iDeCo, short for individual Defined Contribution pension (個人型確定拠出年金), is a highly tax-efficient investment account. Contributions of the same amount are invested monthly, and cannot be withdrawn until you are 60 years old. At most providers, withdrawals can be taken as a lump sum, an annuity, or a combination of the two.
The principal benefits of iDeCo are:
- No income tax on monthly contributions (i.e. they are paid from your gross income, or before tax is deducted).
- This means iDeCo contributions lower your liability for income tax and residence tax.
- No tax on interest/dividends/capital gains.
- Allows dividends and growth to compound tax-free for as long as possible.
- Withdrawals are taxed as income, but tax deductions are available.
Due to these benefits, iDeCo is a good first choice for investors who are earning an income, and are going to be in Japan long term. For investors who are less sure about their future, NISA or Tsumitate NISA are more flexible tax-efficient choices, but iDeCo has the significant advantage that deposits are not subject to income tax.
iDeCo accounts can be maintained tax free until 70 years old (75 from May 2022), but no new contributions can be added after you turn 60 (65 from May 2022).
Most residents aged 20-59 (20-64 from May 2022) are eligible for an iDeCo account. Exceptions include:
- Individuals with full or partial exemptions of national pension contributions (such individuals may join if they receive the Disability Basic Pension)
- Individuals with corporate-type defined contribution pension plans at the company where they currently work, if the rules of the plan do not permit simultaneous enrollment in an individual-type defined contribution pension plan
- Individuals insured by the Farmers' Pension
Minimums and maximums
Contributions are ordinarily made monthly, and can be from ¥5,000 up to the maximum in ¥1,000 increments. The maximum monthly contribution varies according to the circumstances of the subscriber, as summarised below.
|Category 1 subscriber||Category 2 subscriber||Category 3 subscriber|
|Resident aged 20-59 who is not a Category 2 or Category 3 subscriber (freelancer, student, employee not covered by shakai hoken, unemployed, etc.)||Resident under 60 years of age insured via shakai hoken coverage (company employee, public servant, etc.)||Dependent spouse of Category 2 subscriber, ie person insured by spouse's shakai hoken|
|Company employees whose companies do not have a corporate pension plan||Company employees enrolled only in a corporate-type defined contribution pension plan||Company employees enrolled both in a defined benefits plan and a corporate-type defined contribution pension plan||Company employees enrolled only in a defined benefits plan||Persons insured by a kyosai (Japanese) (mutual aid association), including many teachers, civil servants, etc.|
|¥23,000/month (¥276,000/year)||¥20,000/month (¥240,000/year)||¥20,000/month (¥240,000/year)||¥12,000/month (¥144,000/year)||¥12,000/month (¥144,000/year)||¥23,000/month (¥276,000/year)|
- This allowance is shared between iDeCo and fuka nenkin / 付加年金 or kokumin kikin nenkin
Please note that some of the language on the table on the official English iDeCo site can cause confusion, eg
- 'Public servants, etc' (final entry of Category 2 subscribers): the key point is whether the person is insured by a kyosai (Japanese) (mutual aid association). Many teachers, for example, will fall into this category irrespective of whether they are technically a public servant or an employee.
- 'Full-time homemakers (male of female)' (Category 3 subscriber) - the key point is whether the individual is insured by their spouse's shakai hoken; this will apply to spouses on low incomes as well as 'full-time homemakers'
Category 2 subscribers (employees, civil servants, etc.) can apply to pay their contributions directly from their bank account (個人払込) or have their contributions deducted from their salary (事業主払込) BUT the employer can deny the salary deduction option, for example if they don't have a system in place to do so.
Category 1 and 3 subscribers pay their contributions directly from their bank account.
When eligible (see table below), subscribers have the following options to receive benefits:
- Lump sum: this option will have a substantial tax-free portion dependent on duration of contributions
- Annuity: a fixed-term annuity with a duration of 5-20 years
- Combination of lump sum and annuity (if offered by your provider)
Age of eligibility to receive iDeCo benefits
|Total duration of contributions||Age of eligibility to receive benefits|
|10 years +||60-70 (60-75 from May 2022)|
|8 years +||61-70 (61-75 from May 2022)|
|6 years +||62-70 (62-75 from May 2022)|
|4 years +||63-70 (63-75 from May 2022)|
|2 years +||64-70 (64-75 from May 2022)|
|1 month +||65-70 (65-75 from May 2022)|
Tax treatment of benefits
If opting for a lump sum, a tax free amount will be calculated based on years of contribution. This is a Retirement Income Deduction (退職所得控除), and may be shared with other retirement income.
