current deduction. If you used all of the deduction previously and your iDeCo contributions substantially coincide with your period of employment, you might want to run the numbers and look into the possibility of taking an annuity instead of a lump sum so as to take advantage of the pension-income deduction.
One concrete example of these DC calculations that I found reasonably easy to follow (based on overlapping periods of 10 years and a relatively modest DC lump sum of 4,000,000 yen) appears on the following financial-planning site (Japanese):
https://e-fpc.co.jp/pay-consulting/401k ... %e7%b5%a6/
But I can't really take it much further than this myself, uninvolved as I am with iDeCo and other DC pensions. As for the question about splitting iDeCo benefits between a lump sum and an annuity, that presents no problem as long as you've chosen a plan that allows for it (this is called heikyuu 併給). The term of the annuity, whether split or not, also varies according to the plan chosen/available. There's a lot of flexibility available if you're willing to put some effort into finding a good plan: terms of 5, 10, 15 and 20 years are quite common, shorter terms exist, and the annuity itself can be taken once, twice, four times or six times a year.
Previous posts contain a few relevant links to general explanations. Rakuten Securities has a short simulation (in Japanese) comparing the three possible methods of claiming iDeCo benefits (it's part of a two-part article):
https://media.rakuten-sec.net/articles/-/33289
https://media.rakuten-sec.net/articles/-/33290
[Edit: I've revised the beginning of the following paragraph commenting on the article because I don't think the conclusion is quite as clear as I may have made it seem. A link to the first part has also been added.]
Most simulations like this tend to pass over cases involving multiple lump-sum payments taken in different years. A rather more wonkish explanation and simulation -- well beyond my pay grade -- will be found here (the webmaster cautions that some information needs to be updated):
https://shintaro-money.com/ideco-vesting/#10
Ultimately, individuals will have to consider for themselves which of the many options on offer might make the best fit with their own financial situation/outlook/life plan.
In a typical (traditional) case -- in which the lump sum is funded wholly by the company according to a formula based on salary and length of employment -- the retiring employee fills out the appropriate NTA tax form and basically lets the company do the rest. (Not submitting the form, called the "taishoku shotoku no jukyuu ni kansuru shinkokusho" or 退職所得の受給に関する申告書, results in automatic withholding at the rate of 20.42% and a troublesome wait to claim a refund.) This form has sections asking the employee about other lump-sum retirement payments being received, including any lump sums received within the preceding four years (or longer; see below). The company uses the information in these sections to calculate the applicable national and local tax according to the favorable rates described elsewhere, reducing the retirement-income deduction in conjunction with amounts previously applied or currently being applied to lump-sum payments received from other sources. Once a period of five years has passed, reporting is no longer required on these sections and the full lump-sum retirement deduction is again available for use. So, for example, if you take iDeCo as a lump sum and are able to wait at least five years before retiring, the deduction resets completely and you can make full use of it for your taishokukin.
For reference, here's the Japanese NTA page where the three currently available versions of the relevant form can be downloaded (one for up to 31 December 2021; one for 1 January to 31 March 2022; one for the period starting starting 1 April 2022):
https://www.nta.go.jp/taxes/tetsuzuki/s ... 648_37.htm
So far, so good. But now for the proviso, which applies to lump-sum payments received from defined-contribution pension schemes like iDeCo. Those eligible for such DC lump sums are required to submit the same NTA form mentioned above (apparently to the financial institution where the account is maintained). For DC lump sums, however, the NTA form notes -- in parentheses -- that the look-back period is 14 years rather than 4 years, a period that is set to be extended to 19 years as of April 1 of this year. In other words, if you have already used the deduction once for your taishokukin, when you're ready to cash in your iDeCo account up to 19 years later, you'll find that the deduction hasn't reset and the amount that can be applied to the iDeCo lump sum is subject to "adjustment" depending on the amounts involved, how long your iDeCo contributions overlapped with your period of employment, and whether the previous lump sum exhausted the deduction or left something on the table. Basically, if you hadn't used all of the deduction previously, the overlapping period of employment is deemed to be reduced by a corresponding period of time, resulting in a larger available current deduction. If you used all of the deduction previously and your iDeCo contributions substantially coincide with your period of employment, you might want to run the numbers and look into the possibility of taking an annuity instead of a lump sum so as to take advantage of the pension-income deduction.
One concrete example of these DC calculations that I found reasonably easy to follow (based on overlapping periods of 10 years and a relatively modest DC lump sum of 4,000,000 yen) appears on the following financial-planning site (Japanese):
https://e-fpc.co.jp/pay-consulting/401k ... %e7%b5%a6/
But I can't really take it much further than this myself, uninvolved as I am with iDeCo and other DC pensions. As for the question about splitting iDeCo benefits between a lump sum and an annuity, that presents no problem as long as you've chosen a plan that allows for it (this is called heikyuu 併給). The term of the annuity, whether split or not, also varies according to the plan chosen/available. There's a lot of flexibility available if you're willing to put some effort into finding a good plan: terms of 5, 10, 15 and 20 years are quite common, shorter terms exist, and the annuity itself can be taken once, twice, four times or six times a year.
Previous posts contain a few relevant links to general explanations. Rakuten Securities has a short simulation (in Japanese) comparing the three possible methods of claiming iDeCo benefits (it's part of a two-part article):
https://media.rakuten-sec.net/articles/-/33289
https://media.rakuten-sec.net/articles/-/33290
[Edit: I've revised the beginning of the following paragraph commenting on the article because I don't think the conclusion is quite as clear as I may have made it seem. A link to the first part has also been added.]
Most simulations like this tend to pass over cases involving multiple lump-sum payments taken in different years. A rather more wonkish explanation and simulation -- well beyond my pay grade -- will be found here (the webmaster cautions that some information needs to be updated):
https://shintaro-money.com/ideco-vesting/#10
Ultimately, individuals will have to consider for themselves which of the many options on offer might make the best fit with their own financial situation/outlook/life plan.