Early Retirement Extreme Forums

I just realized that most of the FIRE literature is based on US tax code. From what I gather, in the US you can realize a pretty hefty amount of capital gains per year without paying a penny's worth of tax on it. For the purposes of ERE living, the capital gains are basically tax-free.
Unfortunately, in Poland it's very different - we have a flat rate of 19% on all capital gains. Which means, that in an example scenario with 3% inflation and a portfolio generating a 2% real return (5% nominal return), the real return after tax will be just 1.05% (5 % * 0.81 - 3 % = 4.05% - 3 % = 1.05 %) i.e. the taxes eat almost half of the portfolio's performance. And the higher inflation, the worse it gets.

How are dividends taxed ?

@zbigi - That presumes you have a portfolio turnover of 100%/year. At the other end (0% taxes), taxes only eat 19%. This is why it's important to have a practical understanding of the tax code (spreadsheets, spreadsheets, spreadsheets) and not rely on US blogs or apps.

chenda wrote: ↑

Fri Oct 15, 2021 1:31 pm

How are dividends taxed ?

Same as every other capital gain - the whole dividend counts as capital gain, and gets taxed with 19% rate.

zbigi wrote: ↑

Fri Oct 15, 2021 1:29 pm

in an example scenario with 3% inflation and a portfolio generating a 2% real return (5% nominal return),

Tell me you live in Europe without telling me you live in Europe.

the real return after tax will be just 1.05% (5 % * 0.81 - 3 % = 4.05% - 3 % = 1.05 %) i.e. the taxes eat almost half of the portfolio's performance. And the higher inflation, the worse it gets.

But you only pay cap gains on what you sell, when you sell it. Unless you have to remit tax on unrealized gains every year. In which case, please stop giving Elizabeth Warren ideas.

Assuming those numbers persist forever, you'll eventually run out of money if your pre-tax withdrawal rate is higher than the real rate of return. At a 4% pretax or 3.24% post-tax WR you run out around year 36. At a 2.01% pretax WR you run out around year 276. How long has Poland been a country? The math says it happens eventually. (I assumed the entire withdrawal takes place at the end of the year, for those masochistic enough to verify these results.)

So a higher cap gains rate simply requires one to tolerate a lower post-tax WR. It makes the accumulation phase of all types of ER longer, but I don't see where it vitiates the viability of ER completely.

BTW, US state income tax usually doesn't discriminate against types of income. Cap gains are taxed the same as work income from the first dollar. Massachusetts is higher I believe (there I go again) and New Mexico is lower, and then you have the zero-tax states.

jacob wrote: ↑

Fri Oct 15, 2021 1:42 pm

@zbigi - That presumes you have a portfolio turnover of 100%/year. At the other end (0% taxes), taxes only eat 19%. This is why it's important to have a practical understanding of the tax code (spreadsheets, spreadsheets, spreadsheets) and not rely on US blogs or apps.

I didn't realise that the turnover rate affects this (it seemed counterintuitive), but I unconvincingly did some numbers on an example scenario where securities are held for 20 years, and, for that scenario, the real post-tax returns jumped from 1.05% to 1.33%! Thanks!

zbigi wrote: ↑

Fri Oct 15, 2021 1:57 pm

Same as every other capital gain - the whole dividend counts as capital gain, and gets taxed with 19% rate.

Dividends (and rent and earned income) are not considered capital gains here and are taxed differently.

That said, I think if your ERE strategy relies on a particular tax system, you strategy lacks resilience.

unemployable wrote: ↑

Fri Oct 15, 2021 2:11 pm

So a higher cap gains rate simply requires one to tolerate a lower post-tax WR. It makes the accumulation phase of all types of ER longer, but I don't see where it vitiates the viability of ER completely.

I agree. This is what I meant - it's still doable, but harder.
FWIW, I don't really count on much returns above inflation at all (if they happen then it's great, but I'm cautious enough to not want to depend on them), but with inflation currently nearing 6% in Poland, my investments have to basically beat inflation by a solid margin so that I can both pay the tax and prevent stash from shrinking in real terms... Which is annoying. Damn inflation.

chenda wrote: ↑

Fri Oct 15, 2021 2:23 pm

That said, I think if your ERE strategy relies on a particular tax system, you strategy lacks resilience.

