New NISA Tsumitate portion…to DRIP or not❓

[TimVest21]

Hello,
Happy new year to all.

I’m a dividend investor, I don’t DRIP (Dividend Re-Investment Plan) as I want to invest my dividends in what I feel like investing them in…this year is my 5th NISA year, all were ippan NISA…so this will be my first time to do Tsumitate NISA-ing.

Something dawned on me this morning, & I want to ask if I got this (new revelation to me) right.
IF I choose to reinvest the Tsumitate NISA fund(s) dividends, over time, this strategy would allow one to exceed the ¥1.2m Tsumitate NISA portion limit, would it not? My 2024 dividends would be reinvested, and the dividends from the fund(s) in my 2024 Tsumitate NISA would continue to put “new money” (via reinvested dividends) towards those funds in 2025, 2026, & so on as long as I held those funds, correct?

Whereas if I were to not have them reinvested, and had the money deposited in my brokerage account to reinvest as I like, I could invest that money into the very funds that I got the money from, however I’d be limited in terms of time (as the 2024 contributions need to be contributed in 2024), money (as the limit is ¥1.2m for this year), and in terms of long-term maximum contributions (as currently the Tsumitate portion of NISA maxes out at ¥1.2m/year for 5 years, so ¥6m…so if I got this right, by choosing to reinvest, even if I max out my Tsumitate NISA contribution space, the funds would continue to add more new money in as long as I held them. So I’d essentially max out my lifetime ¥6m out of pocket, but the reinvested dividends would go above & beyond that limit in a way that I couldn’t do otherwise…kinda like a Trojan horse effect…right?

Thanks for reading, & thanks in advance for any input.
All the best

[RetireJapan]

Yes. In fact, most (all?) of the funds available in the tsumitate portion of new NISA reinvest dividends internally and do not pay them out. As you noticed, this means you don't waste your contribution allowance reinvesting the dividends.

This ability to reinvest dividends makes Japanese mutual funds one of the best ways to invest for the long term, particularly in tax-advantaged accounts (NISA and iDeCo).

[zeroshiki]

DRIP would mean investing in funds or stocks that pay out dividends and then reinvesting them? Like how it works for ETFs in the US. This doesn't work for a number of reasons. One of them is that the tsumitate portion of the NISA doesn't really have any funds (that I know of) that pay out dividends. Secondly, if you were to do this in your growth portion, DRIP-ing would eat up your allowance every time you buy a new fund with the dividends.
The best thing to do is to buy funds that internally reinvest. This allows you to keep your NISA allowance while the fund grows.

[sutebayashi]

… the reinvested dividends would go above & beyond that limit in a way that I couldn’t do otherwise…kinda like a Trojan horse effect…right?

You scared me with the Trojan horse analogy!
Perhaps you meant more like a compounding snowball effect, but yes I was an ippan nisa person too and typically opted for the dividend reinvesting for the reason you outline.

[adamu]

currently the Tsumitate portion of NISA maxes out at ¥1.2m/year for 5 years, so ¥6m…so if I got this right, by choosing to reinvest, even if I max out my Tsumitate NISA contribution space, the funds would continue to add more new money in as long as I held them. So I’d essentially max out my lifetime ¥6m

Not quite. There is no ¥6M limit. The lifetime limit is ¥18M and it can be all tsumitate. ¥6M is the amount of the lifetime allowance that *must* be from tsumitate (i.e. you can't use the full ¥18M if you only use the growth portion).

About reinvesting. It's confusing because in general you can choose whether to have dividends pay out or to reinvest. But as RJ and zeroshiki said, funds available in the tsumitate portion generally never pay out anyway, so it's a moot point. They always reinvest internally. So yes, the dividends of the funds' investments are reinvested internally by the fund, converting them to a capital gain for you without using any additional annual or lifetime allowance. *IF* the fund paid out a dividend (which it probably won't) and you had chosen to reinvest, that would consume additional annual and lifetime allowance (but you wouldn't pay tax on the dividend).

[TimVest21]

Thank you for the replies and insights…life got crazy, as life sometimes does, and I’m just now getting a chance to review & reply.

Sorry for the Trojan horse scare!!
I’m a big fan of the dividend snowball effect myself, but see this particular situation as Trojan horse-ish as it’s like we’re sneaking troops (reinvested dividends) behind enemy lines (the tax man’s contribution limits)…