Nothing significant, mostly good
I was really happy to see an article this week from my favourite Japanese financial writer, Minako Takekawa.
In the article she explains the upcoming changes to the tsumitate, ordinary, and junior NISA accounts.
Changes to tsumitate NISA
There is just one change to tsumitate NISA, and that is that the duration has been extended by five years. Now, instead of ending in 2037, tsumitate NISA will end in 2042, with that final year being tax free until 2061. Not bad 🙂
Changes to ordinary NISA
Ordinary NISA sees more significant changes.
The first thing is that there will be a new ordinary NISA account. The current ordinary NISA will only run until the end of 2023.
From 2024, the new ordinary NISA account will come in. It is currently only due to run for five years, from 2024 to the end of 2028.
The new ordinary NISA is very similar to the current one, but there are some changes. The ordinary NISA annual allowance will go up slightly, from 1.2 million at present to 1.22 million from 2024.
However, the new ordinary NISA accounts will be subdivided into two levels. In the first level we will have an annual allowance of 1.02 million yen, and will be able to buy pretty much any type of investment. In the second level we will have an annual allowance of 200,000 yen, and we will only be able to buy ‘tsumitate NISA’ approved investments (mainly mutual funds).
I have no idea how they came up with this new, even more confusing structure 😉
The good news is that we will be able to roll over investments into the new ordinary NISA accounts.
That process is also (of course) a little complicated.
If you are rolling over more than the new ordinary NISA allowance (1.22 million yen), you can roll over the entire amount (no limit) and will use up your entire annual allowance. This is probably a good idea.
If you are rolling over less than 1.22 million yen’s worth of investments, you will use up the first level’s allowance first, then if you go over that you will also use up the second level’s allowance.
Changes to junior NISA
There are few changes to junior NISA. Junior NISA will end in 2023 as scheduled. It seems that it may be possible to cash out the contents tax free at that point, or leave them in the tax-free account until the holder reaches the age of 18/20.
I’m disappointed there will be no provision for children after 2023, but to be honest I was not a fan of the junior NISA accounts and felt they should only be considered by people who had already maxed out their own iDeCo and NISA options.
Overall
Nothing huge there, apart from the end of junior NISA.
For most people, tsumitate NISA is probably the easiest option, as you can set it and forget it. You also get 20 years of tax-free growth.
If you already have ordinary NISA accounts, rolling over into the new version seems like a good option.
I would have liked to see an increase in the annual limits for both accounts, as well as an extension of the ordinary NISA tax-free period. Basically something like the UK ISA, where you have annual limits but no duration limit, would have been great.
What do you think? Do these changes affect how you will approach NISA?
Thanks for the helpful information. You anticipated just the questions I would have had about the new vs old NISA and handling of rollovers. I am sorry to see the end of the Junior NISA. I also think it’s a shame Japan doesn’t just adopt the UK’s ISA system which seems both less complicated and more user-friendly.
Those of us who are US citizens have got to find out if there is any loophole regarding the PFIC handling of non-US-based mutual funds. It would be great to identify a Tsumitate NISA-eligible mutual fund that didn’t trigger the PFIC reporting requirements so we could use that 200,000 yen portion of the new account.
I hope everyone is staying healthy during the pandemic.
Thank you for an update!
I was wondering for quite some time: what is the point to have NISA if one invests only in MFs? In case MFs do not pay out dividends and and never sold during NISA term there should be no tax liability. In this case NISA doesn’t give any tax benefits. Is my understanding correct?
Not quite. When you sell a mutual fund in a table account you will have to pay tax on capital gains, but in a NISA account there would be no tax to pay.
Thank you 🙂
That part I understand, however if one invests with intention to sell only after retirement and assuming NISA will not last until then will it still make sense?
I remember in one of your posts you mentioned that the government plans to stop opening NISA accounts in 2022, in this case in 2022 + 5 years what happens to all the investments under NISA? I was assuming they will be transferred to taxable account.
When your investment comes out of the NISA tax wrapper, the purchase price is reset from the price you paid to the price at the point when it comes out.
If the price has increased, those gains will be tax free. However, if the price has decreased the new purchase price will be lower and you will not be able to use the loss to offset gains.
That is one reason the tsumitate NISA is better, as you are more likely to see gains over a 20-year period than a 5-year one.
However, under the current rules you can roll over investments, thus avoiding locking in capital losses for a further five years.
I’m sorry this isn’t very clear, it is a ridiculously complicated system, especially considering the purpose is to encourage people to invest!
Oh, I completely missed that purchasing price is reset after moving out of NISA.
Thank you very much for clarifying this detail! 🙂
Thanks so much for this great summary, Ben – I was also wondering how the roll-over would be handled as this is my 5th year of contributions. If things keep going as they are then even my 2016 year rollover will have space to accommodate more investments. Shocking to see how much stocks and bonds have fallen.
Well, I didn’t really do much apart from shamelessly plagiarise Ms. Takekawa’s article 😉
It’s good to know things won’t be changing too much though.
You should probably mention that you will have to fill up your ‘tsumitate NISA’ allocation before you’re allowed to invest into the ‘normal NISA’ allocation. Of course, to make things complicated, filling the allocation doesn’t actually mean filling it, it just means that you’ve registered all 200k yen worth of tsumitate for the year.
There’s an optional for experienced investors, ie those that currently have a NISA account or have previous trading experience, to apply to be exempted from the ‘tsumitate NISA’ level. In those cases, you’ll be restricted to only 102m yen and ALSO not be allowed to trade in ETFs Reits or mutual funds, only stocks.
The rollover for current NISA account holders is actually quite straightforward. If your account’s current value exceeds the 122m yen allocation, you can roll all of it over. If it’s less, then it first starts by filling up the ‘normal NISA’ allocation, before overflowing to the ‘tsumitate NISA’ allocation.
Lastly, I’d follow Ms. Takekawa’s terminology and use 1st level to refer to the tsumitate allocation and 2nd level for the normal NISA allocation. Because of the way it works, having to fill the 1st before the 2nd.
Fantastic! Thanks for the clarification 🙂
Begs the question: who came up with this system? It’s almost like it’s designed to put people off by confusing them…
Just to clarify, the original referenced article make it clear you won’t need to “fill up” the tsumitate NISA allocation, you just need to use a bit of it before being able to invest in the regular portion. If you do this, your regular NISA allocation will then be eligible for fund purchases. Not doing so will restrict your regular NISA allocation primarily to individual stocks.
Not really sure why they are doing this… it seems overly convoluted and Ican’t see the upside from the government’s perspective. It just adds the extra step of needing to exercise the tsumitate portion first for those of us want to maximize the amount or who put our NISA money into funds (of which I do both). And god forbid yet another separate application process to access both levels…
Interesting that you can roll over the tsumitate-part of a New Old NISA into a Tsumitate NISA.
Predicting this is a stepping stone to 100% Tsumitate NISAs. After the New Old NISAs 5 years are up, I bet they will just allow the rollover of the tsumitate part, and that will be the end of the tax break for the old unrestricted part.