RetireJapan

Tsumitate Wrestler wrote: ↑Tue Nov 12, 2024 11:48 am

RetireJapan wrote: ↑Tue Nov 12, 2024 10:58 am

Tsumitate Wrestler wrote: ↑Tue Nov 12, 2024 10:32 am
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?

RetireJapan wrote: ↑Tue Nov 12, 2024 12:11 pm 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.

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.

adamu wrote: ↑Tue Nov 12, 2024 1:08 pm 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.

TokyoWart wrote: ↑Tue Nov 12, 2024 1:47 pm

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 wrote: ↑Tue Nov 12, 2024 12:48 pm

RetireJapan wrote: ↑Tue Nov 12, 2024 12:11 pm 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,

TunaSki wrote: ↑Tue Nov 12, 2024 12:40 pm
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)