Should one put their bonds in Nisa/iDeco or in a Taxable Account? Strategies...

[Kanto]

As I am in my early 30`s, and I just started investing, most of my portfolio is weighted towards equities.

iDeco -> 80% is in Rakuten VT wrap 20% in Currency-hedged developed bonds

Tsimitate Nisa-> 80% in Emaxis Slim All Country 20% in Emaxis slim 8 Assents.

So I suppose if you expected to be taxed at a lower rate when you cash out of iDeco it would be preferable to have mostly equities in that account?

Assuming I have the capital to buy outside the Nisa/IDeco should I hold all my bonds in a taxable account and use NISA/iDeco for equities only?

EDIT: Ideco Monthly 68,000 / Tsumitate -33,000 -> Maxed each month.

[Bushiman]

So I suppose if you expected to be taxed at a lower rate when you cash out of iDeco it would be preferable to have mostly equities in that account?

Aren't iDeCo contributions tax-free going in, then tax-free when you withdraw?
Within iDeCo you can "switch"; rebalance or buy and sell, no?
My plan was to hold 100% equities till around 10yrs before I plan to retire depending on the market, then "switch" to a way more bond weighted allocation... My monthly iDeCo allocation is only ¥23,000, so I'm hoping it's not a large percentage of my retirement funds... I can afford to gamble with 100% equities for at least the next 10~15yrs...
That was my idea anyway...

[RetireJapan]

Aren't iDeCo contributions tax-free going in, then tax-free when you withdraw?

Not exactly. You put pre-tax income into iDeCo, which reduces your income and related taxes. The account is tax-free while you operate it. When you cash out the proceeds may be taxed according to the formula below:

lump-sum

You can use your retirement bonus allowance (if you haven't used it already). This is up to 15 million yen, based on years of contributions (400,000 per year for the first 20 years, 700,000 per year for the next ten). Anything not covered by the allowance, 50% is tax free, the remainder is deemed to be income and added to your income for the year. Definitely worth thinking about when and how to cash out the account.

installments

taxed as pension income

[Petronius]

you're correct in assuming that the tax rate of your IDECO and NISA will be lower than your investment account's.
Therefore it is preferable to put your high risk/high reward assets in your NISA/IDECO and the remaining investments in your tokutei account

My tsumitate NISA and IDECO carry only equities, bonds are only in my tokutei account.
Be careful with the fact that rebalancing your NISA counts toward the yearly allocation so it is not a good idea if you can avoid it. You can rebalance your IDECO, as Ben pointed out, without paying any taxes on the capital gains.

[Kanto]

you're correct in assuming that the tax rate of your IDECO and NISA will be lower than your investment account's.
Therefore it is preferable to put your high risk/high reward assets in your NISA/IDECO and the remaining investments in your tokutei account

My tsumitate NISA and IDECO carry only equities, bonds are only in my tokutei account.
Be careful with the fact that rebalancing your NISA counts toward the yearly allocation so it is not a good idea if you can avoid it. You can rebalance your IDECO, as Ben pointed out, without paying any taxes on the capital gains.

Gotcha! I did some reading and this seems to be excellent advice.

So I will not touch what is in my Nisa, I just changed the future allocations

The iDeco account was really easy to rebalance! I am lucky in that nothing I bought lost any value.

I will look to buy bonds and hold them in my taxable account.

How does everyone feel about (たわらノーロード　先進国債券)?
https://www.rakuten-sec.co.jp/web/fund/ ... 90C000CML2

[fools_gold]

i]How does everyone feel about (たわらノーロード　先進国債券)?
https://www.rakuten-sec.co.jp/web/fund/ ... 90C000CML2

The Nissei, Tawara and eMAXIS Slim funds are all good. The eMAXIS and Nissei have lower fees, so should perform slightly better in the long term.

By the way, the bond fund in your iDeCo seems to be hedged. Tawara also do a hedged version of their fund if that's what you're after https://www.rakuten-sec.co.jp/web/fund/ ... r401k=true

[Kanto]

i]How does everyone feel about (たわらノーロード　先進国債券)?
https://www.rakuten-sec.co.jp/web/fund/ ... 90C000CML2

The Nissei, Tawara and eMAXIS Slim funds are all good. The eMAXIS and Nissei have lower fees, so should perform slightly better in the long term.

