Should I Contribute to 3a or Continue Investing in VT as a young person?

Investing / Portfolios
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Hi everyone,

First of all, I have been lurking and reading posts on here before and after starting my own investing journey. I want to give a huge thanks and props to this community, y’all are great and togheter with r/swisspersonalfinance are the reason i was even able to save and invest the money as effectively as I have up until now.

Now on to my original question:
I’m seeking advice on whether I should contribute to a 3a account this year or keep investing in VT. Here’s my current situation:

  • Age: 22
  • Living Situation: Still at home, projected to move out in late 2025 or sometime in 2026.
  • Salary: CHF 71,500
  • Tax Rate: Aargau 112%, Gemeindesteuer 92%
  • Projected Tax Bill for 2024: CHF 8,000+ (including military and Bundesteuer; CHF 6,400 for Gemeinde and Kanton)
  • Military Tax: Max 2.67% (completed Rekrutenschule so i heard its less than 3% then)
  • Current VT Investment: CHF 47,000 (now worth CHF 51,000, started in January)
  • Monthly Savings: CHF 3,500 to 4,000 (before taxes)

Goal: Reach CHF 100,000 in VT by early 2026 for a solid foundation and so I can accept the lower savings after moving out without feeling bad about how long it takes to get more.

I’ve calculated that without including military tax, I could save about CHF 1,500 in taxes with 3a contributions. However, I’m concerned about the higher fees and lower projected returns with 3a, as well as the taxes I’d face upon withdrawal.And generally I really like to have all my money on one account that is actually my “real” (usable) money. But I will do 3a if it really is the no brainer choice on having (significantly) more money in retirement.

Would it be wiser to continue investing in VT until I earn more?

Thanks for your insights!.

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There’s a few threads about that, with current players it’s roughly equivalent to taxable setup (you can have close to 100% stock similar to VT, and dividends being untaxed makes up for the 0.5% fees).

The only question for you if whether there’s a chance a later 3a backfill would be more beneficial if you have a lot more income at that time (so higher tax rate).

But to me it’s so uncertain (plus the law will likely limit the backfill to after 25yo + the increase in stock in 3a will lower the amount you can buy back) so I’d probably still go for 3a if I don’t need the liquidity.

edit: that said if your current marginal tax rate is lower than the likely withdrawal rate, it doesn’t make sense. What’s your marginal tax rate? (and how many pension assets do you think you’ll have at withdrawal?)

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Thanks for the quick reply :slight_smile:

Marginal Tax rate is calcluated like this, right? ( I used Einkommensteuer Rechner)
Taxes with 71’500: 7’590
Taxes with 72’500: 7’772

182/1’000 = 18.2%

I calculated it with full 3a amount less income:
Taxes with 71’500: 7’590
Taxes with 64’444: 6’254

What do you think=

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For me it is a no-brainer. Fill 3a first. It’s only a fraction of the savings and at 22, the tax-savings will compound for decades to come.

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Both types of accounts are real money, and both should not be usable :laughing:. 3a might be a good choice even if just to protect yourself from behavioral mistakes of using your savings before you are financially independent.

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I see, but in this case it would be 1’500 CHF saved in taxes that i can then invest in VT and it compound, but in the other case it would be 7’000 CHF that can be invested directly to compound.

What I am essentially asking is are those 7’000 gonna grow so much more slowly in total with all taxes and fees, that its not “worth” the 1’500 CHF saved?

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Why pick a high fee 3a provider? Go with a cheap one. You have income tax on the dividends. Wealth taxes on the whole amount. It adds up over time.

Sure, at 22 you’re not thinking about that now, but if you’re talking about 100k savings target at age 22 then I’m assuming you are a motivated person who will grow their income and wealth over time and in 10 or 20 years, you’ll be glad you sheltered as much of it as you could. As it is, you’re talking maybe 5 months of savings into the 3a, the rest will go to VT.

In 10 years, maybe the 3a you contribute will be 1 month of savings.

What’s your income target? If you plan to stay making 70k a year forever, then maybe tax savings don’t matter too much. If you’re planning on earning 120k, 240k, or more, then taxes will very much matter.

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I did this in a hurry, so if I am wrong, do not send me to hell :slight_smile:

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Just tried to make a calculation.
Option 1 -: put money in 3a
Option 2 -: Pay marginal tax and put money in IBKR
Difference = value of each investment after 40 years and paying lumpsum tax

Table shows value of “Option 1 - Option 2” for different lumpsum tax and Marginal tax.

Assumption 3a tax advantage can actually be achieved by filing tax return. Otherwise, the advantages can be reduced a lot.

