Denmark: Fees on deposit accounts.

[BadHorse]

bestintentions & FBeyer,

really cool to see your investment plans, and tax calculations.
The "How to invest" question isn't just hypothetical for me, so practical examples in a Danish setting are very welcome!

[FBeyer]

Interesting plan you got there FBeyer

My plan is to buy stocks, until I get 50.000 DKK in yearly dividends from stocks (the low tax rate of 27%).

What I will do when my yearly dividends will pass 50.000 DKK I don't know yet, any good suggestions?

It's kind of how I intend to BUILD the portfolio, but not necessarily how I intend to balance it once it starts 'floating'.
600K in stocks is an estimated 40-ish thousand per year and about 30K after tax. 450K in bonds is an estimated 13-18K per year.
300K invested in RE-flipping should hopefully yield more than 15K per year.

Given my intended living expenses (with 10% padding) is about 60K, it's more than enough. Since bonds aren't taking up my entire allotment of Personindkomst I can work freelance or during a single month per year without paying taxes for about 20K per year too.

It's somewhat nice that so much money from bonds is effectively tax free, but it also skews the portfolio towards something VERY bonds heavy. I think I estimated that a 3% WR for me would give a 7-11 portfolio. 700K in stocks, 1.1 mio in bonds

I'm still very much in the teething stages of figuring out what kind of portfolio I want. Gold is out. Commodities is no-go for me, so that leaves Real Estate as the last major asset class. I might as well try to leverage that I'm analytically educated AND have 5 years experience in construction; flipping might be both fun AND lucrative *fingers crossed*

[FBeyer]

bestintentions & FBeyer,

really cool to see your investment plans, and tax calculations.
The "How to invest" question isn't just hypothetical for me, so practical examples in a Danish setting are very welcome!

Read about investing. Understand what makes what tick, and what makes you tick. Then understand how to implement it in DK. There is NO point in trying to copy someone else's portfolio unless you know exactly how that portfolio is intended to work, none whatsoever.

Edit: Especially since my portfolio can be so easily replaced with income still, I honestly don't know if it's something I'll stick with!

[BadHorse]

@FBeyer
Absolutely, I didn't mean to imply that I wanted to copy a portfolio setup!
It is just helpful to see some real examples while reading up on the theory. Makes everything more concrete

[cbroenning]

About the taxes, you will only pay 42% in tax of dividends as long as you have more than 50,000 DKK in capital gains AND you are working and have other income. In many cases once you ER the tax rate will be much lower. Here are my tax calculations given you have retired and you only have dividend income:

Total (dividend) income: 50,000 DKK
Taxes: 13,500 DKK
Tax rate: 27%

Total (dividend) income: 100,000 DKK
Taxes: 18,000 DKK
Tax rate: 18%

How did you calculate these effective tax rates, bestintentions?

The 27% rate of the first DKK 50,600 include gains on sale of shares, so realization each year can be utilized to "defer" the 42% taxation of the gains above the DKK 50,600-threshold. At the same time, it is possible to balance the portfolio a bit in the building phase.

[cbroenning]

Depending on your situation, you can sell shares to regulate the profit to the DKK 50,600 bracket (2016 numbers).

[bestintentions]

About the taxes, you will only pay 42% in tax of dividends as long as you have more than 50,000 DKK in capital gains AND you are working and have other income. In many cases once you ER the tax rate will be much lower. Here are my tax calculations given you have retired and you only have dividend income:

Total (dividend) income: 50,000 DKK
Taxes: 13,500 DKK
Tax rate: 27%

Total (dividend) income: 100,000 DKK
Taxes: 18,000 DKK
Tax rate: 18%

How did you calculate these effective tax rates, bestintentions?

The 27% rate of the first DKK 50,600 include gains on sale of shares, so realization each year can be utilized to "defer" the 42% taxation of the gains above the DKK 50,600-threshold. At the same time, it is possible to balance the portfolio a bit in the building phase.

I'm really in the learning phase regarding how to optimize best for the tax impact in Denmark. My calculations are simply putting the number (ie 100,000) into dividend income on skat.dk and no other income. This should give the numbers in my first post.

How do you regulate your dividend income to 50,000? If you have to sell some of your stocks you also have to pay taxes on their gains

[cbroenning]

Ok, I see

As you might be aware, income is organized into different categories for tax purposes, depending on where the income comes from. The general categories are:

1. Personlig indkomst (personal income)
2. Kapitalindkomst (capital income)
3. Aktieindkomst (equity income)

The categorization is derived from numerous factors. Personlig indkomst is defined in article 3 of Personskatteloven, Kapitalindkomst in article 4 and Aktieindkomst in article 4a. Reading these might give you a slight overview, but I reckon more questions than answers could derive from it.

However, Aktieindkomst is made up of both dividend income on shares and capital gains on shares, meaning that both of these should be included in the calculation of the progression from the 27% bracket to the 42% bracket.

Given that you do not earn enough dividend income to maximize the 27% bracket (50,600 in 2016), it will be fruitful in most cases to maximize the 27% bracket each year by selling shares.

