Pillar 3a contribution when when switching to full time studying

Dear fellow Mustachians

Currently I’m working 80% besides studying, however, I’m considering stuying full time for the next semester.

I have read a bit conflicting information about 3a contributions. As far as I understood, for this year I can deposit the full amount of 7056, because I was employed at the beginning of the year. Is that the case?

Rule of thumb: The younger you are and the less you earn, the less 3a contributions make sense compared to long-term private investing. Of course, this might different if you plan to use 3a for house downpayment, or if you’re leaving the country soon.

Don’t believe financial industry marketing of 3a. Also don’t believe financial influencers, who often receive kickbacks for promoting 3a. Make your own calculation. Don’t just look at taxes saved, look at the higher 3a-fees compounding with time, and consider you need to pay tax on your 3a account when withdrawing (basically being taxed for your stock market returns).

3 Likes

Market return: 7%/year (of which 2% are dividends)
Time horizon: 30 years
IBKR TER: 0%
Viac TER: 0.50%
Marginal tax rate: 25%
Withdrawal tax rate: 8%
Yearly max contribution: CHF 7‘000

As dividends are taxed outside of your 3rd pillar, the expected return after costs/taxes will be identical (6.5%). Meaning: 7k/year for 30 years with 6.5% return gets you to 646k.

A) You don‘t use the 3rd pillar and only use IBKR, you‘ll get to 646k.
B) You use the 3rd pillar and save CHF 1‘750 per year in taxes which you can additionally invest in IBKR. Gives you an additional 161k after 30 years. Wihdrawing 646k from the 3rd pillar will cost you 52k in taxes. So you‘re still better off by ~100k.

It‘s a no-brainer for me.

Yes.

5 Likes

According to this article: Yes you can still contribute if you stop working temporarily.

Depends on what @MustachianStudent 's marginal tax rate is. If he / she is not working it may be very low and not worth locking away his / her money

1 Like

Assuming you pay into pillar 2 at your job, yes, you can deposit the full amount of CHF 7’056 this year. Otherwise the limit is 20% of your net income.

Yes, assuming no changes in these numbers over time and no need to have access to the money before the retirement age, 3a clearly wins.

And these numbers are even too optimistic for the non-3a part. You will likely pay some fees (ETF TER) and also wealth taxes outside 3a.

I agree. The marginal tax rate (and whether the money may be needed) is an important factor. While 3a makes sense for a lot of people, it’s not the case for everyone at every age.

Of course. But if marginal tax rate > withdrawal tax rate, you‘re better off by paying into your 3rd pillar.

And who has a marginal tax rate which is that low? Someone earning almost nothing. That person won‘t be able to contribute anyway.

Working 80% for a couple of months (until the semester starts) will likely result in a very low marginal tax rate.

1 Like

Example

Comparis Witholding tax calculator (tax at source)

Single, salary 60k / yr

canton Zug: tax 1,500 CHF (3%)
canton GE: tax 5,600 CHF (9%)

Right now you are probably not earning much to pay significant taxes. So, 3a contribution won’t result in significant tax savings. Note that it seems that soon it will be possible to contribute into 3a for past years. In this case, I think it makes sense to not contribute now and contribute later when you earn more (but before you have children :joy:).

Furthermore, focusing on your studies, learning your trade and funding a well-paid job will have much more significant impact on your wealth than anything discussed here.

1 Like

Depends also on your financial situation. That money will be locked away until retirement with some exceptions.
You probably need some money for next year (and the years after), you might want to travel a bit after your studies and so on.

If you think you have enough money aside and some money left, then you could invest it somewhere (3a, broker, etc).

People here are sometimes too focused on financial optimization and forget the life context around it;)

1 Like

What tax rate are you referring to?

Total Tax at source: so admittedly not marginal tax rate. In the Zug example the marginal tax rate is about 7%

Calculator
https://en.comparis.ch/steuern/quellensteuerrechner/quellensteuervergleich

How does someone live on 60k/year in Zug? :smiley:

I think there is just no real world example for such s case. Marginal tax rate will always be higher than withdrawal rate for someone that earns enough to be able to contribute to the 3rd pillar.

I assume most students have <60k income regardless of which canton they are resident in.

I just showed data for Zug because Comparis’ calculator proposed it.

It was just an example to point out to OP that 3P is not always a no-brainer

1 Like

It could be a nice idea to open a 3a account in an online bank and wire a fix amount every month to keep the habit. 100chf could be enough.

It could also leave the opportunity open to do a buyback of the missing yearly max amount if one day they will allow it.

The requirement for using the pillar 3a contribution is that you earn a OASI-eligible income in that tax year. So if you earn a salary of more than 2300 francs (or 0 francs if you’re a domestic worker, or artist) in a calendar year, you can make the pillar 3a contribution. If you’re self-employed, the contribution cannot be higher than 20 percent of the income earned.

It’s about pillar 2, not about being self-employed. If you’re employed without pillar 2 (because your salary is below the BVG minimum), you can also only contribute 20 percent of your net income.

1 Like

That’s true. The criterion is whether or not you have a pension fund. But (I hope) the scenario you describe would only be common for apprentices.

For what I know, there was a motion adopted in the federal parliament in 2020 : 19.3702 | Autoriser les rachats dans le pilier 3a | Objet | Le Parlement suisse (parlament.ch)
In my opinion, the law modification (art. 82 LPP) and decree (art. 7 OPP 3) will need a few years and there is a high chance that the potential buyback only could be made for a few years before (e.g. in the five last years)…