In my case I don't "depend" on my tax system in my ERE strategy (unless I depend on the assumption that it will not screw me even more in the future). Right now, I'm actually trying to make the strategy work in spite of the tax system.

Try 33% capital gains on practically the full gain....with dividends taxed at marginal income tax rate...!

I(E)reland wrote: ↑

Fri Oct 15, 2021 2:58 pm

Try 33% capital gains on practically the full gain....with dividends taxed at marginal income tax rate...!

41% tax on dividends from ETFs.
Regardless of your total income,
For Ireland residents.
Try doing FIRE with this number.

bridgebetween wrote: ↑

Sat Oct 23, 2021 6:11 am

41% tax on dividends from ETFs.
Regardless of your total income,
For Ireland residents.
Try doing FIRE with this number.

Which is why in Europe you have a lot of accumulating ETFs.
These basically reinvest the dividends into the value of the etf automatically.

So whereas a distributing ETF has a price of $10 and distributes a dividend of $1 (which gets taxed X%)

The accumulating version of the etf will just “jump” in value to $11

Of course you’re just deferring the taxes, but when taxes are as high at 41% this can mean a lot of money saved over the long run.

As Jacob mentioned, if you aren’t in the USA read up, don’t just copy paste the us norms.
For example, buying US listed distributing ETFs if you aren’t in the USA is suicide, as you get hit with 30% tax on the divindeds.

Depending on the jurisdiction ETFs are issued in, you'll owe income tax (or rather, withholding taxes) on the amount so accumulated.

Switzerland levies a 35% withholding tax on the accumulation, just as they do with dividends

I do all of my long term tax planning assuming capital gains and eligible dividends (Canada) are taxed as "other income" rather than the 50% exclusion rate for capital gains, and the lower (and in some provinces negative) tax credit for eligible dividends. Essentially the same as employment income, save for the fact I won't need to pay employment insurance, or into the Canada pension plan.

For myself, this has means working an extra year to pay for it. There are worse fates. It would be wise to be a bit cynical concerning your tax environment given one's lack of control over it, beyond the nuclear option of moving jurisdictions.

xmj wrote: ↑

Mon Oct 25, 2021 2:40 am

Depending on the jurisdiction ETFs are issued in, you'll owe income tax (or rather, withholding taxes) on the amount so accumulated.

Switzerland levies a 35% withholding tax on the accumulation, just as they do with dividends

didn't know that. It sucks. It's not the case in Italy.
I guess the lesson is once again study your personal tax situation in detail!

unemployable wrote: ↑

Fri Oct 15, 2021 2:11 pm

But you only pay cap gains on what you sell, when you sell it. Unless you have to remit tax on unrealized gains every year. In which case, please stop giving Elizabeth Warren ideas.

Never would've suspected Janet Yellen reads this board. You're welcome, everyone.

At least now work and investment can become completely disincentivized so everyone will be able to ERE.

Seppia wrote: ↑

Mon Oct 25, 2021 7:45 am

didn't know that. It sucks. It's not the case in Italy.
I guess the lesson is once again study your personal tax situation in detail!

To be fair it's not as much of a problem in practice: You declare your holdings on your annual tax filing, then get most of the withholding back (assuming your tax rate is lower than 35%, which it likely will be).

Those European taxes are BRUTAL and would make ERE challenging in Europe.

Only read from the IRS regarding taxes as the amount of disinformation regarding retirement and taxes on the internet (including nearly all forums from "gurus") ranged from deeply flawed to outright wrong. I have read many "retirement gurus" state something like "I've done X for Y years and never had an audit, so it must be correct". Which is equivalent to confidently saying "I've jumped of a Z story building and haven't hit the ground yet, gravity is fake news".

WFJ wrote: ↑

Wed Oct 27, 2021 1:46 pm

Those European taxes are BRUTAL and would make ERE challenging in Europe.

Negatory ... because those brutal taxes pretty much eliminates the shadow tax of personally paid health care risk/insufficient insurance in the US. Bankruptcy or shortened lifespans, ... and so on. The average is about the same but the variation in individual outcomes differs.