NISA vs. iDeCo: Japan’s Tax-free Investing Titans

Fight!

Conceptual image of Japan's NISA and iDeCo accounts fighting.
Had a nice question about the difference between investing in a NISA account and an iDeCo account (J401k or 拠出年金) the other day. Here are my thoughts.

First of all, the similarities. Both accounts are designed to encourage you to save and invest by reducing or eliminating your taxes.

Second, the complexity. iDeCo accounts are much simpler to maintain. Once you open an account and decide your investments, you can then ignore it for several decades. NISA accounts are more involved, as you an annual allowance to invest and the accounts have shorter duration.

The purpose. NISA accounts are aimed at getting more people investing in the stock market (this hasn’t really worked so far, as most people using NISA accounts were already investing in the stock market) while iDeCo accounts are designed to provide or supplement retirement benefits.

The duration. iDeCo accounts cannot be accessed (except in limited circumstances) until you reach 60 years of age. NISA accounts can be accessed any time but currently have a 5 year limit.

Eligibility. Any resident of Japan over the age of 20 can open a NISA account (younger residents can have a junior NISA account opened for them from April 2016 until December 2023). iDeCo accounts are mainly aimed at self-employed people or normal employees who are contributing fully into the national pension scheme and are not civil servants.

The benefits. iDeCo accounts are extremely beneficial. Contributions to the account are made from pre-tax income, so if you pay in you will reduce your income and resident taxes. Capital gains are tax-free until you cash out, when the proceeds are subject to the same tax that retirement bonuses are. In a NISA account, capital gains and dividends are tax free.

The drawbacks. iDeCo accounts have limited eligibility and you cannot get the money until you are 60. NISA accounts only last 5 years at the moment, and you can lose out if you make a capital loss on an investment which then recovers after the five year period ends.

In conclusion, if you are eligible and plan to live in Japan until you are 60, you should probably open a iDeCo account and contribute the maximum amount each month (68,000 yen for a self-employed person, 23,000 for a normal employee). If you have extra money that you don’t need in the short- to medium-term that you want to invest a NISA account may be appropriate.

For a lot of people, both accounts are going to be a good fit.

Questions?

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25 Responses

  1. Hey Ben,
    I’ve been following your posts about both of these types of accounts. The one thing that worries me about them is that if you have little knowledge and confidence regarding the stock market, how do you know where the good places to invest your money are?
    Many thanks,
    Greg

    1. Hi Greg
      That is an excellent question that I haven’t really been covering properly. Thanks for asking it!
      Have you read Millionaire Teacher, by Andrew Hallam? If not, start there. The short version is that you shouldn’t worry about picking good stocks, just buy an index fund that contains all the stocks in a country or even the world.
      I’ll try and do a post about this soon.

      1. Hey Ben,
        Sorry to take so long to get back to you on this. Yes, I do have the book. I purchased it on your recommendation. Unfortunately it’s still sitting on my bed head unread. I’ll get onto it. As always thanks for your thoughts.

      2. Hi Greg
        No worries! Recently I am noticing more and more that the problem is not knowing what to do, but rather just doing it. My own struggle is with exercise, but it’s almost exactly the same 😉
        Make a plan (read a chapter a day or a chapter a week) then let me know if you have any questions!
        I’ll be doing some posts about this and eventually hope to make some ebooks focusing on getting started. Stay tuned…

  2. Do you have to reside in Japan to collect the J401k? Supposing I work in Japan for the next decade or so but return to my home country before the age of sixty, is my money totally lost?

    1. Hi Douglas,
      I wasn’t sure, so I just called the bank my wife’s account is at. The way it works is, if you move overseas you won’t be able to contribute any more, but your contributions so far will remain in the account and you can manage them normally. Once you reach 60 years of age you can withdraw the money normally (and must do so before 70).
      Hope that helps!

      1. Sorry if this is going outside the realm of the website, but if we do like Douglas suggests then we should hopefully have large amounts of cash that we have to take out between 60 and 70. Lets say we have 10,000,000 yen. If we move that to the USA do we have to pay tax on it from the Japanese or USA side of things?
        Also does a J401k account have to be reported on the FBAR as a foreign bank account? If that is the case then it would be smarter to open an account in my Japanese wife name instead for now.

