RetireJapan

Hi,

So I think I understand about the tax benefits of iDeCo, but I was wondering if the taxes you'll pay on receipt of the money in retirement nullify or at least reduce the benefit of having the account? I guess the tax you pay will depend on a number of factors, and also maybe you'll be paying tax because you'll have a higher income, which is better than having a low income, especially at that age! Can someone shed any light on this for me?

Thanks.

The tax on iDeCo (as I understand it) is as follows:

-you get a tax-free allowance based on years enrolled with a maximum of 15 million yen after 30 years
-half of the remaining sum is tax-free
-the rest is taxed as income for that year

This becomes slightly more complicated if you also have a retirement bonus (taishokukin) as that uses the same allowance. You can see an example here: https://www.nta.go.jp/publication/pamph ... l/02_3.htm

RetireJapan wrote: ↑Mon Mar 23, 2020 2:21 am The tax on iDeCo (as I understand it) is as follows:

-you get a tax-free allowance based on years enrolled with a maximum of 15 million yen after 30 years
-half of the remaining sum is tax-free
-the rest is taxed as income for that year

This becomes slightly more complicated if you also have a retirement bonus (taishokukin) as that uses the same allowance. You can see an example here: https://www.nta.go.jp/publication/pamph ... l/02_3.htm

Possible a very silly question.

Is your whole iDeCo pot taxable when you cash out? Or just the capital gains on it?

Also, why is this being treated as income?

Although only half needs to be declared. (Assuming the taishokin payment completely consumes any taishokin allowance.)

Moneymatters wrote: ↑Thu Aug 20, 2020 12:58 am Possible a very silly question.

Is your whole iDeCo pot taxable when you cash out? Or just the capital gains on it?

Also, why is this being treated as income?

Although only half needs to be declared. (Assuming the taishokin payment completely consumes any taishokin allowance.)

The whole lot is potentially taxable, not just the capital gains. There's a good rundown of the issue here: https://www.sankeibiz.jp/econome/news/1 ... 001-n1.htm

If your taishokukin is likely to be near or over your tax free allowance you can avoid paying tax on your iDeCo by taking it as a pension from ages 60 to 65, or as a lump sum at age 60 (assuming you are retiring at 65).

fools_gold wrote: ↑Thu Aug 20, 2020 5:35 am

Moneymatters wrote: ↑Thu Aug 20, 2020 12:58 am Possible a very silly question.

Is your whole iDeCo pot taxable when you cash out? Or just the capital gains on it?

Also, why is this being treated as income?

Although only half needs to be declared. (Assuming the taishokin payment completely consumes any taishokin allowance.)

The whole lot is potentially taxable, not just the capital gains. There's a good rundown of the issue here: https://www.sankeibiz.jp/econome/news/1 ... 001-n1.htm

If your taishokukin is likely to be near or over your tax free allowance you can avoid paying tax on your iDeCo by taking it as a pension from ages 60 to 65, or as a lump sum at age 60 (assuming you are retiring at 65).

Thanks for the link! As always a comprehensive view of the challenge and detailed examples. You can rarely accuse such Japanese articles of over simplifying things.

https://news.goo.ne.jp/article/financia ... 43754.html

Do you mind to clarify my understanding of case two on that link.
I do over simplify things so I'm reading it a:-

• Take early retirement and use up all your employment based tax free allowance 所得控除.

• Wait 5 years whilst not working and then cash out iDeCo.

• A new 所得控除 of 40万 * 5Years will have grown to 200万 you can take tax free.

The thing I'm not 100% on is.
Even if you are unemployed and no longer contributing to iDeCo.
Are you really building up another 所得控除 that can be applied against a ideco cash out?

Moneymatters wrote: ↑Thu Aug 20, 2020 7:26 am
Thanks for the link! As always a comprehensive view of the challenge and detailed examples. You can rarely accuse such Japanese articles of over simplifying things.

https://news.goo.ne.jp/article/financia ... 43754.html

Do you mind to clarify my understanding of case two on that link.
I do over simplify things so I'm reading it a:-

• Take early retirement and use up all your employment based tax free allowance 所得控除.

• Wait 5 years whilst not working and then cash out iDeCo.

• A new 所得控除 of 40万 * 5Years will have grown to 200万 you can take tax free.

The thing I'm not 100% on is.
Even if you are unemployed and no longer contributing to iDeCo.
Are you really building up another 所得控除 that can be applied against a ideco cash out?

I think these 2 articles explain it better by using concrete examples:

https://toyokeizai.net/articles/-/221061
https://sekita-tax.com/severance-pay/

Basically, it seems that if you cash in your iDeCo 5 years before getting your retirement bonus you can claim the tax-free allowance for both.

It doesn't work the other way round. Also, if you're not contributing towards your iDeCo it doesn't count towards a tax-free allowance. So, you wouldn't gain anything by waiting 5 years to cash out your iDeCo.

Case 2 had me scratching my head. In this example, the person has 20 years service and 15 years of iDeCo contributions. From the time line it looks like the contribution period for iDeCo and the service years are concurrent. Yet the overlap period is only 10 years. There's no explanation at all as to why this is.

fools_gold wrote: ↑Thu Aug 20, 2020 12:26 pm

Moneymatters wrote: ↑Thu Aug 20, 2020 7:26 am
Thanks for the link! As always a comprehensive view of the challenge and detailed examples. You can rarely accuse such Japanese articles of over simplifying things.

https://news.goo.ne.jp/article/financia ... 43754.html

Do you mind to clarify my understanding of case two on that link.
I do over simplify things so I'm reading it a:-

• Take early retirement and use up all your employment based tax free allowance 所得控除.

• Wait 5 years whilst not working and then cash out iDeCo.

