Splitting the world: creating tax-advantaged global stocks portfolio using funds in 3a account

Taxes
21

Be creative and find your way!

First, you can always use VT ETF or MSCI World ex CH Index Fund to invest “unbalanced” funds.

If you have “too much” in 3a, that is relatively easy. 3a: developed ex US + MSCI World, taxable: US, MSCI Emerging Markets doesn’t really matter where. That would be the most optimal allocation. A system of 2 linear equations to solve, I would say :joy:

In extreme cases, when 3a account is much larger than taxable, one can have Emerging Markets only in taxable and MSCI World ( + Emerging Markets if needed) in 3a.

If you have a bit too little 3a, you either complement US stocks with Developed Markets ex US ETF, or buy VT. If the difference is quite big, one can for example buy MSCI Europe ETF in addition to US (+ Emerging Markets) in taxable account.

22

If it’s 10% of your total assets, you’ll probably end up with VTI and VXUS (or VEA + VWO) at IBKR as well. If it’s 60% of your total assets, you’ll include World ex CH or US there. You just have to account for contributions as they are limited for the 3rd pillar. I rebalance 1-2x/year.

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(crosslinking from 3a solution from Finpension - #526 by Dr.PI; seems better fitting here)

Alright so here’s what I came up with
(I have 2+3 accounts at Finpension+VIAC; not moving them around yet)

Goal

Keep Dev ex US in 3a pillar, US + EM at IBKR.

Finpension (Swisscanto funds)

Fund %
Europe ex CH NT CHF 49
Switzerland Total (II) NT CHF 9
Canada NT 10
Japan NT 20
Pacific ex Japan NT CHF 11

VIAC (CSIF funds) (*)

Fund %
Europe ex CH 32
SMI + SPI Extra (2:1) 6
Canada 7
Japan - Pension Fund 13
Pacific ex Japan 7
World ex CH hedged (**) - Pension Fund Plus 34

(*) These proportions fit with the remainder of my AA outside of 3a (i.e. 65% of total VIAC portfolio should go to Dev ex US), YMMV.
(**) Could probably reassign it to US+EM, to be 100% correct, but keeping it simpler for now.

IBKR

  • Wipe out VEA
  • Substitute VWO for IEMG (to match on MSCI vs FTSE with the 3a)
  • I hold some small cap value tilts with SLYV/AVUV/AVDV

Objections? :slight_smile:

1 Like
24

I wish I was able to put so much in my 3rd pillar to cover enough of the world. For now I aim to cover small single markets like Japan or Canada to avoid holding separate ETFs for them. I also hold my CH allocation there to minimize the tax drag on dividends (I think Swiss companies pay lots of dividends)

2 Likes
25

I re-read the thread and some other resources and now think that I should move my “Pacific ex-Japan” (dominated by a high-dividend Australia) and UK portions of my portfolio to 3rd Pillar. Japan has historically paid lower dividends and Switzerland is also not that high on the dividends. Links:

I will therefore consider adding a Japan (and likely Canada) ETFs to my taxable account. I’ll probably go with a Canada-based ETF for the latter.

Does it make sense?

26

This is less optimal because of reduced (to 0) L1 withholding tax for the pension fund vs. 10% for a US fund and 15% for a European fund.

Yes that is good.

And there is no L1 tax loss one way or another.

27

Why would a U.S. fund (with Japanese stocks/dividends) have lower withholding tax than a European one?

EDIT: Got it from the table above and the DTA. Many European countries seem to enjoy 10% too though (including Switzerland). Why 15% for a US fund and 25% for a European fund? Shouldn’t those be 10% and 15% respectively?

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Different double tax agreements. The rates are wrong though, sorry.

29

Regarding L1 tax loss for Japan. It’s 10-15% of a rather small dividend payout. Not having to pay income tax on much larger Australian or British dividends will save more (as per your amazing tables). Although, I don’t see a vanilla UK option on VIAC/Finpension…

30

One might also want to account for the withdrawal fee of the 3a.
For instance, these computations show that if one invests at year n and plans to withdraw the money from 3a at year n + d with d small, well, this is not very sensible:

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With a longer horizon:

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31

I would say it’s a wrong reasoning. If you want to account for taxes paid at the exit, you should also consider taxes saved in the first place. As we know, contributing to the 2nd pillar, saving on taxes and withdrawing after 1 year the same amount can easily result in 30+% of return due to different tax rates saved and paid. That’s why it is de facto forbidden.

I didn’t want to mess with these tax rates also because it is a general feature of pension schemes 2 and 3, not related to what kind of assets you have there.

In fact there is another very distantly possible issue discussed: that with 3a you pay taxes on the whole amount withdrawn, i.e. it becomes a capital gains tax. We tried to do some estimations, looks like that for 40+ years the 3a with 100% stocks can grow so much that due to the exit tax you better invest in a taxable account.

3 Likes
34

Maybe at least caveat your answer in that thread? It’s true only for people with marginal tax rate < top withdrawal rate (but for those it’s usually more obvious that 3a isn’t a very good deal, if you don’t pay a lot of taxes, don’t try to optimize for it :slight_smile: ).

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Those of us with B permit, we cannot get those tax advantages (or it’s debatable whether it’s worth it).

So, I think the reasoning could be okay for some.

36

I am bit confused with the recent discussion. The calculations from Dr Pi were based on specific scenario and I believe was mainly to illustrate a good way to utilise 3a and optimise taxes.

It is a very good summary of what can be considered while making such decisions but it can never be a complete solution.

The reality is always very specific to individual

  • marginal tax rates
  • withdrawal tax rates
  • asset allocation in taxable account vs non-taxable
  • expected returns
1 Like
37

I see. I was highlighting a way in which the computations should be expanded to take a not so uncommon personal circumstance into account.