Ideco and NISA contributions is lose (or quit) employment

[JimmyK]

I think this question came up somewhere in another thread. Does anyone know what happens if you start IDeCo and NISA, only to find yourself out of work for a period of time (or indefinitely) before reaching retirement age? Presumably one can continue to make contributions when unemployed, but would the system be the same as it would if self employed? For example, I’m employed by a company in Japan and I’m able to contribute a maximum of JPY23k a month into iDeCo. If I were no longer employed I realize that figure could change, but could I continue to contribute JPY23k pm, or reduce to the minimum JPY5k pm, or perhaps even increase to the max JPY68k available to the self-employed (if circumstances allowed)? Obviously, I wouldn’t be getting the same tax benefits that ideco is designed for, but I could still benefit from growth of the funds I invest in. Presumably no problem making contributions to NISA if unemployed, as the monthly and annual limits aren’t tied to any employment status anyway. Of course, this assumes I’d actually have any money to invest without a job and income! Haven’t started either iDeCo, or NISA yet, but planning to soon.

[adamu]

Sounds like you have it sussed

The important thing for iDeCo is what category of pension payer you are. If you go from employed to unemployed, that's a move from category 2 to category 1 (min ¥5k, max ¥68k). Everything else is as you said.

Personally I wouldn't bother with iDeCo if I thought I would be unemployed shortly, unless I was maxing out the NISA, or thought I'd be likely to max the lifetime allowance in the future. As you said you don't get the income tax benefits of iDeCo when unemployed (and will have to pay income tax on the eventual withdrawals, minus deductions), so you'll get the same CGT benefits from using the more flexible NISA.

The only benefit I can see of using iDeCo over NISA while unemployed is that dividends are reinvested in an iDeCo.

[Tkydon]

Yes.

As you said, you would not be able to take the tax benefit in a particular tax year unless you have any income in that tax year against which to take the deduction. However, if you were out of work for a number of months, you could still take the total deduction against the partial year's income, or against other sources of income, if you have any. It will reduce the Income tax in that year, and the Residents' Taxes and Health Insurance payments in the following year.

You have to remember that, during a period of unemployment, you would still be on the hook for National Health Insurance (depends on your household situation and previous year's income) and National Pension Contributions (Y16,520 per person per month), unless you claim exemptions due to unafordability, but if you claim an exemption (partial or full), you would then not be entitled to contribute to iDeCo for that period.

You would be entitled to some level of support from Hello Work - Unemployment Insurance for a period, depending on the reason for unemployment and the amount of time employed and premiums paid before unemployment.

[northSaver]

The only benefit I can see of using iDeCo over NISA while unemployed is that dividends are reinvested in an iDeCo.

I think that every fund you can buy in iDeCo you can find an equivalent fund in NISA that reinvests dividends? Or maybe you meant the other way around: when unemployed you might need income from dividends, which won't be possible with an iDeCo but might be possible with a NISA (if you hold distributing ETFs)?

[adamu]

The only benefit I can see of using iDeCo over NISA while unemployed is that dividends are reinvested in an iDeCo.

I think that every fund you can buy in iDeCo you can find an equivalent fund in NISA that reinvests dividends?

Possibly? Just pointing out that theoretically, if a fund (e.g. bond fund?) were to pay out a dividend, the dividends stays tax protected in an iDeCo, but not in a NISA.

[RetireJapan]

I might continue paying into iDeCo at the minimum level to accumulate the tax-free allowance (or do you get that anyway just from having an account?). I believe the monthly fees go up too if you are not paying in.

[Moneymatters]

I might continue paying into iDeCo at the minimum level to accumulate the tax-free allowance (or do you get that anyway just from having an account?). I believe the monthly fees go up too if you are not paying in.

That’s a good question. I don’t know. But these links imply it’s just for joining the system.
I make two payments a year but I’m sure it counts as a whole year. So I’m sure you don’t have to make a payment each month….

https://diamond.jp/zai/articles/-/22220 ... る%E3%80%82

https://my-best.com/articles/370#

[Tkydon]

I might continue paying into iDeCo at the minimum level to accumulate the tax-free allowance (or do you get that anyway just from having an account?). I believe the monthly fees go up too if you are not paying in.

The Tax Deduction is based on the actual amount of your iDeCo Contributions from Post-Tax Income in that tax year, and your actual Marginal Rate of Income Tax.

Assuming the Marginal Income falls into a single Marginal Income Tax Bracket, then the refund is based on the National Income Tax and Reconstruction Tax Rates (If not you will have to do a calculation for the portion of contributions that fall into each tax bracket).

