I’d like to bring to attention a point which doesn’t seem obvious at first. I guess there are good arguments for investing as much as possible from the 3a pillar cash one is holding. The reason is obvious: you usually have the money there for the very long term. So you might as well invest it. That’s a theme you can read in most bank’s 3a advertisements at least.
Well, turns out: the investment in the 3a pillar that are available as of 2019 are … expensive. Even VIAC is in fact quite expensive with 0.5% when comparing with “free market options” (also keep in mind that FX conversion in VIAC is not free at all, rather the opposite: it cost round about 1% usually - a one off, sure, but still, much more than at IB)
It would in fact make much more sense to invest as much money as possible in your non 3a pillar and keep the emergency cash actually in 3a. The reason being that
- 3a investments are relatively much more expensive than non 3a
- it doesn’t matter where you’re having your emergency cash: sure, 1 or 2 day emergency money you might want to still have in a plain bank account or under your mattress, but most investments can be liquidated within 2-3 days easily. So in case of a real emergency all you’d have to do is bridge 1-2 days, liquidate some investments, nd in parallel invest some 3a cash into 3a funds/etfs so that you stay invested and don’t have to liquidate in a bad moment.
With such a plan in mind I don’t see any reason to hold any non 3a cash other than what you need to pay for your monthly bill
I dont understand your point? You can not withdraw money from 3a accounts unless you retire, buy a house or leave the country. Whats the point of keeping cash there?
Maybe the name “emergency cash” is not well adapted as it is impossible to get it for a real emergency. We could call it “3a for balancing a portfolio with cash”. The problem is that even in this case it does not fill its function. In case of financial crisis I will not be able to dig in my pile of cash to invest it in stock, or at least not outside the expensive world of pillar 3a.
Here’s an example for illustration:
Let’s say a person has 70’000.- in 3a accounts and 255’000.- outside. The person has chosen to have 5’000.- always liquid (to pay bills etc) and 25’000.- as emergency money (to cover emergency cases, job loss, what not).
In a more traditional setup, the person chooses the following investments:
- 70’000.- invested in 3a mutual funds or etfs
- 225’000.- invested outside of 3a in etfs
- 30’000.- outside of 3a in a bank account
My alternative suggestion is to instead do:
- 45’000.- invested in 3a mutual funds or etfs
- 25’000.- in 3a cash
- 250’000.- invested outside of 3a in etfs
- 5’000.- outside of 3a in a bank account
(Maybe the 30’000.- in cash is a bit much for some, but it’s just an example to illustrate. The point is to have the largest chunk of (emergency) cash in 3a.)
In case of needing that cash:
- sell 25’000.- non 3a etfs - money should be available within 2-3 days
- simultaneously buy 25’000.- 3a mutual funds/etfs - low market risk as this can be done on the same day
The expectation is that an emergency is not likely/frequent.
The advantage is to have cheaper/better investment options outside 3a and even higher interest of cash within 3a.
It’s true that at first sight VIAC - or other solutions - might seem expensive however IMHO it’s not as simple.
As everybody knows contributions can be deducted but I think it’s important to also pinpoint that you don’t pay taxes for dividends/ fortune in your 3a account.
The dividends thing allows you to diversify your portfolio by introducing in your 3a some assets like bonds or real estate that wouldn’t make any sense for a Swiss investor in a non tax-privileged account.
Regarding fortune, in Vaud you pay almost 0.016% for a fortune of 250’000 CHF which would mean almost 400 CHF to add to the taxable income). Depending on your tax bracket it’s a figure to take into account.
That’s why I say it’s not that simple.
With Viac you can change your strategy anytime, but asset re-allocation will only take place on the first day of the next month IIRC. So you would have to wait up to a month for your money to get back into market.
Good point - I indeed neglected the taxes So I guess this needs a case by case analysis then, as everybody’s tax situation is different…
One point though: dividends in 3a are not directly taxed, true, but they are ultimately still taxed when finally withdrawing the money from 3a. That’ll be at a reduced rate, yes, but must be taken into account.
Have to yet run some sample numbers but I’d guess the wealth tax has a much smaller effect. That’s based on the assumption that the decision to pay into 3a is independent on this whole discussion where/how to invest or keep emergency cash. But agree, if you have more investments outside of 3a that money would grow faster, thus the wealth tax is higher. True. Then again, if the money in 3a grows faster you pay that Kapitalbezugssteuer in the end as well. So I think you really need to run some numbers to know for sure.
Just a small example then: let’s assume 2.5% dividend and 15% income tax and 5% 3a Kapitalbezugssteuer. In a very rough approximation (it’s too late today ) the advantage within 3a would be 10% less tax on 2.5% dividend == 0.25%. So perhaps that could serve as some rough guidance. So you could subtract those 0.25% from the VIAC cost, arguably, indeed.