Currently, the tax free allowance is calculated at ¥400,000 per year for the first 20 years of contributions and ¥700,000 per year for subsequent years of contributions, up to a maximum of ¥15 million (achieved after 30 years of contributions). Partial years of contribution will be rounded up, and a contribution period of less than two years will attract an allowance of ¥800,000. Half of any sum exceeding the allowance will be taxed.
|Total duration of contributions||Tax free allowance|
|20 years or fewer||¥400,000 x years of contributions (or ¥800,000 if this is less)|
|21-29 years||¥700,000 x (years of contributions - 20) + ¥8 million|
|30 years +||¥15 million|
For example, with 25 years of contributions, the allowance would be 20 x ¥400,000 + 5 x ¥700,000 = ¥11.5 million.
If the lump sum in the above example was ¥16 million, tax would be due on (¥16 million - ¥11.5 million)/2 = ¥2.25 million.
If opting for a pension, a Pension Tax Deduction (公的年金等控除) applies.
The full list of iDeCo providers is available in Japanese on the official site (Japanese).
There are many providers, but SBI, Monex, and Rakuten are especially useful due to their low fees, and availability of low-cost index-funds.
SBI and Monex have completely separate systems for iDeCo compared to their regular securities accounts. For iDeCo, you will log in to a different website with different account credentials. Rakuten has an option to manage the iDeCo from within the same account.
|SBI main site||https://www.sbisec.co.jp/ETGate|
|Monex main site||https://www.monex.co.jp/|
|Rakuten main site||https://www.rakuten-sec.co.jp/|
Uses the main site if you have a Rakuten Securities account, or uses JS&T (same as Monex) if you only have an iDeCo account).
Because of this, there is little benefit to picking the same iDeCo provider as an existing securities account, unless you use Rakuten. It's best to pick the provider that best satisfies your needs (cost, fund selection, etc.).
End of Year Tax Adjustment - Nenmatsu Chousei (年末調整)
- Do not need to submit a tax return
- Pay their iDeCo contributions from their bank account (個人払込) i.e. do not have the contributions deduced from their salary (事業主払込)
must declare their iDeCo contributions on their end of year tax adjustment in order to receive a refund of the tax paid on contributions with their December salary.
Employees whose payments are deducted from their salary (事業主払込) should already have had the tax calculations applied to their salary, so do not need to declare iDeCo information on their end of year tax adjustment.
The National Pension Fund Association should send a certificate in the post (小規模企業共済等掛金払込証明書) around October/November stating the contributions made to date, and including predicted contributions until the end of the year.
To claim the refund on the tax adjustment:
On the "Salaried Employee Insurance Premium Deduction Declaration Form" (給与所得者の保険料控除申告書):
- Enter the amount stated on the pension association certificate in the relevant section of the form:
- Small scale business mutual aid etc. contribution deduction.
- Defined contribution pension individual contributions under the defined contribution pension law.
- Submit the original certificate (小規模企業共済等掛金払込証明書) with the tax adjustment form.
- If your employer uses an electronic process instead of the paper form, you will probably need to attach a scan of the certificate, and still submit the original certificate to the HR department.
If you have lost the NPFA certificate, you can request a copy.
If you do not complete the tax adjustment in time, or didn't include the iDeCo information, you can submit a tax return instead.
Unfinished: Information to add / elaborate on
- 個人型年金加入確認通知書 and 個人型年金 being short for 個人型確定拠出年金 according to https://www.ideco-koushiki.jp/library/pdf/member_operator_guide_H3001_revision.pdf
- Fees: https://ideco.morningstar.co.jp/pension/fee.html
(1) At the time of joining: 2,572 yen + tax (2,829 yen including tax) (collected by the National Pension Fund Association and common to all financial institutions) ＋ (2) Enrollment fee (commission collected by financial institutions separately from the National Pension Fund Association when joining iDeCo): Varies depending on the financial institution (mainly free, but some financial institutions require an enrollment fee) Etc, etc.
- What happens if you change status/move job or wish to change monthly amount (or put in lump sum within the allowances)
- Further info on tax of benefits and how these relate to Retirement Income Deduction and Pension Deduction
- What happens if you move abroad
- Conditions in which you can access the benefits early
- Changes set to come into effect in May 2022 will allow subscribers to contribute up to 65 years of age.