Marginal Income Tax and Reconstruction Tax rates:
0%, 5.105%, 10.21%, 20.42%, 23.483%, 33.693%, 40.84% or 45.945%...

This means that you are paying the iDeCo contributions out of the remaining income after these tax rates have been applied; the remaining 100%, 94.90%, 89.79%, 79.58%, 76.52%, 66.31%, 59.16%, or 54.06% value after Tax respectively...

If you set that remaining amount to 100%, then the Original Pre-tax Income would be the following multiples of the Post Tax Annual Contribution amount respectively:

1 / (1 - National Income Tax and Reconstruction Tax Rates)

= 1 / Remaining % after Taxes

100%, 105.38%, 111.37%, 125.66%, 130.69%, 150.81%, 169.03% or 185.00%...

The Refund at year end will then be the excess over 100%. i.e. the amount that was paid in tax on that income that should not have been paid.

(1 / (1-Marginal Tax Rate)) -1 x Total Annual iDeCo Contributions

0%, 5.38%, 11.37%, 25.66%, 30.69%, 50.81%, 69.03% or 85.00% of the Contributions, respectively.


Not only that, but you will also then see a reduction in your Total Taxable Income for the Year equivalent to

100% (no reduction on No Taxable Income), 105.38%, 111.37%, 125.66%, 130.69%, 150.81%, 169.03% or 185.00%...

of the Contributions, which in turn will lead to a reduction of 10% of that amount in your Residents' Taxes, and around 12% in your Annual Health Insurance Premiums. (Not a refund in your hand, but a cost saving nonetheless).

(1 / (1-Marginal Tax Rate)) x Total Annual iDeCo Contributions x 10%

0%, 10.538%, 11.137%, 12.566%, 13.069%, 15,081%, 16,903% or 18.5% of the actual contributions in Residents' Tax Reduction

and

(1 / (1-Marginal Tax Rate)) x Total Annual iDeCo Contributions x about 12%

0%, 12.6456%, 13.3644%, 15.0792%, 15.6828%, 0%, 0%, 0% of the actual contributions in Health Insurance Premium reduction for the lower tax brackets, after which you would have already reached the maximum annual Household Health Insurance Premium and would not benefit from any reduction...

Maximum annual Household National Health Insurance Premium = Basic Medical Max ¥650,000 + Latter Day Care Max ¥220,000 + Long-Term Nursing Care Max ¥170,000 = Total Max ¥1,040,000, so top out somewhere between ¥8M and ¥10M Total Household Taxable Income, depending on the number of people in your household.

[RetireJapan]

I might continue paying into iDeCo at the minimum level to accumulate the tax-free allowance (or do you get that anyway just from having an account?). I believe the monthly fees go up too if you are not paying in.

The Tax Deduction is based on the actual amount of your iDeCo Contributions from Post-Tax Income in that tax year, and your actual Marginal Rate of Income Tax.

Sorry, this has nothing to do with my post.

I am referring to building up the taishokukin koujo, not any reduction in income tax (which wouldn't matter under the OP's original scenario of losing or quitting job).

[Tkydon]

I might continue paying into iDeCo at the minimum level to accumulate the tax-free allowance (or do you get that anyway just from having an account?). I believe the monthly fees go up too if you are not paying in.

The Tax Deduction is based on the actual amount of your iDeCo Contributions from Post-Tax Income in that tax year, and your actual Marginal Rate of Income Tax.

Sorry, this has nothing to do with my post.

I am referring to building up the taishokukin koujo, not any reduction in income tax (which wouldn't matter under the OP's original scenario of losing or quitting job).

I don't know what you mean by "accumulate the tax-free allowance".

Assets inside the iDeCo can be switched without incurring taxes on switching, but will be taxable on disbursements in retirement. If you are planning to Switch a lot in the future, you might want to still contribute as you would avoid tax on switching, but if you are buying and holding eMAXISSlim All Country Index Fund forever, then it would offer no benefit.

If the OP doesn't have any Taxable Income against which to offset any iDeCo Contributions, then it is not Tax Free. It's just the same as putting Post-tax money into a regular Investment Account, as the contributions are not tax advantaged on the way in and the disbursements will be taxed in retirement.

Of course it will depend if the OP is out of work for a short period (months) or a long period (greater than a year), and whether or not he has income to offset in that tax year.

If the OP has no income to offset in the tax year, he would be better off putting the Post-Tax money into NISA, as the disburements will be completely tax free.