Maybe not so certain after all?
This is our fourth portfolio post. You can see the previous ones here: geography, risk, and asset allocation.
I believe in focusing on things you can control. How much money you save, what you invest in, how you react to financial news.
Taxes are one of the biggest costs to a portfolio, along with fees and investor error. However, by investing in certain ways you can reduce the taxes you have to pay on your investments.
Today we are going to look at three legal ways to do just that.
1. Use tax-advantaged accounts
The government would like people to save and invest for their future (as the national pension might not be adequate), and to put their money to work to help Japan be more productive (instead of keeping it in under a mattress or in a post office saving account).
Any resident of Japan can open a NISA account, most people can open iDeCo, and business owners can contribute to the small business association retirement plan.
NISA gives you five years of tax-free investing, both dividends and capital gains. Each adult in a family can invest up to 1.2m yen a year, and children can invest up to 800,000 yen a year. That's four million yen a year for a family of four ;)
iDeCo allows you to invest pre-tax income (this reduces your income tax, local inhabitants' tax, and other payments) and invest tax-free. You can't get the money until you are sixty, or you can let it continue to grow tax-free until you are seventy.
The small business association plan reduces your income taxes, local inhabitant taxes, and social security payments.
I think long-term residents should look at NISA, people planning to retire here should definitely be maxing out their iDeCo account, and business owners who pay tax should look into the small business association.
2. Hold shares for the long-term
Holding investments for decades allows them to grow without paying fees or capital gains taxes.
Once you buy individual shares you won't have to pay any fees on them. If you choose low-cost passive ETFs or index funds you'll pay a tiny annual fee.
Buying and selling will incur sales commissions from your provider, and capital gains are taxed at 20%. Because of this, even if you are lucky enough to make money by buying and selling frequently, you'll lose a big chunk of it to your provider and the government.
3. Do tax-loss harvesting
This is in a way contrary to the last point. Tax-loss harvesting is a technique where you reduce your capital gains tax liability by buying and selling shares strategically.
I can't be bothered to do this myself, but THEO does if for me automatically in my account. For more hands-on investors, it might be worth the time to do it in your ordinary accounts. Of course, in a tax-advantaged account, you don't need to do this.
So there you go. Two ways for most people to reduce their taxes (and one bonus one for overachievers). Are you already doing this? Did I miss anything?