3. pillar, is it worth it, how to optimize my portfolio + withdrawal?

[jay]

@BobJosh

Sure, I save about 1.6-2k a year (depending on canton) by reducing my taxable income, and the withdrawal tax is much lower than the marginal tax rate, BUT the money invested also compounds quite significantly during the time, which is also taxed, so I think it comes out quite close in the end?

With regards to income tax savings due to contributions and withdrawal taxes, the only thing that matters in the end is that the withdrawal tax rate is (significantly) lower than the marginal income tax rate when contributing.

While you will pay withdrawal taxes also on the profits, you also earn investment return on the extra capital you were able to invest due to tax savings (7k invested in 3a would have to be compared to 5k invested outside 3a if you save 2k in taxes). If the withdrawal tax rate wasn’t progressive, this would exactly even out and there would be no concern at all. The withdrawal tax rate progression acts as a form of capital gain tax but it’s typically fairly mild. Compare your marginal income tax with the worst withdrawal tax rate you can expect and as long as the latter is still significantly lower, 3a should be worth it.

3a comes with higher fees than good ETFs at inexpensive brokers, however, with VIAC, finpension or TrueWealth, you can normally more than compensate this by not having to pay dividend or wealth taxes on 3a investments (you can even completely avoid US WHT).

@BobJosh

On top of the money being ‘locked’ and who knows what changes will be legally in the future that could potentially increase the withdrawal taxes.

There is a risk but as has been seen in recent discussions, there is heavy resistance to significant increases to 3a taxes. I think 3a contributions are much less at risk than pillar 2 contributions.

@BobJosh

I assume since there are no CG taxes on these, and there is technically a capital gain tax on 3. pillar withdrawals it would be reasonable to keep the lower risk, lower return parts of my portfolio in the 3. pillar if I decide to open one, right? Unless I am missing something. I will probably have the ‘home bias’ in the 3. pillar, so mostly the SMI, or other Swiss ETFs, maybe some bonds. Would this make sense? Or Should I keep the same ratio inside and outside of the 3. pillar?

As mentioned above, the capital gain tax effect in 3a is typically mild. 3a is not the best place for something like Bitcoin’s past performance but for broad stocks funds I would rather differentiate between high and low/no dividends. See Splitting the world: creating tax-advantaged global stocks portfolio using funds in 3a account for a whole thread on this. That said, I myself actually use the same strategy (to the extent possible) in 3a and outside as I don’t consider the effect to be large enough to be worth the additional balancing complexity (especially as VIAC/finpension don’t allow manual trades, which makes manual balancing painful).

@BobJosh

Can I separate accounts within finpension any time? Or it’s better to have 5 accounts from the start?

You can’t split existing accounts. I’d suggest to open 5 accounts right away. There are other reasonable approaches but I think it’s simple enough to directly start with 5 accounts.

@BobJosh

Would this even matter if I were to leave the country before retirement age and withdraw the money then?

If you withdraw all of your pillar 3a accounts in a single tax year, it wouldn’t matter.

@BobJosh

How does finpension handle this from the technical aspects, if I open 5 accounts? Is it like having more accounts at IBKR, and I can switch with the same login?

Yes, a single login to access all accounts.

@BobJosh

Would I need to create 5 different bank transactions to send to each account or I can allocate it within finpension once I send it all out?

The former, you have to send contributions to the right account.