• A new 所得控除 of 40万 * 5Years will have grown to 200万 you can take tax free.

The thing I'm not 100% on is.
Even if you are unemployed and no longer contributing to iDeCo.
Are you really building up another 所得控除 that can be applied against a ideco cash out?

I think these 2 articles explain it better by using concrete examples:

https://toyokeizai.net/articles/-/221061
https://sekita-tax.com/severance-pay/

Basically, it seems that if you cash in your iDeCo 5 years before getting your retirement bonus you can claim the tax-free allowance for both.

It doesn't work the other way round. Also, if you're not contributing towards your iDeCo it doesn't count towards a tax-free allowance. So, you wouldn't gain anything by waiting 5 years to cash out your iDeCo.

Case 2 had me scratching my head. In this example, the person has 20 years service and 15 years of iDeCo contributions. From the time line it looks like the contribution period for iDeCo and the service years are concurrent. Yet the overlap period is only 10 years. There's no explanation at all as to why this is.

Thanks for spending time on this. Do you have anything that shows "if you're not contributing towards your iDeCo it doesn't count towards a tax-free allowance"?

Regarding the sekita-tax link.
Specifically example:
退職金を受給した翌年以降にDC一時金を受給（1回目控除不足なし）

That seems to show the two years after employment building a new 80万 tax free allowance.

Or should we assume this person took retirement then kept working (I guess somewhere else..) and still paying into iDeCo for those two years.

What do you think?

Also, I guess the thing that isn't in any doubt is that...
If you cash out the iDeCo later and have no tax-free allowance at that time, the iDeCo value will first be halved to calculate the taxable amount.

Moneymatters wrote: ↑Fri Aug 21, 2020 1:19 am
Thanks for spending time on this. Do you have anything that shows "if you're not contributing towards your iDeCo it doesn't count towards a tax-free allowance"?

Regarding the sekita-tax link.
Specifically example:
退職金を受給した翌年以降にDC一時金を受給（1回目控除不足なし）

That seems to show the two years after employment building a new 80万 tax free allowance.

Or should we assume this person took retirement then kept working (I guess somewhere else..) and still paying into iDeCo for those two years.

What do you think?

Also, I guess the thing that isn't in any doubt is that...
If you cash out the iDeCo later and have no tax-free allowance at that time, the iDeCo value will first be halved to calculate the taxable amount.

Hi. The article you linked to before uses "積立年数" to calculate the tax-free allowance for iDeCo lump sums. Also I found two more links stating that only years in which you contribute are counted. The first one specifically states that you can't count years in which you didn't contribute and just acted as an operator.
https://fpsdn.net/fp/hkatou/column/1632
https://diamond.jp/articles/-/222205

From that, I'm assuming that the person in the sekita-tax article is still paying into iDeCo after getting a retirement bonus. As those two years don't overlap with the service period for the retirement bonus, they can be included in the tax free allowance for the iDeCo.

I'll try to find something more official to confirm things. I've not had much luck with the NTA website.

fools_gold wrote: ↑Fri Aug 21, 2020 3:49 am
Hi. The article you linked to before uses "積立年数" to calculate the tax-free allowance for iDeCo lump sums. Also I found two more links stating that only years in which you contribute are counted. The first one specifically states that you can't count years in which you didn't contribute and just acted as an operator.
https://fpsdn.net/fp/hkatou/column/1632
https://diamond.jp/articles/-/222205

From that, I'm assuming that the person in the sekita-tax article is still paying into iDeCo after getting a retirement bonus. As those two years don't overlap with the service period for the retirement bonus, they can be included in the tax free allowance for the iDeCo.

I'll try to find something more official to confirm things. I've not had much luck with the NTA website.

Thanks!

So only years during which you contribute will build a tax-free allowance. That actually makes sense.
I'm guessing that even if you invest less than 40万 within a year you'll still get the 40万 allowance. (For each of the first 20 years.)

Since 2017 you can continue to contribute when unemployed! Who knew..
https://dc.rakuten-sec.co.jp/resignation/#skip04-04
Depending on how much you contribute and what other income you might have when it's time to withdraw, this could still be preferential to just investing through a broker account and paying cap gains tax. But obviously limited choices of what to invest in.

Another option for after 60 is to take ideco at 108万 per year tax free. (公的年金控除額60万円＋基礎控除48万円).
This assumes no 退職 tax free allowance you can use and you don't have other pension income eating up that tax free allowance.

Moneymatters wrote: ↑Fri Aug 21, 2020 6:24 am
Thanks!

So only years during which you contribute will build a tax-free allowance. That actually makes sense.
I'm guessing that even if you invest less than 40万 within a year you'll still get the 40万 allowance. (For each of the first 20 years.)

The tax-free allowance seems to be the same regardless of the level of your contributions.

Moneymatters wrote: ↑Fri Aug 21, 2020 6:24 am Since 2017 you can continue to contribute when unemployed! Who knew..
https://dc.rakuten-sec.co.jp/resignation/#skip04-04
Depending on how much you contribute and what other income you might have when it's time to withdraw, this could still be preferential to just investing through a broker account and paying cap gains tax. But obviously limited choices of what to invest in.

I think it is still preferential because your contributions aren't taxed. IDeCo allows you to defer the income tax on contributions to a later date.

Moneymatters wrote: ↑Fri Aug 21, 2020 6:24 am Another option for after 60 is to take ideco at 108万 per year tax free. (公的年金控除額60万円＋基礎控除48万円).
This assumes no 退職 tax free allowance you can use and you don't have other pension income eating up that tax free allowance.

You can also receive it while you're working, but in that case I assume your basic allowance would already be used up so you could only get 60万円 tax free.

This has been very interesting! I hadn't thought really about the tax implications too deeply.