Tax efficient portfolios

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

  1. return on investement of maybe 7%
  2. 25-30 years time horizon (who goes all into their 3a at 25?), nobody who did not grow up rich
  3. reinvested tax savings
  4. 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 :joy:

Hello everyone,

This article was discussed at least once already:

The authors are clearly biased, as they advertise their investment services. Nevertheless it is great to explore alternatives!

Consider yourselves assumptions behind these calculations, but I personally decided to continue contributing to 3a no matter my margin tax rate. At minimum it provides you with a diversification of brokers.

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What about a low marginal tax rate for part-time, approx. 15%? 3a still worth it?

With a 15% marginal tax rate it’s questionable. It depends on the expected withdrawal tax rate. I would estimate 3a to typically still be slightly better in the end but probably not by much. You’d have to run the numbers in more detail, also accounting for fees, wealth and dividend taxes. Also keep in mind that with a 15% marginal tax rate, you will no longer get a full tax credit for US WHT.

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I think you’re being too harsh on their article.

They readily admit „Wir haben bewusst ein extremes Beispiel mit hoher Rendite und langer Laufzeit gewählt“. They also do make mention of important factors they disregarded (up-front tax savings and the opportunity to invest them, staggered withdrawals).

The main point of the article is very valid: one should consider which type of asserts to invest in in- and outside of pillar 3a. And there are considerable drawbacks in pillar 3a, especially for equity fund investments.

Do they want to sell you their services in helping you with that? Absolutely. I think that’s fair enough. But they also are you enough pointers to make up your own calculation if you want to do it on your own.

You misunderstand and/or misrepresent the article’s advice there:

Their advice is not to forgo pillar 3a in order to invest in “their” non-3a investments instead.
Their advice is to do invest in pillar 3a - but optimise which class of assets to hold there.

Namely, to prefer lower-risk, fixed income investments (if you have them) in 3a rather than investments that generate a higher share of capital gains. “Die risikoarmen Anlagen setzen Sie vorzugsweise in der Säule 3a um”

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They provided an example of a 3a investment with certain assumptions, trying to demonstrate that some investments are better outside of 3a. However, even their ‘extreme’ example investment is still significantly better in 3a, if we use their assumptions, as per my non-3a calculation of the same investment. They just didn’t bother to even do the non-3a calculation. And comparing saved income taxes with paid withdrawal taxes is irrelevant on its own. Or did I make a mistake in my calculation?

There is some truth to their advice (because of the progressive nature of the 3a capital withdrawal tax). However, the difference is often not as big as they make it look like, so it depends on details such as dividend/coupon yield and it’s not clear cut at all. They failed to provide an example where non-3a investment would be better. Their example might work better in a canton with a lower marginal tax rate.

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No - you‘d end up with CHF 2‘358‘417 outside of 3a - compared to CHF 2’193’086 with 3a.

Based on their assumptions - because they are (explicitly) disregarding the effect of dividends and implying that returns from equity investments are capital gains (which is, from experience, mostly but not entirely true), hence tax-free. Also, pre-tax money, as you said yourself.

I‘ don‘t really like their way cumulating the 88‘020 in tax savings without interest or investment returns and comparing them to the withdrawal tax though (when these tax savings are made over a 40-year period with high incestment returns).

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What I implied with this is that before you actually can invest pre-tax money outside of 3a, you have to pay income taxes on it and you can invest only what is left after paying income taxes. Based on their numbers, you can invest only CHF 4567.50 post-tax a year with CHF 6’768 pre-tax money. That’s why I got CHF 1’591’617 in my calculation.

They probably indeed looked at it this way but that’s completely ridiculous. I can’t accept this as simplification given that a reasonable comparison as per above is still very simple and the gap between the results is huge: CHF 2.36 Mio. vs. CHF 1.59 Mio.

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One day ChatGPT will resolve such questions within milliseconds, just make sure to click fiduciary-mode so you can sue it in case of incorrect advice :stuck_out_tongue_closed_eyes:

Got it. I thought I could as much money I wanted in the 3A and that the tax deduction was only based on the 7k threshold.
Thank you very much for your reply.

Thank you Luk_nuts !

In this regard I opened 5 3A pillars at Finpension in order to minimize this effect . Thank you for pointing this out though.

Point taken.

Though they’re obviously calculating the tax savings as being consumable - or investable somewhere wholly unrelated.

Again, you’re comparing something they calculated based on certain „extreme“ assumptions (a 3a equity investment) to something else they are not suggesting.

They are not discouraging 3a investments at all. They’re merely giving you food for thought or making you think about which assets to invest and hold in pillar 3a.

What one rather should compare is a 3a equity investment with high capital gains vs. a fixed-income investment with (relatively) larger returns from dividends/interest/distributions. Though admittedly they didn‘t flesh out such comparison in numbers either). But that’s the main point they‘re making: to prefer such investments over equity investments in pillar 3a - assuming that you do fixed income (e.g. bonds) and pillar 3a anyway.

The whole article is presenting an extreme edge case to get attention. Valid though it may be I find it misleading.

I’m pretty sure that Mustachians aren’t the target group anyway.

How practical is this?
Are there any Funds in Finpension or VIAC that allow to select for high yield bonds or high dividend Funds?

IMHO the takeaway from the post is to put low yield investments in the 3a. Might make sense if you consider the whole asset allocation and want a bond or real estate portfolio.

I’d still like to see a realistic case where high 3a capital gains are actually worse than low yield investments, as the article implied. I can imagine that for Zug or Schwyz they might exist for some income brackets.

They do offer high yield, emerging markets and inflation-linked bond ETFs.

Since „yield“ typically ignores price movements and capital gains (1, 2), the takeaway is to hold high yield investments in pillar 3a.

Stocks typically are low-yield investments, compared to (as the name says) high-yield bonds. The last 10 to 15 years with their depressed fixed income yields are rather the exception than the norm. But high-yield bonds typically have higher yields than stocks‘ (dividend yields).

Anyway, the overriding factor should be the upfront tax savings. They are investable and alone make pillar 3a worthwhile for most readers, as @Cortana stated.

That’s something the article mentions yet curiously disregards. Which is baffling, especially in light of the high returns of equity investments it assumes. That’s would be my main point of critique.

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