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.
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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.
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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…
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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.
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Thanks for pointing this out! I have it now corrected in my personal scenario planning.
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.
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.
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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.).
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.
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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.
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:
Re higher TER of 3a funds compared to VT and the like, don’t forget also that 3a funds are shielded from wealth tax which may (depending on your circumstances) account for most of the TER difference
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As I said, write down the math, end or beginning it doesn’t matter since multiplication is commutative.
(just write down the formula for the return in each case, for simplicity assume exactly same return in 3a and outside, but see below why 3a wins here anyway).
(Or use the search function I’m fairly sure someone wrote down that formula at least once, for example Tax efficient portfolios - #14 by jay)
3a has total cost of about 0.5% vs. a typical 0.1% TER, but 3a is shielded from tax. Assuming 2% dividend (fairly typical), as long as your marginal tax rate is >20% 3a will have higher return – without taking into account the tax gain from the start – (and that’s also not taking into account the marginal wealth tax which can add >0.x% cost to the outside of 3a returns).
And competition makes it fairly likely for the cost of 3a to go down over time (already went down by 0.05%?)
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So would you happen to know what this dude got wrong?
They didn’t. It’s complementary to nabalzbhf above explanations.
Several elements have to be factored in (wealth tax, income tax, management fees, product fees, transaction fees, capital gain tax at withdrawal etc) when investing using a 3A or brokerage account.
An extreme case would be to get a 3A capital at 65 years old that is less that what you contributed over time (withdrawal before an extreme market downturn). You’ll still have to pay taxes on your withdrawal.
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It has many flaws and unrealistic premises:
- The tax savings on 3a don’t appear to be invested into the stock market, only accumulated.
- The example assumes extremely high returns for a very long time (40 years) and a fairly high payout tax on the total amount of 10.7 % which is not split between different accounts and years.
- There is no real reason why you should not go 100% shares over a long time and 3a if you make a lot money.
I think if you do more realistic examples like a
- return on investement of maybe 7%
- 25-30 years time horizon (who goes all into their 3a at 25?), nobody who did not grow up rich
- reinvested tax savings
- staggered payout over 5 years
there will be hardly any scenarios that make you worse of with a 100 % equity 3a portfolio.
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They might be somewhat misleading, yes you’ll pay more in taxes than what you originally saved, but you’ll still get more in the end than not doing 3a (because if you don’t do 3a, you start with -30% due to income tax in their examples).
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To be fair, that is mentioned as being unaccounted for in the article: “Weiter könnte man auch die jährliche Steuerersparnis in Aktien reinvestieren oder die 3a-Gelder gestaffelt beziehen und so die Situation optimieren.”
…and these upfront tax savings can be substantial:
In Zürich, for example, your marginal tax rate seems to be about 20% on “only” CHF 80’000 of taxable income (i.e. the very low end of salaries among this forum’s readers’). That’s 1’400 upfront tax savings that may be invested and earn compounding returns.
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It is but they ignore it for their advice, so the calculation in the article is misleading.
Investing the same CHF 6’768 pre-tax income outside of 3a with their parameters, you’d end up with CHF 1’591’617 after taxes, compared to CHF 2’193’086 with 3a. This assumes the same 32.5% marginal tax rate and 8.8% p.a. return net of fees and dividend taxes, and no wealth taxes.
I.e., 3a would be massively better, in contrast to their advice. This skips over lots of details but at least it’s an actual comparison based on their assumptions.
Either they don’t understand how to properly compare 3a and taxable investments, or they are actively misleading readers to direct them to their non-3a investments. Either way, such a publication means that I would recommend everyone to stay away from that company.
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Excellent, thanks for all the replies, seems like some tricky math to me! But of course, I’m not a math hero by any means 