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

[Dr.PI]

@jay

No, if I’m understanding this correctly, I don’t think this makes sense. With 3a you effectively invest the tax savings (as you invest pre-tax money), which means that your tax savings grow as part of your portfolio.

You are right. I did a lower estimate of 3a efficiency.

[johndoe1]

Very helpful, thanks for all the comments! So do we have a consensus on 3a contributions ?

[Dr.PI]

Not yet. If you are 25 and your marginal tax rate is 20% or less, then probably 3a investment is not worth it. Especially considering changing legislation risk.

[nabalzbhf]

My take: since we have those low cost, pick your amount of equity offers (frankly, viac, finpension), if your 3a is a small amount of your wealth, it’s likely a no brainer (you probably have a high marginal tax rate and don’t care about having the money locked in).

If not (e.g. early career professional), might make sense to wait until the lock-in doesn’t matter as much and the marginal tax rate is higher (higher savings), esp. with the likely upcoming legislation changes.

[the_p]

@jay

You arrive at exactly the same amount if you were to pay the 10% before investing. You would invest CHF 5’400 instead of CHF 6’000. CHF 5’400 * 1.07^35 = CHF 57’654

Thanks, I didn’t realize that this would be the same result.

[dom.swiss]

@johndoe1

That’s very interesting! Can you draw any general conclusions from your calculations, like: the less you earn and the older you get (less compounding effect left), the less it’s worth it contributing to 3rd pillar?

You got lucky that I have no life besides my spreadsheets Thanks for the question, as it made me revise my plan. I went back to the drawing board and I can report the following findings:

1. With high salary (>130k) and 20+ years available, maxing out pillar 3 and investing all is the clear winner
2. With high salary (>130k) and up to 10 years available, voluntary pension contributions and maxing out pillar 3 investments wins
3. When earning less, the tax effect of pillar 2 and 3 contribution is not as marked and investing all wins.

Another interesting thing happens after retirement at age 65:
Withdrawing all capital and investing it leaves massively more money for you to spend and wealth for your heirs than leaving everything in the pension fund and getting a monthly “salary”.

Happy for anyone to review/comment my assumptions and calculations (Vorsorge vs. Investment - Google Tabellen)

[johndoe1]

Wow, thanks, this is incredibly helpful, really appreciated! Going to check it out more thoroughly asap.

I’ve already figured some mistakes of mine, like voluntarily contributing way too early and way too much to 2nd pillar

• So do I get it right, 3a is worth it at any age (even very young) as long as you earn more than 130k? You noted “20+” years, so that could be 30 years or more available?

• Is that because in pillar 3a you can chose 100% stocks (unlike for pillar 2)?

[dom.swiss]

@johndoe1

So do I get it right, 3a is worth it at any age (even very young) as long as you earn more than 130k? You noted “20+” years, so that could be 30 years or more available?

With pillar 3a, you gain 3 times: a) less tax on the last CHF 6883.- of your income (as of 2022), b) investment with almost market returns (I say “almost”, because the most cost efficient investment setups are not available for pillar 3a investments) and c) dividends within pillar 3a are also tax-free. The higher your salary, the better the tax savings. This triple benefit works for any number of years.

[jmp]

There is even a 4th benefit: the amount in 3a is not included in your taxable wealth !
The marginal tax on wealth may be around 0.5 to 1% (location dependent), this tax savings is recurring annually.

[rolandinho]

@jmp

The marginal tax on wealth may be around 0.5 to 1% (location dependent), this tax savings is recurring annually.

I can only confirm/emphasize this!
In my canton a marginal wealth tax rate of 0.9% starts at “only” around 800k wealth. It’s admittedly a tax-hellish canton.
For every Rappen “hidden” in 3a or second pillar almost 1% annually is saved.

[dom.swiss]

Wealth tax rate in Liechtenstein is 4% and starts after the first 25k, if I remember correctly. Never would have thought that the little income low-tax neighbor of Switzerland has created a hell of its own.

[Polo]

You can add some stocks to your portfolio that pay dividend exempt from income tax. Example: WIR Bank
Don’t know though if there are other stocks that pays thoses types of dividends on a stable basis…

[jay]

@dom.swiss

Wealth tax rate in Liechtenstein is 4% and starts after the first 25k, if I remember correctly.

Not quite that bad. 4% of your net wealth is added to your taxable income and you then pay income tax on that, as I understand it. So in the end you pay less than 1% (depending on your tax bracket) and dividends are not taxed separately. This sounds like taxes on investments are typically lower than in Switzerland, depending on canton and tax brackets.

[dom.swiss]

Thanks for pointing this out! I have it now corrected in my personal scenario planning.

[Doc82]

Hello Dr. PI and all, sorry if I pitch in with this question.
Multiple times it has been mentioned that pension funds from accredited institutions such as Finpension are the most favorable way to put money in the market because of taxes advantages on dividends (no WHT) and other (no revenue tax ?).
So, I wonder why not to put all the money we can save in Finpension to get the most in a long-term view, instead of using ETFs through brokers ?
The only disadvantage I see is that these money will be locked till the retirement age.

Thank you for your feedback in advance.

[Luk_nuts]

As an employee, there is a maximum of 7’056 CHF you are allowed to annually contribute to Finpension/VIAC.

Also, the 0.39% annual recurring fee at Finpension is higher than what you would pay, when investing with a Broker such as IBKR.

[Dr.PI]

@Doc82

So, I wonder why not to put all the money we can save in Finpension to get the most in a long-term view, instead of using ETFs through brokers ?

Sure, if you invest 7k per year per working adult in the household, go with 3a investment. It is a good idea to use it as an investment vehicle of the first choice. But if you are serious about it and earn well, like many forum members, you would invest at least few times more per year. And for this you have to go for taxable investments with brokers (ETFs etc.).

[johndoe1]

You’d need to consider that with 3a, your stock market capital gains will be taxed in the end (when you withdraw your 3a money before retirement). Capital gains in your taxable accounts will not.

So the longer 3a investments accumulate equity capital gains (lets say 10-20 years), the more you’ll get hurt by 3a withdrawal taxes.

Also, if you don’t earn much, you won’t even be saving too much taxes initally.

[nabalzbhf]

@johndoe1

So the longer 3a investments accumulate equity capital gains (lets say 10-20 years), the more you’ll get hurt by 3a withdrawal taxes.

You should write down the math, time isn’t a factor. It’s always winning as long as 3a withdrawal is lower than marginal tax rate.

[johndoe1]

Is it though? I’m curious.

With 3a contributions, you save taxes in the beginning (no stock market returns). With private investing, you save taxes in the end (no taxes at withdrawal). Assuming rising equity returns, which is more profitable?

Also take into account: you could have invested the higher TER of 3a when investing privately.

Here’s an article on this, unfortunately in German:

Aktien in der Säule 3a – eine Steuerfalle?