Calculator

Notes -:

  • Marginal tax rate increases over years , so it would dampen the IBKR results. But I did not account for that.
  • Assumption is that VT type instrument is used in Taxable account to maximize tax benefits of treaties
  • Finpension type 3a accounts are using for 100% Equity mapping VT

Edit -: there was an error in formula, I corrected it … Thanks @PhilMongoose

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It’s not going to be make or break either way and the magnitude of the difference depends on your life conditions between now and then, like salary evolution, wealth accumulation and market returns.

Investing in 3a gives:

  • more immediate money to invest (18.2% tax savings)
  • tax free dividends compounding (with your current salary, that would make roughly 0.34% annually (1.85% dividend yield for a VT equivalent allocation with 18.2% income tax saved on it).
  • wealth tax free growth.

On the other hand, you’ll have to pay taxes at withdrawal, which will also affect capital gains.

At this point in time, the taxes saved on dividends roughly counterbalance the increased fees of the account. This should get better as your salary increases (assuming it does). It’s then a matter of initial boost with taxes at withdrawal vs wealth tax. As your wealth increases, it is increasingly likely that the wealth tax makes the assessment more favorable toward the 3a investments.

Both will lead you were you want to go given the start you’ve taken and if you keep saving and living beyond your means (your savings rate can decrease as you move out, that is not a problem). I’d look at it as a choice between 100% VT or access to a different vehicle that allows for tax optimisation (keeping dividends heavy parts of the portfolio in 3a - this is especially significant if you want a more conservative allocation later on in life and have bond funds to keep outside of your 2nd pillar).

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Thank you very much for the answers,I really really appreciate some strangers taking their time to help me out here :heart:

As I feared (and what led to make this post) is that there is not a simple answer as it is related to many factors including unknown ones like my salary progression, which I really can’t say with certainty of how it evolves. I didn’t study but now have a nice job in all aspects which I see myself staying at for atleast the next 5 years, the Salary will only moderatly increase in that time. After that I have no idea.

What I learned so far in my investing journey is how much I desire to see a single, simple account with all of my investments.(hence my name). Just reading and thinking about 3a and all the possible scenarios und uncertainties gives me a headache :sweat_smile:

For now my goal is 100k in VT, just reaching the 50k did something to my brain I am not overexaggerating, its like a wave of calmness and confidence, I now finally have a meaninful amount of money in the first time of my life. A calmness that is disturbed by my 3a uncertainty.

After I reach 100k in VT for me its also a “no-brainer” to invest into 3a, it would then “feel right” as I kind of checked the VT aggressive growth phase. So I just want to have that “Baseline” first, am I misled here or is this a case where I have a wrong fantasy, I only want to move out with that Goal reached, so its a thing of the faster I reached it the faster I can move out (I want to).

What is the worst case scenario of me not paying into 3a for 2 years (This one and 2025), would I at worst miss out on a few hundred CHF or would be a fatal mistake costing me thousands in this timespan?

You guys are probably older and more experienced than me, so I wonder if I am just hung up on an imaginary number because my monkey brain likes 6 digit numbers more than 5 digit numbers

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It seems you know what feels right for you. That is what I would do. In investing, aiming for the best outcome is often the enemy of doing good enough.

I don’t think we can give you certainty on that. You need to experience it for yourself. The question is if you’d feel more regrets having followed the path you want to and realizing later that you’d have enjoyed having 10-20k more space in your 3a accounts or not following that path and then realize that you actually did know yourself and were right all along but got diverted by discussions on an internet board.

At max, you can put 14’314.- into 3a during those 2 years (7056 in 2024 and 7258 in 2025). That means roughly a 2’600.- tax difference given your numbers. That would delay your goal of 100k in VT by 4 months with 3.5k savings per month, assuming flat markets. A market crash would postpone that goal either way. Outsized returns would make you reach that goal quicker and extend the difference to a little more than those 4 months (not too significantly more).

You probably are but, on a psychological standpoint, we often have an easier time moving forward after having reached our imaginary targets than when we bypass them. Your number is fine. I would not get hung up on it if life circumstances warrant an adaptation (moving out with a partner, for example) but I don’t see a reason to cast it away either just because.

You are doing fine and the difference over your investing career will not be significant. You do have enough liquid assets and seem to have family support, so that having 15k locked up in 3a shouldn’t make or break your life situation either. You have the luxury of choice and can:

a) keep everything in VT, as you enjoy, and reach your target 4 months quicker (and reassess if market behavior and/or life circumstances warrant it).

OR

b) invest what you can in 3a, postpone your goal by roughly 4 months and probably have a little more money when you retire (or withdraw it to buy a house, launch an independent venture or move to a foreign country). Emphasis on “little”: while the actual number might look significant to you today (potentially something in the low 5 digits), it won’t matter that much in regards to your total invested assets at the time.

