Tax Savings on iDeCo Payments

[Sybil]

I was wondering about the amount of tax relief on iDeCo payments. I read somewhere on this website that if you were in the 20% tax bracket your iDeCo payments would provide 20% tax relief. However, someone in this tax bracket might actually be taxed at much less than 20% in real terms. Income tax is calculated at 20% of taxable income minus 427,500 yen so someone in the 20% tax bracket could be paying tax at a rate of just 10%.


Can anyone confirm which figure is correct in regard to iDeCo tax relief?

[TokyoWart]

Do you mean tax relief from putting money into an iDeCo? Anytime you can shelter income by putting it in an account which means it is not counted against your income, the correct calculation is to assess against the tax on your last yen earned, or in this case, your marginal tax rate or tax bracket, because that last-yen-earned is the one being sheltered by the investment. As you point out, someone in the 20% tax bracket is not paying an average tax of 20% on all income (i.e. their effective tax rate will be lower than 20%) but that under-states the taxes you save by sheltering the last yen earned.

[Sybil]

Thanks for the clarification. I guess if too many people utilize the tax break, the government will have to find new taxes to increase their revenue....

[TokyoWart]

Thanks for the clarification. I guess if too many people utilize the tax break, the government will have to find new taxes to increase their revenue....

iDeCo is very modest as a tax shelter. The maximum for someone who is self-employed is something like 816,000 yen/year and most people on this site are looking at 144,000-276,000 as the maximum that can be sheltered. Compare that to a US IRA ($6,000-$7,000/year) or 401K ($19,000-$26,000, much more if self-employed) which can be done jointly by the same person. In the same way, the Japanese NISA is like the UK ISA only it has much lower limits than an ISA and is time-limited while ISA is not.