Looking for advice: 2nd and 3rd Pillar

Don’t forget the taxes you have to pay when you withdraw either 2P or 3P.

Probably doesn’t make sense to save taxes at a low rate now if the tax rate when withdrawing is likely to be higher

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Maybe, maybe not.

His marginal tax rate is probably between 20 and 25%.
Tax rates for a capital payout from a Schwyz-domiciled fund (such as finpension) start at 2.5%.

Though it also applies to capital gains that (from other personal wealth) would otherwise be free, yes.

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If you live in Switzerland, the 3a foundation’s domicile doesn’t matter. You have to pay the tax rate of your personal (tax) domicile.

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True and worth mentioning (see examples of tax rates at finpension).

I intentionally mentioned only the withholding tax rate for non-residents since, for a 29-year old who just received his B permit, capital withdrawal with a Swiss domicile may seem bit of a stretch (of time and/or the imagination) :wink:

In the event of withdrawal when leaving CH there will probably be taxes in the destination country, depending on the dual tax agreement

As I mentioned in another thread, the decision to buy-in and/or contribute more to the 2nd pillar (or 3rd) is heavily dependent on your assumptions about the future, which is to say that it is (at least in part) very specific to every individual.

In essence though, as @Burningstone mentioned earlier, it boils down to the comparison between:

  1. how much that money is expected to return outside the fund, and;

  2. how much that same money is expected to return in the pre-tax vehicle (i.e. 2nd/3rd pillar) plus the expected returns on the tax rebate/refund it generated.

There are many other factors to take into account (as already mentioned in this thread), such as current marginal tax rate, investment horizon, lump sum tax rate and/or domicile at the time of withdrawal, etc. I have just recently posted a small tool in another thread that can help you think about all these different factors (and allow you to plug in your own assumptions):

As you will see, the “investment horizon” is one of the most important variables. Indeed, when you make a buy-in or contribution into the 2nd or 3rd pillar, the tax rebate/refund is practically guaranteed, giving you an immediate boost on the return. As years go by though, this early head start will erode in comparison to the higher returns you could make outside the fund.

I mention this last point because this is what got my interested in this topic in the first place. Indeed, as a foreigner myself initially (now Swiss as well), I had “definitely” left Switzerland a few times already, cashing my 2nd pillar in full (note: it would be only the over-mandatory part for European citizens). In such cases it’s possible to have your 2nd pillar transit through Schwytz for instance for a better lump sum tax rate. Therefore, if for some reasons you think you might only stay for a few years in Switzerland, the “investment horizon” is relatively small, and the 2nd/3rd pillar contributions might look like a better financial transaction. Unfortunately, as @Barto just mentioned, it also depends on where you are going back to (with regards to the local tax treatment of that lump sum), and that opens up a whole 'nother can of worms! :slight_smile:

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Thank you everyone for the responses :slight_smile:

As recommended by @Burningstone I did some research on the 2nd pillar fund and It seems to be returning an average of 2%/year on the last 10 years.

Adding the other problems of the 2nd pillar mentioned by @San_Francisco (no offense taken :smiley: ) , I will do some math later, but it doesn’t seem to be worth the higher contribution for the tax savings I will have with my salary.

@Wolverine from what I understood, the numbers I gave are used for savings/investments, and on top of that 0,5% is used for life/disability insurance.

@MisterB thank you for the tool and feedback, I will check the tool later.

…residents.

Depending on your insurance status in that new country of residence, you may be still be eligible to cash out in full (e.g. in Portugal).

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You’re absolutely right, I misspoke. Thanks for pointing that out.

Regarding the last part of the question: In canton Aargau, if you are taxed from the source there is a form that you can fill in from kantonales Steueramt homepage to reclaim taxes for your 3a contributions. A similar straightforward form exists to reclaim firefighter contributions and childcare expenses.

Not anymore, since 2021 tax year.
Whoever wants deductions needs to file taxes fully (and continue to do so in the future), AFAIK.

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Indeed, it seems that they removed this option (it seems to remain only for firefighting contributions).

But we need to ask for it each year?

No, you only have to request ordinary tax assessment once. You’re then required to file a tax declaration every year as long as you reside in Switzerland. As far as I know, it’s impossible to go back to not filing a tax declaration.

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Indeed. Once taxed through the ordinary process you cannot go back! Unless you leave Switzerland and come back again on another fiscal year, I guess?

Just realised that I was on a thread that is 11months old (sorry) :sweat_smile:…I’ll post my reply anyway for future readers (since I realised only after it was written): it is exactly the right question for a young person to ask. Disclaimer: I don’t know what implications the B-Permit has on 3a investments (if any).

I agree 100% to the combined replies of @San_Francisco and @MisterB : first priority to maximising your 3a and investing it according to your risk profile (i.e. Finpension/VIAC etc). Tax savings, more aggressive investment opportunities and more flexible options for use in a future (direct/indirect) mortgage.

I want to simply stress that this requires discipline above that required by your pension coming directly off your salary. I really wish that I increased my 2ieme later than I did, using it intentionally as a bond part of an overall portfolio rather than my main retirement savings vehicle…while it is now very healthy, it represents 2/5 of my overall portfolio making it more conservative that it should be for someone my age/risk profile.

@Rshine : in your case, until your salary increases a bit, be aggressive and try to get to the 588 chf /month in 2023-2024 for your 3a since less cash flow early in your career will also hopefully help you establish a cost of living at a lower level, encouraging more savings potential as your salary increases and as you save for a future mortgage/retirement in a tax efficient way…

I’ve started to have this discussion with a lot of new (young) colleagues after seeing years where so many would lease a nice car with their first few salaires/bonuses and have nothing left for FIRE, 3a, or extra 2ieme…you need to live and have fun but you need to make choices too ;)…those choices are easier when they are as early as possible in your career.

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Can’t really fault them though, to be honest, if that’s their first „proper“ salary.
You gotta have fun with that and splurge a bit.

Probably better/easier to convince them to save and invest a good amount of future salary increases?

Hi, I just realized I forgot to give an update, so thank you for remembering me with your late reply :sweat_smile:. Just after I posted this we found that my girlfriend was pregnant with our first baby and with all the excitement and preparations I forgot about the post.

Anyways, for the 2nd pillier I decided to contribute the minimum I can (3.5%).

For the 3rd pillier I haven’t done anything last year.

Our cost of living is already low, we don’t have big salaries but we still managed to invest a bit more than 40% of our salaries this year. Mostly on ETFs.

I will check the 3rd pillier again in a month or two when I have a better idea of the kid expenses as he will start going to childcare this month.

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congratulations!

This is amazing! With the added tax advantages, the 3a is indeed worth considering but with a baby you may have other priorities short term…

always :+1: … work to live not the other way around :slight_smile:

Congratulations on the baby!
Do you know what is the interest on your 2. pillar for 2022? It should have been announced already. If it’s the state-mandated 1%, that was a good decision to go with minimum. But there are some pension schemes that pay out more (like banks) and there it might be fair to consider higher contributions.