By the way, the bond fund in your iDeCo seems to be hedged. Tawara also do a hedged version of their fund if that's what you're after https://www.rakuten-sec.co.jp/web/fund/ ... r401k=true

I was thinking hedged as I plan to hold them for a long time.
https://personal.vanguard.com/pdf/ISGHC.pdf

Thoughts?

[Bushiman]

Aren't iDeCo contributions tax-free going in, then tax-free when you withdraw?

Not exactly. You put pre-tax income into iDeCo, which reduces your income and related taxes. The account is tax-free while you operate it. When you cash out the proceeds may be taxed according to the formula below:

lump-sum

You can use your retirement bonus allowance (if you haven't used it already). This is up to 15 million yen, based on years of contributions (400,000 per year for the first 20 years, 700,000 per year for the next ten). Anything not covered by the allowance, 50% is tax free, the remainder is deemed to be income and added to your income for the year. Definitely worth thinking about when and how to cash out the account.

installments

taxed as pension income

Thanks for the info'! So hard to keep track of everything...
I went back and read this blog post...
Seems the general consensus is to take the lump sum as the cumulative tax on the annuity ends up way more...

[adamu]

I'm confused about currency hedging myself.

The objective seems to be to try to keep the performance stable in respect to the local currency. Normally, the value of bonds vary based on the interest rate. But if you add currencies into the mix, then they vary based on the interest rate and the exchange rate. So hedging means that the performance of the bond should be similar to its performance in its own currency, regardless of the exchange rate.

For long term holdings, I wonder if hedging is worth it? You're just trading an uncertainty (exchange rate) with a drag on returns (the cost of hedging). I guess the argument is that bonds are supposed to be the "safe" bet, so we should remove as much uncertainty as possible. If the exchange rate is negatively affecting your stocks, you don't want your bonds to go down at the same time.

[Kanto]

I'm confused about currency hedging myself.

The objective seems to be to try to keep the performance stable in respect to the local currency. Normally, the value of bonds vary based on the interest rate. But if you add currencies into the mix, then they vary based on the interest rate and the exchange rate. So hedging means that the performance of the bond should be similar to its performance in its own currency, regardless of the exchange rate.

For long term holdings, I wonder if hedging is worth it? You're just trading an uncertainty (exchange rate) with a drag on returns (the cost of hedging). I guess the argument is that bonds are supposed to be the "safe" bet, so we should remove as much uncertainty as possible. If the exchange rate is negatively affecting your stocks, you don't want your bonds to go down at the same time.

Did you see the write-up?

https://personal.vanguard.com/pdf/ISGHC.pdf

Conclusion: For foreign bonds, reduce focus
on yield; keep focus on diversification
Earlier research has established that hedging an
international bond portfolio is an important way to
reduce the risk of currency movements. However,
hedging introduces an additional return stream that
a domestic bond investment does not have, namely
a hedge return, which can be measured and estimated
over the short term. This paper’s discussion has
highlighted four observations about the return impact
of hedging:

• Hedging does not merely produce an investment
without currency return; rather, it represents an
alternative return stream to replace currency return.

• Over the short term, the contribution to return
from hedging has tended to be much less than
the contribution to return from foreign currency
that is unhedged.

• The relative volatility of the hedge return has been
small compared with the price movement of
international bonds, meaning that the diversification
benefits of international bonds should not be
weakened by hedging activity.

• Over the medium to long term, hedging has the effect
of adjusting for differences in market fundamentals,
mainly differences in interest rates and inflation. This
has tended to equalize returns across markets and has
detracted from the usefulness of yield to maturity as a
long-term return predictor.

Based on these observations, Vanguard urges investors
to be aware of the impact that hedging can have on their
international bond portfolios. It is likely that a reduced
focus on the yield of a hedged international portfolio is
warranted. Also of note: Comparisons between yields
across domestic and international markets are not valid,
and we discourage the use of yield differentials in setting
bond allocations. Rather, investors should focus on the
diversification benefits that international bonds can bring
to a balanced, low-cost portfolio.

Vanguard obviously has to avoid making a direct recommendation. It seems hedging is more of a complicating factor then I initially thought.

Perhaps I should by Hedged and Hedged in equal parts?