Right. But in my case I would not have all 3a money in VIAC. Some of the competitor allow you to invest on a daily basis, with a reaction time of 1 day. So VIAC couldn’t be used for that (as of today at least, who knows they might offer non-monthly rebalancings at some point)
Now you could of course argue: why choose any other 3a solution besides VIAC if it is more expensive than VIAC. But the point would be: it would only contain (emergency) cash - and only in the case of an emergency would that money be invested…
But yea, I have to go back to the drawing board (ie excel sheets) and calculate both cases exactly with taxes. Seems to be more delicate then I thought…
I’m going to try to give you a simple example that applies to Vaud:
A fortune of 250’000 CHF generates a taxable income of aprox 400 CHF in the tax return. Then you apply the cantonal/ communal coefficients (154.5 % + 68.5 %) and you end up having to pay approx 900 CHF (400 x 2.23).
That’s basically a 0.36% of 250’000 CHF so I’d rather have that in a tax free account.
For an employed person it takes a long time to get to those amounts in the 3a but if you’re a freelancer in the high bracket it might take you 7/8 years if you contribute the maximum amount.
Then add to that the dividend thing and the tax deductions (for a revenue of 250’000 and a full contribution of 33’000 CHF you could end up deducting 14’000 which is approx 5%) and it might be quite interesting.
A fortune of 250’000 CHF generates a taxable income of aprox 400 CHF in the tax return
Not 5000 CHF (assuming a modest 2% div yield)?
If you’re talking about wealth tax then you forgot to deduct 0.3% for “management”. It’s ok to deduct it even though IB doesn’t really charge you anything, no questions asked, no proofs required, it’s a pauschal deduction.
That’s basically a 0.36% of 250’000 CHF so I’d rather have that in a tax free account.
That pays 1% per year in interest? You don’t need a math phd to see which option is better in the long term. For a short term storage if you will leave Switzerland anyway it might be ok though. But try not to get taxed by your new country of residence or it may cost you even more
Absolutely. But don’t get me wrong: I’m by no means arguing against taking advantage of paying into 3a and having that money deducted from the income tax. I think that’s a great option to have, sure, absolutely.
My whole argument comes after you’ve payed money into 3a. It is at a point where the question is: where should you invest, in 3a or outside. And again, I see that as completely orthogonal to the question as to whether you should pay into 3a or not. These are 2 independent things. So in your example, sure, pay those 250’000 into 3a if you can do so. That’s not my point.
Then to ultimately decide where is it more economical to invest into mutual funds/etfs: inside 3a or outside 3a, we need to really compare into the very detail 3 things:
- dividend tax: comparing ordinary income tax outside 3a vs Kapitalbezugssteuer inside 3a
- wealth tax: comparing orginary wealth tax outside 3a vs, again, Kapitalbezugssteuer inside 3a. I think this point is actually a big argument to not invest in 3a. As 3a is actually the only place in existance today (2019) where Switzerland has in fact a Capital Gain Tax!
- investment cost/courtage/deposit fee of 3a investments (eg VIAC) vs outside (eg IB)
I’m not a financial guy so my terms are for sure wrong.
Let me rephrase: for a fortune of 250’000 CHF you end up paying to the taxman 900 CHF which is a 0.36%. That’s not really far from the management fee of VIAC (0.53%)
However that’s not really much, the important thing is the tax deduction indicated above.
I find the 3a account plus VIAC extremely interesting.
Note I’m getting to these numbers by using VaudTax directly.
No you don’t. As I already mentioned you forget the portfolio management deduction which will make it a zero. It’s min(0.3%, 6000 CHF) in ZH at least.
I’m afraid I’m not following.
Say I have those 250’000 CHF in a bank account at 0% interest? Wouldn’t I be charged 900 CHF by the taxman?
Cash in bank is not eligible for this deduction, only securities (stocks, bonds, ETFs…)
But you were gonna invest in stocks anyway as you mentioned VIAC.
I don’t think we have that deduction (portfolio management deduction) in Vaud but I could be wrong
Yes but in 3a (VIAC or whatever) I don’t pay wealth tax initially.
You don’t pay wealth tax in 3a, right, but you pay Kapitalbezugssteuer on Capital Gain instead! Something which you don’t when outside of 3a. So the dividend gain you get inside 3a would have to be compared with the capital gain tax loss inside 3a.
But anyway, as mentioned earlier, I’m not arguing against putting money into 3a. I see that as a given and do it myself too. I’m only trying to find the best place to keep emergency cash after all the money has been payed into 3a that I want. And yes, it sounds weird to have emergency cash in 3a - but you can shuffle investments within 1 day and magically have it available outside of 3a. So it really just boils down to where is it more economical.
That’s a really good point.
I did a quick calculation with UBS and for those 250’000 the one-off tax was about 10%
(Note I didn’t take into account any splitting)
Yes that’s the deal with 3a: you can deduct it from income when you pay in, but you pay Kapitalbezugssteuer when you pay out. So it’s still a gain overall. Just that this introduces the nasty side-effect that capital gain is now taxed as well.
And yes, splitting 3a accounts has some effect - highly depends on canton too