What is iDeCo? Japan’s Retirement Savings Plan

Planning for retirement can be a challenge, especially in Japan where the cost of living is high. Thankfully, the iDeCo (個人型確定拠出年金) offers a great way to save for retirement with some excellent tax benefits. In this post, we’ll break down everything you need to know about iDeCo, its advantages, and how it works.

What is iDeCo?

iDeCo (Individual-type Defined Contribution pension plan) is a voluntary, private pension system that allows individuals to make regular contributions toward their retirement. This system is beneficial for employees, the self-employed, and even non-working spouses who want to prepare for the future with tax incentives.

Tax Benefits

The tax benefits are one of the major attractions of iDeCo. You can reduce your taxable income and avoid paying taxes on investment gains. Here’s a breakdown of the tax advantages:

Example: How much it can Reduce your Taxes

Let’s take an example of an individual who earns 4 million yen a year and decides to contribute 23,000 yen per month to iDeCo. Here’s how it impacts their tax savings:

By contributing to iDeCo, this individual lowers their taxable income and saves around 82,800 yen in taxes annually!

How Does iDeCo Work?

When you join, you can contribute monthly payments, which are then invested in financial products like mutual funds or fixed deposits. The goal is to grow your savings until retirement, with tax incentives throughout the process.

Here’s how it typically works:

1. Enroll in iDeCo: Sign up with a financial institution offering iDeCo accounts.
2. Make Regular Contributions: Choose how much you want to contribute monthly (up to your limit).
3. Invest Your Money: Pick investment products based on your risk tolerance (stocks, bonds, mutual funds, etc.).
4. Receive Tax Benefits: Each year, the amount you contribute is tax-deductible.
5. Withdraw at Retirement: When you turn 60 (or later), you can start withdrawing your account, which will be taxed at a lower rate.

Who Can Enroll in iDeCo?

iDeCo is open to most residents of Japan, including foreign residents with long-term visas. However, eligibility and contribution limits vary depending on employment status.

Eligibility and Contribution Limits

Here is a breakdown of who can enroll in iDeCo and how much they can contribute:

Key Points to Note:

• Contributions are locked until you turn 60 years old, which means its an a long-term retirement savings plan.
• The earlier you start contributing, the more you benefit from tax savings and compounded investment growth.

How to Apply for iDeCo

Applying for iDeCo is a straightforward process. Here’s a simple step-by-step guide to get started:

1. Choose a Financial Institution: Many banks, securities companies, and online platforms offer iDeCo accounts. Compare fees and services before choosing.
2. Submit an Application: You will need your pension number and personal details. Financial institutions will provide the necessary forms.
3. Select Your Contribution Amount: Decide how much you want to contribute monthly (up to your employment category limit).
4. Pick Investment Products: Choose from a selection of stocks, bonds, and funds based on your risk appetite.
5. Start Contributing: Once approved, your contributions will be automatically deducted from your account monthly.

Below you will find a guide to opening an Japanese Bank account which is needed in registering for an iDeco account

Guide to opening your Japanese bank account

Opening a Japanese Bank Account: How to do it

Financial Institutions Offering iDeCo in Japan

iDeCo vs. NISA: Which is Better?

Both iDeCo and NISA (Nippon Individual Savings Account) offer tax advantages, but they serve different purposes. iDeCo is for retirement, with contributions locked until age 60, whereas NISA allows you to invest and withdraw funds more flexibly. Here’s a comparison:

Conclusion

iDeCo is a great option if you are serious about saving for retirement while taking advantage of significant tax benefits. It’s especially useful for those who want to prepare for the future in a structured way. By contributing regularly and making smart investment choices, you can ensure a more financially secure retirement.