Investing in ETFs with lower dividend payouts for tax efficiency

[Thaek]

I believe it doesn’t make sense to select ETFs based on dividend yield. If you do ETF investing the goal usually is to buy the whole market/segment etc. If you really want to optimize dividends than start investing in stocks directly with low or no dividend payment. In the S&P 500 alone there are a lot of great companies without dividends. https://www.dividend.com/investor-resources/sp-500-companies-that-dont-pay-dividends/

@hippo

P.S. Does anyone know how dividends are taxed in an accumulating fund such as CSPX?

Yes they are taxed, worst case even for capital gains. Has been discussed here before several times. And when we are talking about tax optimization than CSPX (IE-based) is a bad idea you will lose 15% dividends due to tax leakage, better invest in a US based ETF when holding US stocks

[hippo]

Theoretically a company can redistribute profits either through share repurchases or by distributing dividends. A company would pick whatever is most tax efficient distribution to their shareholders.

You are right that you lose some diversification by doing this but I still think it is an important consideration and analysis to make when picking a portfolio/ETF. If there are similarly diversified options with lower dividend payout it seems to make sense to prefer that.

Investing in individual stocks likely has a much higher fee burden as well as time burden than just picking an ETF or two but it would be interesting to run some analysis there. These would be incredibly tax efficient for Swiss returns costing only broker fees + wealth tax.

When you say CSPX is worse case for capital gains do you mean that for tax purposes they assume all capital gains are dividends so tax you on the full appreciation? That would make it well worth avoiding! And IE based is another good point to remember. Thanks!

[Thaek]

@hippo

When you say CSPX is worse case for capital gains do you mean that for tax purposes they assume all capital gains are dividends so tax you on the full appreciation

If the fund does not provide a report on the dividend amount then the tax authority will assume all capital gains are dividend amounts and will tax it fully. But most funds provide those reports. But you should be able to find threads in this forum with more info regarding this.

[dbu]

Then just buy Berkshire Hathaway - that way you practically own an index of great solid companies, a successful business, and pays no dividends.

[EPMike]

Just buy Berkshire Hathaway. It a fund with 0% TER and no dividends. Also, it performs better than VTI.

[EPMike]

you beat me by less than a minute… at least you confirmed my view of BRK

[dbu]

Haha cheers to the exact same thought at exact same time

[wapiti]

You can also buy growth fund
https://www.msci.com/documents/10199/a20000f5-7518-404d-9d37-2fd47939ed28

[Karol]

@dbu

Then just buy Berkshire Hathaway

While we are at this, is buying Berhshire Hathaway at SIX (BRK/B:SW) instead of BRK.A:NYSE counted towards $60,000 limit for non-US residents?

(I am aware that for Swiss residents the limit of 60k is not there, but if you retire outside of Switzerland, suddenly you might need to start taking it into consideration)

[Thaek]

@Karol

I am aware that for Swiss residents the limit of 60k is not there, but if you retire outside of Switzerland, suddenly you might need to start taking it into consideration.

Bad news for you: The US estate tax also applies to Swiss residents

@Karol

While we are at this, is buying Berhshire Hathaway at SIX (BRK/B:SW) instead of BRK.A:NYSE counted towards $60,000 limit for non-US residents?

I believe it doesn’t matter at which exchange you buy the Stock. If it’s an US security it will fall under the 60k limit in case of an inheritance.

Non American (AD/ADR) companies that are traded at a US Stock Exchange such as Alibaba on the other hand should not fall under the 60k Limit. But the IRS is deciding on an individuel basis, so if they feel like screwing you it might still get taxed:
https://blog.tagesanzeiger.ch/geldblog/index.php/74889/so-greift-der-us-fiskus-nach-ch-erbschaften

[Karol]

I thought the limit is increased to ~5M for Swiss residents.

What is your long-term plan for “tax efficiency”, assuming that you plan on retiring in the country without the US estate tax treaty?

Am I right that at retirement:

• Your holdings will be hugely in VT/VTI/etc. so US situated assets
• You cannot suddenly sell all of it when retiring and buy IE based funds not to become professional investor
• Suddenly you might be taxed 30% on dividends and get under the US estate tax limit right after moving to another country
• And as you are older, your chances of unfortunate death are increasing

[Joey]

@Karol

I thought the limit is increased to ~5M for Swiss residents.

I was under that impression also. We discussed this a while back here: Some help with fund choice and fund currencies - #16 by cray

tl, dr: Upon death you are treated as a US citizen. For US citizens the first 5M of your portfolio are exempt from the estate tax. The only concern swiss investors should have is if that treaty gets “revoked”

[Thaek]

Just red the discussion I guess you are right. I just remembered that a while back the banks were calling are their customers with 60k+ regarding the tax. Article here: https://www.ktipp.ch/artikel/d/usa-verlangt-neu-steuern-von-schweizer-erben/

But my understanding from the discussion here is that its only 5Mio total (including swiss real estate etc.) and after 60k+ you have to go trough the US tax process.

[oozoo]

thats easily avoided - before you die simply press “Close All Positions” in the IB app

[weirded]

The topic has also been widely discussed here: The $60'000 cap for US investments

[hedgehog]

@Karol

(I am aware that for Swiss residents the limit of 60k is not there, but if you retire outside of Switzerland, suddenly you might need to start taking it into consideration)

Why don’t u worry about that when you’re actually about to move out. Stock market’s open every business day. Great chance to revisit all positions, reset CGT cost basis while it’s still tax free and optimize for new country’s taxman

@Karol

You cannot suddenly sell all of it when retiring and buy IE based funds not to become professional investor

BS

@Thaek

But my understanding from the discussion here is that its only 5Mio total (including swiss real estate etc.) and after 60k+

60k is guaranteed in any case, 11M (previously 5M) is for the case if all your wealth is in the US, else it’s prorated - if you have significant non US holdings (real estate etc) exemption can be much smaller than you think.

[Karol]

@hedgehog

Why don’t u worry about that when you’re actually about to move out

Because I have to deal with 2 tax systems already now, being a tax resident also in Poland. So thinking about it as “moving out” for retirement is just an excuse in this case

@hedgehog

BS

Actually you are right. My mistake, you can sell a lot cause the only important condition is < 50% of your yearly income in capital gains. So it’s OK.

@hedgehog

60k is guaranteed in any case, […]

Thanks. Understood.

[hedgehog]

@Karol

Because I have to deal with 2 tax systems already now, being a tax resident also in Poland.

Why? Double tax residency is only a temporary situation. Or are living half year here, half year there, every year?

@Karol

Actually you are right. My mistake, you can sell a lot cause the only important condition is < 50% of your yearly income in capital gains. So it’s OK.

Even if you violate that, it still doesn’t mean they will tax you on capital gains.

These conditions from Kreisschreiben specify the cases when they definitely won’t tax, nothing about the cases when they will.

[Karol]

@hedgehog

Double tax residency is only a temporary situation. Or are living half year here, half year there, every year?

Karol:

It’s not really easy to avoid Polish tax residency for Polish nationals.
In my case I cannot avoid it. So it is kind of a permanent thing.