RetireJapan

Dear All,
Does anyone have any particular recommended strategies for allocating their investment portfolio
between NISA (tax-free) and general trading (taxable) accounts. Suppose you have 300 man yen to invest in a
given year, and plan to invest 60% =180 man yen in stocks, and 40% = 120 man yen in bonds.
You can only put up to 120 man yen in the NISA, so how should one best allocate the investments between
the tax-free NISA and the taxable general account ? Is it better to put all of one type of investment in one of these
accounts, or should you aim to balance each account (i.e. aim for a 60-40 split in both accounts)?

For example, one possibility is to buy 120 man yen worth of the stocks
and put them in the NISA, with the remaining 60 man yen of stocks + 120 man yen bonds into a general
trading account. The rationale being that perhaps it could be expected that the stocks will grow faster, and so
the overall growth would be expected to be higher doing it this way since more tax is avoided. So is putting
stocks in the NISA and the rest outside the NISA the best strategy when one has more than 120 man yen per year
to invest ?

However, one could also argue that there is the risk that stock funds may fall further in a market correction, which would
be unfortunate if it happened right at the end of a all-stock NISA since you could end up paying tax on an overall loss.
However, this situation could also presumably apply if one was holding the stocks outside of the NISA, depending on the
timing of the tax years?

Does anyone have any thoughts / suggestions ?!

I don't think there is a "best" strategy, it's really a matter of understanding risk/reward and where you stand on the spectrum.

As you mentioned, putting assets with bigger growth potential on your NISA can yield bigger gains because the capital gain won't be taxed at all, but the counterpart is that any potential loss at the end of the 5 years period will also be 100% assumed by yourself (without possibility to offset the loss against other gains).

Now you have a 5 years period which should give you plenty of room for growth, especially if you limit yourself to index funds, but there is of course no guarantee.

I have personally decided to go mostly with stocks. Bonds are ~15% of my NISA account.

I buy only bonds within NISA. Of course, they won't grow as much as stocks, so I won't benefit that much from tax exemption, but I also won't lose as much if stocks plummet.
Furthermore, for stocks I prefer to buy Japanese MF which don't pay out dividends, but for bonds I buy AGG which pays out dividends and within NISA they are not taxed. And finally, buying foreign ETFs in NISA doesn't cost anything, while outside of it the commission is quite high.

Many thanks for the interesting and valuable advice.
I can see that the stocks being down at the end of the 5 year term can be a problem, but perhaps one remedy would be to then
rollover the whole holdings into a new NISA ? That way, if they do then go rapidly up again in the 6th year the capital gains tax would
again be avoided? Obviously this won't be possible though once the whole NISA system comes to an end. I guess another option, if you are approaching the end of a NISA (or second NISA if rolled-over) term and have made good gains would be to cash out a year early, and then possibly start a new NISA of mainly bonds / other 'safer' option for the final year ?


Incidentally, regarding 'rollovers', I am still a little confused. For one thing thing some people use the word to refer to the year-by-year progress of a given NISA, while other people seem to use the same word for the end of 5-year term transfer. But regarding the latter, I read
somewhere (on this site I believe, but I couldn't find the page again when I searched for it) that it was possible to roll the whole of the sum (gains and all ) into a new NISA. So if one invested 120 man yen and this had grown to 200 man yen after 5 years then one could 'rollover' the whole 200 man yen into a new NISA rather than just 120 man yen worth of it. Can anyone confirm that this is definitely the case ?

I think this is what you are referring to...
http://www.retirejapan.info/blog/new-nisa-rule

NISA is unnecessarily confusing

The main thing to keep in mind is that each year is treated separately: ie once the five (or twenty) years are up, that year ends and can be rolled over (if NISA is still operating at that point).

Also, from this year the rules were changed so that you can roll over the entire amount, even if it has grown larger than 1.2 million.

Ori wrote: ↑Sat Jul 21, 2018 12:18 pmfor bonds I buy AGG which pays out dividends and within NISA they are not taxed.

Just to clarify here: actually they are taxed 10% by the US. You can probably see it on your dividend statements. It's the Japanese tax that is not applied.

I'm in a similar situation, I took about a month to choose regular NISA vs Tsumitate NISA.

I decided to go for the NISA because I wanted to take advantage of Foreign ETF's but in reality, I have chosen to go with self-reinvesting mutual funds for my regular NISA.

My current plan is to stick self-reinvesting options into my NISA and put everything else outside of the NISA since that will probably get the most benefit. I may even switch to Tsumitate next year just because it seems that Tsumitate is a better offer for only investing in mutual funds.

Ori wrote: ↑Sat Jul 21, 2018 12:18 pm Furthermore, for stocks I prefer to buy Japanese MF which don't pay out dividends, but for bonds I buy AGG which pays out dividends and within NISA they are not taxed. And finally, buying foreign ETFs in NISA doesn't cost anything, while outside of it the commission is quite high.

Yes, dividends are not taxed, that is true. But neither are capital gains(you will eventually pay taxes on the reinvested dividends when you sell the mt, it's just deferred). A big advantage of this in fact is that by using MF that do not generate dividends, you can "reinvest" the dividends without using up your NISA bracket, which effectively "expands" your nisa allowance.