NISA accounts allow you to buy stocks or similar investments and not pay tax on them for five years (ordinary) or twenty years (tsumitate). You will have to choose what to buy but it’s a good way to save on taxes and keep your money flexible.
Modeled on the British ISA (individual savings account), the Nippon ISA, or NISA, is designed to encourage individuals in Japan to invest in the stock markets.
A NISA account can be opened at a number of financial institutions (most banks and online brokers offer them). It is basically a tax wrapper for stocks and funds. For a period of five years or twenty years all dividends and capital gains are tax-free (the purchase price of the assets is ‘reset’ at the end of the five-year period). You can invest up to 1,200,000 yen per year (this was raised from 1m per year from January 2016) for an ordinary NISA account or 400,000 yen per year for a tsumitate NISA account.
The disadvantage of the accounts is that capital losses cannot be used to offset capital gains made outside the accounts*. Also, price falls will also be reset and any subsequent recovery will count as a capital gain**.
The NISA system started in 2014. At present it is fairly limited, but there is a good chance it will be improved in the future. The government has made a slight improvement by allowing you to open a new account every year instead of every four years as originally planned. They are also considering extending the duration.
From 2018 a new type of NISA account became available. Known as a 積立 (regular investment) NISA, it has a lower annual allowance of 400,000 yen but a duration of 20 years. Only mutual funds are available, and as the name suggests people have to set up regular monthly transfers to the account.
Junior NISA accounts were created in April 2016 and allow parents and guardians to open an account for a child and contribute up to 800,000 yen a year on behalf of children under 20.
The five year limit is the biggest drawback to the current NISA accounts, but there is a chance this will be extended in the future (as happened in the UK). For most people, an iDeCo (defined contribution pension) account is probably a better option if they are eligible for one.
NISA is best used by people who are already investing in the stock market, are not eligible for an iDeCo account or do not plan to stay in Japan until retirement, or those would like to invest more than they are allowed to in iDeCo.
* normally if you buy a stock and the price goes up, you can sell it for a profit. This is called a capital gain, and is subject to taxation. In a normal account, if you have a stock where the price has fallen you can sell it at a loss and write off the loss against the gain on the first stock. For example, if you make a 10,000 yen profit (capital gain) from selling stock A, and you sell stock B at a loss of 8,000 yen, you only have to pay capital gains tax on 2,000 yen. This process is not allowed in a NISA account.
** the way assets in NISA account avoid paying capital gains tax is that the price is reset when the five years is up or when you sell the assets. For example, if you buy a stock in your NISA account for 1,000 yen and five years later it is worth 3,000 yen, the government will consider 3,000 yen as the purchase price. You will only have to pay capital gains tax on any subsequent rises in the price. On the other hand, if the stock price falls to 600 yen five years later that will be considered the purchase price, and you would have to pay capital gains tax if it went back up to 1,000 yen and you sold it.
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