Tax efficient portfolios: taking into account the exit tax on 3a

The capital withdrawal tax rate and the income tax rate can’t be really compared. The point is, that one rate is applied before, the other one after growth.

Back-of-the envelope example with made up numbers:

  • Income tax rate: 30%
  • Capital withdrawal tax rate: 10%.
  • Pay 6k into 3a, save 1.8k in taxes.
  • The 6k is locked in for 35 years, compunding at 7%.
  • After 35 years, the 6k turns into 64k and the 10% tax is 6.4k.

The calculation would have to be refined though, but it’s not exactly “let’s save 20% on taxes”.

The providers selling 3a solutions are always advertising “saving of taxes”. TrueWealth, which is selling a non-3a investment solution once had an article about “debunking the tax saving myths”. I can’t find the article anymore, but here’s a similar one: Aktien in der Säule 3a – eine Steuerfalle?

I personally don’t have any 3a, mainly because for me it’s not worth it locking down the funds for decades.

I once did a full calculation for somebody, who was deciding about whether to put money into 3a or IB (i.e. simulating all the taxes at the exact rates and all the tax savings with the exact parameters for that person). The result was that it didn’t make any difference. Person went with IB, since for the same outcome, it had the advantage of not locking down the funds.