Maybe not so certain after all?
This is our fourth portfolio post. You can see the previous ones here: geography, risk, and asset allocation.
I believe in focusing on things you can control. How much money you save, what you invest in, how you react to financial news.
Taxes are one of the biggest costs to a portfolio, along with fees and investor error. However, by investing in certain ways you can reduce the taxes you have to pay on your investments.
Today we are going to look at three legal ways to do just that.
1. Use tax-advantaged accounts
The government would like people to save and invest for their future (as the national pension might not be adequate), and to put their money to work to help Japan be more productive (instead of keeping it in under a mattress or in a post office saving account).
Any resident of Japan can open a NISA account, most people can open iDeCo, and business owners can contribute to the small business association retirement plan.
NISA gives you five years of tax-free investing, both dividends and capital gains. Each adult in a family can invest up to 1.2m yen a year, and children can invest up to 800,000 yen a year. That’s four million yen a year for a family of four 😉
iDeCo allows you to invest pre-tax income (this reduces your income tax, local inhabitants’ tax, and other payments) and invest tax-free. You can’t get the money until you are sixty, or you can let it continue to grow tax-free until you are seventy.
The small business association plan reduces your income taxes, local inhabitant taxes, and social security payments.
I think long-term residents should look at NISA, people planning to retire here should definitely be maxing out their iDeCo account, and business owners who pay tax should look into the small business association.
2. Hold shares for the long-term
Holding investments for decades allows them to grow without paying fees or capital gains taxes.
Once you buy individual shares you won’t have to pay any fees on them. If you choose low-cost passive ETFs or index funds you’ll pay a tiny annual fee.
Buying and selling will incur sales commissions from your provider, and capital gains are taxed at 20%. Because of this, even if you are lucky enough to make money by buying and selling frequently, you’ll lose a big chunk of it to your provider and the government.
3. Do tax-loss harvesting
This is in a way contrary to the last point. Tax-loss harvesting is a technique where you reduce your capital gains tax liability by buying and selling shares strategically.
I can’t be bothered to do this myself, but THEO does if for me automatically in my account. For more hands-on investors, it might be worth the time to do it in your ordinary accounts. Of course, in a tax-advantaged account, you don’t need to do this.
So there you go. Two ways for most people to reduce their taxes (and one bonus one for overachievers). Are you already doing this? Did I miss anything?
>> Each adult in a family can invest up to 1.2m yen a year, and children can invest up to 800,000 yen a year. That’s two million yen a year for a family of four 😉
Shouldn’t that be four million yen per year for a family of four?
Argh, indeed. I like your version better 🙂
Having invested heavily in THEO last year, but not having withdrawn any money, am I being taxed on the increase in value of the portfolio? If so, how much tax do I need to pay, and where does it say how much capital gains I’ve made? Did you get any documents sent to you from your investments that are not tax exempt?
Hi Michael
It depends on what kind of account you opened with them. See the FAQ for more details: https://theo.blue/faq
“一般口座を選択されたお客さまに限り、税務申告を行う際に参考となる項目に対応した数字を算出してご提供する予定です。ただし、当社は税務アドバイスをご提供するものではなく、実際に確定申告を行う際には税理士などの専門家のアドバイスに従ってください。”
Basically if you opened a tax-reporting account (特定口座) you don’t have to do anything. They take care of taxes for you.
Looking at my account, I am currently making a paper loss on the year, even though my investments are up 17% (thanks to their tax-loss harvesting).
Until you sell you don’t owe any taxes other than on dividends, which they also take care of for you.
If you are worried, I have found their customer support to be excellent, normally replying to emails in under an hour or two, so might be worth dropping them a line with specific concerns.
I went to the chamber of commerce yesterday about the small business pension plan. So it looks likes you get access to your money when cease trading, sell you business, or die. Also from last year you can give your business to your wife or child. You get 1% return per year and nice tax break when your do your tax return. Is it really that simple?
共済金A ・個人事業を廃業した場合（※1）
・配偶者・子以外に個人事業の全部を譲渡した場合
・平成28年4月1日以降に、配偶者・子に個人事業の全部を譲渡した場合
・共済契約者の方が亡くなられた場合
・全額金銭出資により個人事業を法人成りした場合（※2
Basically, yes. The tax reduction is very nice. If you are paying tax, particularly in the higher brackets, this is probably a good idea.
So with Theo generally a tax reporting account is best? (Just ran into this question)
One more thing, with NISA how difficult is it to choose your investments? Can you just choose a fund? Like an index fund?
Yes, I believe tax reporting accounts are the easiest way to handle things. There may be advantages to hard-core investors in doing things manually, but I don’t really understand them 😉
NISA is just a wrapper for investments. You can put shares, ETFs, and mutual funds in there. You just choose to ‘put them in’ your NISA account when you buy them.
I am sure this has been asked (probably by me before) and answered: What is a good source for index fund and mutual fund recommendations?
I am a hands off investor. I want to buy a fund and forget about it for 20-40 years. The big firms in the USA have great resources, you type in the number of years you want to want a fund to mature, then they give a you a fund recommendation and all the awesome you need about it. Bam, done.
For index funds, its takes a bit more research, but generally its not hard to find a few that match the type of diversification you are aiming for.
My Japanese is nowhere near good enough to do any sort of investigating into what funds to buy in Japan. Can I just go to the bank and say I want a NISA account, I want an index fund with 30% in US stocks, 30% in foreign stocks, 40% in bonds (made those up off the top of my head), and they can recommend a fund for me?
Hi Bob
As far as I know, RetireJapan is the best place to do this in English. The Bogleheads forum has a few Japan-based investors that occasionally answer questions, but if you go to our forum you can ask there.
As one forum thread goes into, if you ask a bank for recommendations they will recommend expensive funds that are profitable for them.
I would post your specific question in the RJ forum and you should get some advice.