      2. Hi Robert
        Unfortunately US citizens have another layer to consider. I don’t know enough about the IRS to give you advice, but an American friend of mine told me that the US government does not consider J401k or NISA to be tax-exempt. You should definitely check with them before opening either account. Same with regards to FBAR.
        Opening accounts in your Japanese wife’s name would appear to be the best option, provided you are sure you’ll still be on speaking terms when you are 70 😉

      3. So, I could be living outside Japan after reaching 60 years of age and still withdraw the money tax-free? (non-US citizen)
        How about in case of deceasing before the age of 60? Do my children of spouse get the money that has been accumulated so far?
        If the answer to both is “yes”, I guess J401k is a no brainer while working in Japan.

      4. Hi Tatu
        I guess it would depend where you were living. They might be likely to tax it as income?
        If you die your family (spouse, children, parents, grandparents, siblings) get the money:
        Q3: 死亡した場合はどうなるの？
        確定拠出年金で積み立てた資産は個人のものですので、死亡した場合は死亡一時金が支払われます。遺族が死亡一時金として資産残高を受給することができます。死亡一時金を受給できる遺族の範囲は、配偶者、子、父、母、孫、祖父母または兄弟姉妹か、主として死亡した者の収入により生計を維持していたその他の親族になります。
        また、死亡一時金は相続税対象となります。(法定相続人１人につき500万円まで非課税)
        (※平成21年12月1日現在の法令等に基づく)
        So it seems like a bit of a no-brainer to be honest 🙂

      5. Thanks.
        Yeah, the tax-free thing was about not getting double-taxed by both, JP and the country of residence. So you would get the tax-free benefit on the JP side even though living in another country. That’s good enough.
        One remaining thing is that do the banks (Rakuten, Iwate bank…) allow you to keep your account and J401k, if you move abroad? Or do they require that you have an address in Japan?

      6. Hi Tatu
        I have only talked to Iwate Bank, and they said the account would remain dormant while you were abroad. I guess they can’t close it, otherwise that would be an easy way to get the money out early 🙂

  3. Hi Ben,
    I think that the J401K is not yet available for employees of national universities. Is that correct?
    Thanks,
    Brian

    1. Hi Brian
      It is not available, and I am not sure the ‘yet’ will ever come to fruition unfortunately. The new guidelines just changed from ‘people in kyosai nenkin’ to ‘people in kyosai kumiai’ can’t join.
      I think the spirit of the law should let us join, but the letter hasn’t caught up yet.
      I am very annoyed about this! 🙂

  5. True that J401k is more tax advantageous if we are able to fully utilized it. But would it not defeat its purpose should the mutual funds offered have high total expense ratios?

    1. Hi Desmond
      That would be the case, but it depends on the funds your J401k provider gives you access to. In my wife’s case Iwate Bank has both active and passive funds, and the expense ratios for the passive ones are very reasonable (0.3% or so).

      1. Wow, that is almost on par with the passive iShares ETFs listed on the Tokyo stock exchange, and also the series of passive mutual funds by Mitsui Sumitomo.
        Unfortunately my company provided some very sub-par funds which were not only actively managed, the total expense ratio (inclusive of all miscellaneous fees listed in the prospectus) topped 3% even though no employee contributions are needed.

      2. This is one reason the provider matters a great deal. Iwate Bank sent us their list of funds with details along with the application form, which I would expect from a decent institution.

  6. Hi, Ben
    Found your blog recently and greatly impressed. I think it’s the only blog in English about retirement in Japan that comes out in Google search.. Don’t know what we would do without it.. I already read “Millionaire Teacher” book thanks to your advice. Now comes a million dollar question: what happens to NISA account if I moved out of Japan. Thanks to the comments, I already understood what happens to J401k. How about NISA?
    Thanks again and again.

    1. Hi Yulia
      Thanks for the kind words. I hope the site can help people 🙂
      As for what happens to NISA accounts when you leave Japan (permanently?), I believe all financial institutions in Japan would expect you to close your account before you leave.
      If you were leaving temporarily and had an address in Japan that would not be the case, but otherwise I think that would be the official response.
      With NISA accounts, you can sell your assets and get your money at any time, so there would not be any impediment to you closing the account should you choose to leave Japan.

      2. It’s a side note, but one doesn’t have to close bank accounts when leaving Japan permanently. That would actually be hard because outstanding bills get posted after the fact. So it’s common for people to leave a little cash in the account, leave the country for good, and get a friend to grab tbe remainder from the ATM. And since you’re gone at that point, you can’t close the account but it’s fine. I talked to UFJ Tokyo and staff said this is normal.