I have changed my mind!
I have yet to use tsumitate NISA myself, and until recently my advice to people looking to choose between ordinary NISA and tsumitate NISA was to go for ordinary if you could afford to invest the full amount and tsumitate if you couldn’t.
But I have changed my thinking on this.
One big reason for this is that it seems that the government is moving towards shutting down ordinary NISA, leaving tsumitate NISA as the only tax-advantaged normal investment account (unless they create a new one in the future).
But another reason is that I started looking at tsumitate NISA in a different way. Instead of looking at the maximum amount investable or the range of products available, I started looking at tsumitate NISA as a time machine that delivers money to the future.
Basically by fully funding a tsumitate NISA account each year (investing 400,000 yen into it), you are effectively sending future you about one million yen a year in tax-free wealth that will not count as income. If you do this every year you can create a ‘ladder’ of these that will arrive every year regardless of what you do in the future.
The one million is a reasonable guess at how much a 400,000 yen investment in diversified index funds might be worth after 20 years of growing tax-free (basically you might expect it to double a couple of times, resulting in it being worth somewhere around 1.6 million yen after twenty years, so round down to 1 million to tamper your expectations).
This ladder of free cash could supplement your pension, and best of all will be ignored by the government when setting your taxes, health insurance, medical co-pays, and all the other things that are determined by income.
Especially as you get older and less able to manage a complex portfolio, this simple method (basically sell everything in your tsumitate NISA when the tax-free period is up) would make it easy for you or a trusted family member or lawyer to manage your investments.
Assuming you start the ladder at least 20 years before retiring (I am 43 now, so should really get started on it) and continue funding it indefinitely, you should end up with a nice little bonus each year for the rest of your life.
What do you think? Does the magic time machine ladder idea sell you on the benefits of tsumitate NISA?
I have always been a fan of the tsumitate NISA. The investment amount might be a lot lower than regular NISA, but it’s for longer and somewhat safer.
I am planning to retire early and I will be coming up to my last year of the 20 year limit with tsumitate NISA at the age of 54. Hopefully, I will have retired a bit before then. I will be using it as my pre-pension/iDeco bonus money outside of my regular retirement savings. Maybe even invest a bit more into my mutual funds.
But yeah, I am def with you on starting a tsumitate NISA account ASAP. I started with SBI but now that Rakuten is allowing users to use their rakuten credit card to gain points while investing, I am thinking of switching. But the timing of it makes it really troublesome. So if you have a rakuten card, I recommend going with Rakuten! Apparently, you can only switch in October or something like that. Need to look into it a bit more.
This is exactly the way that I’ve started to look at it. We already have our iDeCo, and so this would essentially work as an extra income each of the 20 years that it’s paying out when we’re retired.
Since we’re self-employed, the iDeCo payments are relatively substantial, so I was always wondering if we’d be able to stretch to max out the 5-year NISA in order to gain as much tax-free growth as we could. As a result, this one was already looking more likely for us, but this way of thinking actually frames it as an even greater benefit.
Another advantage is dollar-cost averaging. By investing the same amount of money every month, the ups and downs of the stock market get moderated. When the stock or mutual fund price goes down, the investor receives more shares, which then gain in value once the stock or mutual fund goes back up in value. Investments that are automated and hands-off ensure that the investor’s fears don’t cause him or her to skip the most profitable investments when the market is down.
Dollar-cost averaging is not a great system, you’re basically betting against the historical trend that market is going up 70% of the time. You’ll get better returns by not doing it.
The value of monthly contributions are as you say, you don’t forget or skip them.
On paper perhaps, but in the real world it is probably going to work well for most people over decades, especially as most people are investing from their income, not from a lump sum (that is a different discussion!).
Can you start a Tsumitate NISA even if you’ve got a standard NISA account? I have been using Matsui Shoken.
As Nick says above, this would be an excellent supplement to the iDeco accounts that my wife and I have (as well as mutual funds, a Japanese & U.K. pension, and a few other bits and bobs here and there).
You can only have one NISA account for each calendar year, but you are free to choose between tsumitate NISA and ordinary NISA, and could even alternate them if you wanted. Each calendar year is treated as a separate account.
Thanks. I’ve just applied to change from a normal NISA to a Tsumitate NISA. There seems to be a bit of minor paperwork involved.
Hummmm
I am not completely convinced. There is so few tax-free investments possibilities in Japan that I prefer to maximize the NISA for as long as is exists and then tranfer to a Tsumitate later on.
Well, I am still using ordinary NISA, so make of that what you will…
But tsumitate is growing on me ^-^
I think I’ll ride the normal NISA to the end, I was able to fund it fully this year too 🙂
After that, if things don’t change, tsumitate for sure 🙂
I agree. My regular NISA already produces well over ¥400,000 just in dividends each year(I.e. the max you can invest in the Tsumitate NISA), so I think it makes more sense for me to just keep buying other taxable stocks with that income. Also I have less than 20 years until retirement.
I’m happy to see your thoughts on tsumitate, Ben. I like that the max payments are lower and the timeframe longer than the regular ISA, which makes saving for the long term easier. Now, if I could only live forever…
interesting…. I should check better what Nisa can bring over this tsumitate. I’ve my Ideco now and keep moving money in order to recup the loss with corona. wonder if Nisa can do the same. Amy link to the forum to go directly to a clear explanation?
You can ask questions here or in the forum on the RetireJapan site 🙂
I have a Tsumitate NISA for about two years not but I am thinking about transferring to a standard NISA precisely because of the maximum amount investable and the range of products available. I want to invest in other products too besides index funds in the near future. Just like Eagleyes said, I think maximizing my (non-taxable) investments in the near future would be better in the long run. I am 41 one now. I can invest through a standard NISA until I am 45 or 46, and then transfer my investments to a Tsumitate NISA and keep it there until my retirement. I assume I will be successful with my investments in these five years, which might be overly optimistic.