I’d just keep in mind that markets go up and go down and that you should be pyschologically ready for that (you would actually be in an excellent situation to benefit from a market downturn, as an early accumulator, if you have the temperament to go through it without loosing sleep).

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To keep things simple, in most cases adding money to 3a (based on current regulations) would be a good idea. The table I shared also shows that.

However for some cases, mainly for very low marginal tax rates and higher lump sum rates , 3a might underperform

What is important is to use low cost 3a provider.

Sorry if I confused you.

Last point -: money inside 3a is also your money :slight_smile: it’s not like that it is taken by someone else

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Your formulas look wrong - the 3a fees look double counted.

You deduct 3a fee in return of F8 and then deduct it again in the formula. If you remove this from F8, you get:

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Ahh. I thought I might have made some error. Let me check ……

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Imagine what 7 figures will do to your brain in a few years :crazy_face:

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Fair, but it’s a common mental block I share, and see in other countries with similar schemes like the UK and US.

The 3a pot is really illiquid and the only realistic scenarios when it becomes liquid and can be used to buy a supercar (scratch that, they won’t exist by then) or stuff down strippers’ thongs is reaching retirement or leaving CH. Do we know how long it takes to actually get the 3A as cash? Is it weeks? Month(s)?

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I think I hadn’t understood the whole problematic. If I understand your objectives correctly, you want:

  • to reach 100k invested in VT;
  • to move out.

On top of that, you ponder whether it is better to invest in 3a while trying to reach the 100k in VT or if it is better to start 3a investments after having reached that milestone.

Here are very, very rough and dirty simulations to try to see the impact as a matter of time required to reach 100k VT and total net worth when doing so:

Hypotheses:

  • Starting capital: 51k

  • New inputs: 3’750.-/month or 2’250.-/month in an out of home scenario (1’500.- for living expenses)

  • Max 3a investments at the end of November, each year during the accumulating phase (for the respective scenarii; max capped at 7’258.-/year)

  • Marginal tax rate while contributing: 18.2%

  • Taxes when the 3a is withdrawn based on Aarau, amount taxed = 3a capital at the end of the accumulating period indicated

  • No wealth taxes, same costs/returns for 3a and VT in IBKR (extra costs and tax advantages roughly cancel each other out in these scenarios)

  • 5 market returns scenarios: flat (0% returns); 5% CAGR (0.41% monthly); 20% CAGR (1.53% monthly); -10% CAGR for 2 years, then flat (-0.87% monthly for 2 years, then 0%); -30% CAGR for 2 years, then flat (-2.93% monthly for 2 years, then flat).

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The final net worth indicated are systematically taken at the end of the longer period (that is, the period indicated for the VT+3a investments).

For example, under the flat market hypothesis, it takes 14 months to reach 100k in VT while living under your current situation. It would take an additional 8 months (22 months total) if you lived on your own with 1’500.- of expenses for rent and other additional costs.

With 3a investments, it would take 3 additional months to reach 100k in VT while living as you currently do. The difference after 17 months would be 2’300.- in favour of investing in 3a.

It would take an additional 8 months (30 total) to reach 100k in VT with 0% returns while living on your own with 1’500.- monthly additional expenses. The difference after those 30 months would be 3’450.- in favour of investing in 3a.

All numbers should be taken only as orders of magnitude and shouldn’t be considered precise. Actual taxation effects will vary with the duration of the 3a investment.

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2-4 weeks as per my experience

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Thanks for the additional information, I have 2 questions:

  1. I heard about the possibility of 3a being less tax-advantaged soon, should that be a thing to consider which might make it less of a good idea with the uncertainty it brings? I mean who knows how 3a will look like in 40 years, no?

  2. What about going the middle route and just not investing the full 3a amount?
    As someone who really loves round numbers, why not invest 5’000 CHF each year for these 2 years, in this way I do save 1000 CHF taxes per year but still get to my goal of VT 100k faster. (And I enjoy it much more to have a seperate account (3a) that shows a clean 5k or 10k after 2 years)

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I don’t think, that there will be a change, tbh. But if so: it really depends, what the new tax rates would be. If I understand correctly, the tax rate is still preferred (compared to the income tax), but the taxes will increase. It probably still makes sense to contibute to pillar 3a, but more with focus on investments with (high) dividend or interest, since dividends/interests in pillar 3a are tax-free (during the year).

Interesting approach. One has to evaluate - analogue to the mandatory health insurance - if it makes sense to partially contribute to the pillar 3a.

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