Japan's NISA tax-free investing account is getting much better in 2024

Japan's NISA is getting Are you ready to take full advantage of it?

Dec 05, 2023

Executive summary: With the new NISA in effect starting January 2024, the investable amount limits are significantly increased, and the time limitation for tax-free growth has also been removed.

Introduction

In Japan, capital gains are taxed at a flat rate of 20.315%. If not mitigated, this tax can significantly impact your savings for retirement. Japan offers several tax-free investment vehicles, including a defined contribution plan and an individual savings account, to support residents in saving up for retirement without having to pay capital gains tax.

In this post, we will cover the newly revamped NISA (Nippon Individual Savings Account), which has made significant improvements compared to the previous version. Using NISA is a great idea not only for long-term residents who plan on retiring here, but also for shorter-term visitors who want to invest a little during their time in Japan.

With NISA, you can withdraw a large portion of your investments without paying capital gains tax. For instance, if you earned 100 million yen in gains within your NISA at the time of retirement, you would be able to withdraw the whole amount, saving a substantial 20 million yen.

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The new changes

The first major change is the increased investable amount. It is now possible to invest a total of 18 million yen, with a yearly limit of 3.6 million yen. This amount is significantly larger than the previously available NISA accounts, and is a very welcome improvement.

The second change is the removal of the time limitation. Previously, tax-free growth was only available for 5 or 20 years (depending on the NISA type). Now, growth is tax-free no matter low long you leave the money in the account. This change can have a significant impact on individuals who planned to keep their investments until retirement, as compound interest has a snowball effect.

The two NISA buckets

Until the end of 2023, there were two types of NISA: standard (一般 - ippan) and accumulative (積立 - tsumitate). The standard NISA allowed tax-free growth for 5 years, with higher limits and more options for funds/stocks. On the other hand, the tsumitate version allowed tax-free growth for 20 years but had lower limits and a smaller fund selection.

The choice came down to your risk appetite and investment goals. If you were looking for higher potential returns and were comfortable with taking on more risk, the standard NISA would have been the better option. However, if you preferred a more conservative approach with steady, long-term growth, the tsumitate NISA would have been a suitable choice.

The new NISA combines the two old NISA types above into a single framework with two buckets, called the growth system (成長投資枠 - seichou toushi waku) and the accumulative system (積立投資枠 - tsumitate toushi waku). Similarly, you will have a larger fund selection in the growth system, as well as the ability to hand-pick stocks, while the accumulative system is restricted to broader index funds.

The new growth system section allows you to invest up to 2.4 million per year, while the accumulative system section offers 1.2 million per year. By completely filling both sections each year, the total amount over 5 years reaches the 18 million yen limit.

How to get started

Any major Japanese broker offers NISA support, allowing you to easily set up your NISA account with just a few clicks if you already have a broker account. Within your broker account, you can have multiple investment accounts. By default, you usually have a general account (一般口座 - ippan kouza) and a designated account (特定口座 - tokutei kouza) available. Opening a NISA would simply make a third account available in your broker website.

When you buy any stock, ETF or index fund, you can choose which account to put it in, so it is always a good idea to select your NISA until it is full.

Two widely used online brokers in Japan are Rakuten Securities (楽天証券 - rakuten shouken) and SBI Securities (SBI証券 - SBI shouken). In comparison to the brokerage accounts offered by traditional banks, these online brokers offer lower fees, a wider range of investment vehicles, and more features.

Plan your investment strategy

If you have excess cash in your savings account, now is a good time to consider moving it to NISA. However, before investing, make sure to keep an emergency fund that covers 3-6 months' worth of living expenses. Within the new NISA's growth system portion, you can transfer money "in bulk" at any time. This is especially useful when you receive unexpected large sums of money, like a salary bonus or inheritance.

Once you have invested all of your available funds, it is time to automate future investments. You can set up a recurring order with your broker to regularly contribute a specific amount of money to your NISA every month (this is what tsumitate usually refers to). This allows you to easily maintain investment discipline and reduces the need for manual purchases and decision fatigue. Set it and forget it! You can do recurring orders on both the growth as well as the accumulation systems of your new NISA.

How much should you invest

NISA imposes no minimum investment amounts, and thanks to the multitude of index funds available, it is possible to start with as little as a few thousand yen. If you are new to investing, start with small amounts until you familiarize yourself with the process and learn all the features of your broker.

Once you have enough emergency fund money in your bank, you can start putting all your excess income into NISA every month. This can be as little as 5,000 yen, and as much as 300,000 yen. Revisiting the account limits described above, 300,000 yen would allow you to fill our NISA in 5 years, while a more conservative 50,000 yen would take you 30 years to fill it.

Investing is not a race, so choose the amount that you feel most comfortable with and increase it over time as your income allows.

Let your funds grow

NISA is intended to be a long-term investment platform. Thanks to the elimination of the tax-free growth limit, you can keep all the invested money in your NISA until you need it. Hopefully, that will be in the distant future when you decide to retire.

Compound interest can work wonders on 18 million yen. If you plan on retiring in Japan after 20 or 30 years of completing your NISA, you can expect over 100 million yen to be available to you tax-free by the time you retire, assuming the stock market continues behaving as it did over the last 50 years.

My take on the new NISA

I am personally very excited to start using the new NISA with higher limits. I was able to fill my 2023 NISA account relatively early this year, which means I could definitely benefit from having more space in my NISA to park all the funds and stocks I’m interested in.

I am also excited to see several Japanese brokers fighting for customers as the end of the year approaches. Both Rakuten and SBI have significantly reduced their trading fees and currency exchange fees, which is a win-win scenario for us investors!

FAQs

What happens if I have to leave Japan? Is it still a good idea to open a NISA?

Yes, it would still be a good idea to open a NISA. Simply sell your assets before leaving. You can withdraw the money at any time, so you can make use of NISA regardless of your future plans in Japan. You will also be able to re-fund your NISA in the future if you come back.

Does the old NISA roll over to the new one?

No, your old NISA investments will be rolled over into a general or designated account once their time limit is reached (5 or 20 years, depending on the type). Not to worry, though, since the purchase price is "reset" at the time of the roll-over, which means you only pay tax for the growth that happens after the roll-over is complete.

Should I sell some of my existing investments in taxable accounts to fund my NISA?

If you wouldn't be able to fill your yearly NISA allowance otherwise, then it can be a good idea to sell your existing investments in taxable accounts and repurchase them within NISA, since you would be losing out on tax-free growth otherwise. However, if you are confident that you can fill your NISA allowance regardless, then this process wouldn't be worth the trouble.

Can I put my RSUs in NISA?

Generally, it is not possible to do that. RSUs are normally received into general or designated accounts. You can always sell and repurchase the stock within NISA if you were planning to hold it after the grant is complete.

This was the first post of Yen Sensei: Personal Finance in Japan, a blog and newsletter covering all aspects of personal finance for English-speaking Japan residents. Drop a comment if you have feedback or questions, and consider subscribing if you would like to receive new posts in your inbox.