“Worried about retirement funds?” “Want to save on taxes but don’t know where to start?”
0For those facing such concerns, iDeCo (Individual-Type Defined Contribution Pension) is a powerful option.
iDeCo is a government-provided system where “you contribute your own money, manage it yourself, and build your own pension.” Its greatest appeal lies in its overwhelming tax advantages, unmatched by other investments.
This article will explain iDeCo’s structure, advantages, disadvantages, and differences from the new NISA in a way that’s easy for beginners to understand.
1. What is iDeCo? A Simple Explanation of How It Works
iDeCo is a private pension system designed to supplement public pensions.
- Regular Savings
You save a fixed amount each month (starting from ¥5,000). - Investment Management
You choose and manage your investments, such as mutual funds or time deposits. - Payout
You receive payments as a pension or lump sum, generally starting at age 60 or later.
2. The Three Powerful Benefits of iDeCo
iDeCo is called the “ultimate tax-saving strategy” because it reduces your taxes at three key points:
① Full contributions qualify for income tax deductions
Every monthly contribution qualifies as an “income tax deduction,” lowering your income tax for that year and your resident tax for the following year.
Example: For a salaried worker earning ¥4 million annually who contributes ¥20,000 monthly (¥240,000 annually), with a 10% resident tax and 10% income tax rate, this results in approximately ¥48,000 in annual tax savings.
② All Investment Gains Are Tax-Free
Typically, investment gains are taxed at around 20%, but with iDeCo, they are tax-free.
The portion that would normally be taxed is instead reinvested, allowing you to grow your assets efficiently.
③ Tax advantages at withdrawal
When you start receiving payments after age 60, mechanisms like the “public pension deduction” and “retirement income deduction” apply, significantly reducing your tax burden.
3. Key iDeCo drawbacks and considerations
While the benefits are substantial, be aware of the following limitations:
- Withdrawals generally prohibited until age 60
As this is dedicated retirement savings, you cannot cancel the plan early even if you need funds for reasons like marriage or home purchase. - Fees apply
Hundreds of yen in fees are incurred upon enrollment and for monthly management. - Risk of principal loss
If you select investment trusts as your investment product, the value may fall below the principal amount depending on market conditions.
4. 【Comparison】iDeCo vs. New NISA: Which Should You Prioritize?
A common question is, “Which is better—NISA or iDeCo?”
| Features | iDeCo | NISA |
| Primary Purpose | Preparing for Retirement Funds | Free asset formation |
| Tax savings benefits | Very large (with income deduction) | Moderate (only investment gains are tax-exempt) |
| Liquidity of funds | Not available until age 60 | Anytime |
| Suitable for | People who want to reliably save for retirement | People who want to prepare for life events |
Recommended Strategy
First, consider using the new NISA for money you might need unexpectedly, and allocate surplus funds or “money you absolutely won’t touch until retirement” to iDeCo.
Summary: Who Should Start iDeCo?
iDeCo is especially recommended for people like the following:
- Salaried workers and public servants looking to reduce their income tax and resident tax
- Those who tend to spend their savings (enforced savings)
- Those who don’t want to lower their standard of living in retirement
