Which to Prioritize: New NISA or iDeCo? A 3-Step Guide to Tax Differences and Asset Building Without Confusion

Hello, this is Ikupapa.

“I hear both New NISA and iDeCo are beneficial, but which one should I prioritize starting with?” When I first started learning about tax-free systems, I was just as confused by their complexity as you might be.

However, to give you the conclusion, as explained by Ryogakucho, “If you have to choose just one, it is recommended to start with New NISA due to its ease of use and liquidity.”

For my future retirement and the freedom that follows, I have utilized tax-free systems while prioritizing asset liquidity. In this article, I will clearly organize the tax differences between New NISA and iDeCo in “three steps” and explain why New NISA should be your first choice.

1. Organizing the tax differences between New NISA and iDeCo in “three steps”

Taxation on asset management becomes much easier to organize when you think about it in the following three stages.

STEP 1: When contributing money

• New NISA: There is no direct tax-saving effect based on the amount contributed.

• iDeCo: The entire amount contributed is subject to an “income deduction,” which reduces your income tax and resident tax for that year (similar to a business expense).

STEP 2: When investing

• New NISA: All dividends and capital gains earned during the investment period are “tax-free.”

• iDeCo: Similar to New NISA, there is no tax whatsoever on the profits gained during the investment period.

STEP 3: When receiving (cashing out) money

• New NISA: No matter when you sell and withdraw from the account, there is no tax at all, and 100% remains in your hands.

• iDeCo: In principle, it is subject to taxation upon receipt. However, because large deduction frameworks such as the “retirement income deduction” and “public pension deduction” are provided, the system is designed to keep the tax burden light.

2. Three reasons why I recommend “New NISA” if you choose one to start

While iDeCo offers significant tax-saving benefits during the contribution phase, there are several points to keep in mind to master the system. Therefore, New NISA is overwhelmingly recommended as your first choice. The main reasons are the following three points.

• ① There is a sufficient tax-free limit of 18 million yen per person (36 million yen for a couple).

• ② There is no “capital lock-up” until age 60, allowing you to freely cash out in case of sudden expenses.

• 3. There is no difficulty in the procedures or tax calculations at the exit (when receiving funds)

iDeCo has restrictions that generally prevent withdrawals until age 60, and it has aspects suited for advanced users, such as tax-saving benefits that vary depending on how you choose to receive the funds. It is most rational to prioritize filling your New NISA quota, which offers greater flexibility, and then consider using iDeCo in parallel once you have sufficient surplus funds.

💡 My personal experience and asset management tips

I myself have maintained household management with an 'expenditure rate in the 80% range' based on my take-home base income, while focusing on utilizing the NISA quota with an emphasis on liquidity (ease of handling) in case of emergencies.

As a result, I have been able to build a foundation of assets in the tens of millions of yen (quasi-wealthy level).

With retirement just a few years away and looking forward to a multi-base lifestyle and immersion in 'academics,' 'art,' and 'faith,' having the 'freedom to cash out without penalties when needed' provides great peace of mind.

3. Summary and 'Tax-Exempt System Utilization Homework' to Start Today

The tax system may seem difficult at first glance, but it can be understood simply by breaking it down into three stages: 'at the time of accumulation, during operation, and at the time of receipt.'

When in doubt, taking the first step with the user-friendly 'New NISA' will allow you to grow your money steadily without failure.

Thank you for reading to the end. For steady asset building, why not start the following 'tax-exempt system check (homework)' today?

1. Check the accumulation settings for your New NISA in the securities account you are currently using (or plan to open).

2. Write down in a notebook the ratio of funds you plan to use before age 60 versus funds you will not use until old age.

3. Search for 'Lib-Dai New NISA iDeCo' on YouTube and watch one basic video comparing the systems.

I will also continue to value my daily study for the Boki Level 3 exam as I steadily prepare for future independence and a free lifestyle. I hope this article serves as a trigger to resolve your confusion about the systems and helps you proceed with asset building with peace of mind.

Let's continue to work through our to-do lists for today, calmly and in good spirits.