Now that I know how to post pictures, I have made an example for you showing you the benefit of seeling shares each year to maximize the 27% bracket. In both of the two scenarios 1,000,000 is invested in year 1, with a ROI of 5%, and everything is sold at the end of year 15. Dividend income is set to 0, but if there were any, it would just add to the equity income.

Scenario 1 - Realization each year:

Scenario 2 - Realization year 15:


Comparison


As you can see, the tax payable is significantly smaller. However, as you pay taxes each year, you will reduce the amount invested, implying a smaller gross profit. Considering these two factors, you still come out ~42k strong.

What you have to consider though, is that the upside implies a positive ROI. If the market value of the shares in year 15 is equal to or lower than the purchase price in year 1, you will effectively have been paying taxes each year on a profit you never see. So there is a risk, depending on your time frame and thus the shield against fluctuations.

[bestintentions]

Ok, I see

[...]

Wow, thank you for that great explanation. I'm really excited to learn some more about FI in Denmark. I will definitely be using this tactic in my build-up phase to optimize my situation.

The numbers for tax rates I gave are more relevant for when you actually retire and only have capital gains as income. The tax rate changes because of 'personfradrag' and some other stuff. It was just to illustrate how much tax you would have to pay on your capital gains when retired.

I think the tax rate is very important when talking about FI in Denmark. After all in the US you have to accumulate 25x of annual expenses to be FI. In Denmark this would be more like 30x-34x because of the tax rate.

[DrBrain]

Ok, I see

As you might be aware, income is organized into different categories for tax purposes, depending on where the income comes from. The general categories are:

1. Personlig indkomst (personal income)
2. Kapitalindkomst (capital income)
3. Aktieindkomst (equity income)

The categorization is derived from numerous factors. Personlig indkomst is defined in article 3 of Personskatteloven, Kapitalindkomst in article 4 and Aktieindkomst in article 4a. Reading these might give you a slight overview, but I reckon more questions than answers could derive from it.

However, Aktieindkomst is made up of both dividend income on shares and capital gains on shares, meaning that both of these should be included in the calculation of the progression from the 27% bracket to the 42% bracket.

Given that you do not earn enough dividend income to maximize the 27% bracket (50,600 in 2016), it will be fruitful in most cases to maximize the 27% bracket each year by selling shares.

Now that I know how to post pictures, I have made an example for you showing you the benefit of seeling shares each year to maximize the 27% bracket. In both of the two scenarios 1,000,000 is invested in year 1, with a ROI of 5%, and everything is sold at the end of year 15. Dividend income is set to 0, but if there were any, it would just add to the equity income.

Scenario 1 - Realization each year:

Scenario 2 - Realization year 15:


Comparison


As you can see, the tax payable is significantly smaller. However, as you pay taxes each year, you will reduce the amount invested, implying a smaller gross profit. Considering these two factors, you still come out ~42k strong.

What you have to consider though, is that the upside implies a positive ROI. If the market value of the shares in year 15 is equal to or lower than the purchase price in year 1, you will effectively have been paying taxes each year on a profit you never see. So there is a risk, depending on your time frame and thus the shield against fluctuations.

Thank you for some good pictures, something to think about regarding "Aktieindkomst".

Let’s try to work with Scenario 2 - Realization year 15, let’s call this little tweak version 2.1
After 15 years you got primo 1.979.932 + unrealized profit for the year 98.997, total 2.078.929 DKK.
You have not yet paid tax on this amount, it's all the first 1.000.000 and the rest are unrealized profit.
If you add a little risk, it's more or less possible to avoid paying tax, in theory...

At Nordnet it's possible to borrow up to 40 % of your portfolio, in this case 2.078.929 * 40 % = 831.571,60
This will cost you 1 % in interest (this is deductible in your tax btw), but you will be able to take out 831.571,60 from your portfolio, by borrowing the money cheaply at Nordnet.

This of course adds an element of risk, if the value of portfolio would drop. If the 40 % value is passed, the interest rate will rise.

This model is worth to consider, if you are planning to invest in stocks in Denmark.

[Eureka]

Great thread! I wonder why I didn't see it earlier ...

I guess an optimum Danish long-term tax strategy is not possible as there seems to be some kind of tax reform every few years. The latest proposal being on lowering taxes on stocks from 27% to 25% up to 51,700 kr, 35% up to 150,000 kr and only keeping the 42% for +150,000 kr. Another proposal is to start taxing foreign ETFs like Danish funds (aktieindkomst).

http://www.nordnetbloggen.dk/aendrede-a ... 1/09/2016/

The link is to an article from September, so maybe someone has additions or updates?

[cbroenning]

Do any of you actually invest in Nordnet Superfonden, and how much of your portfolio? As an index investment, I am really intrigued by the fact that the expenses related to investment/management are zero if you invest through a "månedsopsparing".

[wizards]

I allocate DKK 5.000 to Superfonden each month (40 % DKK, 30 % SEK, 20 % NOK, 10 % FIN) in my "Ratepension". I have approx. 10% of this pension in these funds as of October 31.

You actually don't need to use "månedsopsparing" to get the zero costs - it's free no matter how you buy it.