Today a lesson from having fickle friends: Dutch politicians and the associated tax department. With the future stroke of a pen, they may make our lives (those whom strive for FIRE in the Netherlands) a whole lot more difficult. So today a post on how a government can screw up your FIRE plans.
Disclaimer: we are not tax professionals and this is only our interpretation of the tax code. Consult a specialist if you want to make sure the tax approach is best your situation!
Taxes, they are as certain in life as dying. They can be both a menace as well as a blessing. The bad thing is obviously that it leaves you with less money to spend and invest. The good thing is that if you become unemployed in this country, or sick; your financial life will (initially) not be too bad (exceptions apply). It’s also nice to see how good our roads/police & fire departments/etc. are, and how well we are able to keep our heads above water. It’s not all bad.
In the Netherlands we have 3 different types of personal taxes:
- Income taxes (see also this post on “Box 1“);
- Dividend tax when you have a sizeable interest in a company (see also this post on “Box 2“); and,
- Wealth taxes (for current taxes see also this post on “Box 3“).
We will be talking today about the last one: wealth taxes. This actually is also called “VermogensRendementsHeffing” or VRH in Dutch. It is technically not the wealth that is taxed, but the returns (interests, dividends, capital gains, etc.) it creates. That is if you actually have your money invested. As savings obviously don’t get you much these days.
Box 3: Wealth Tax
The last several years the wealth tax was based on an assumed return on investment. A few years back this was 4%, which was taxed at 30%. So effectively you were taxed at 1.2% on the value of your wealth (assets minus debts). You even got a certain amount of wealth that was exempt from taxation.
The good thing here is that if you invested into things like the stock market and/or real estate, your returns where likely way higher than 4%. So the effective tax load on your returns was limited, sometimes to well under 10% of your returns.
This single 4% return was changed into a staggered system in 2017. This updated tax system involved several thresholds for your wealth. Between these thresholds the government assumed a split between savings and investments. Each had their own assumed returns. The result was three different blended rates (i.e. 2.9%, 4.7% and 5.5% in 2017; 1.93%, 4.46% and 5.6% in 2019). The taxation rate was maintained at 30%. The result on this system was that people with lower wealth levels would benefit. This helped both savers and small investors.
For more details of the effective taxation rates and wealth thresholds see here.
Savings rates on regular savings accounts are currently extremely low (some close to 0% around here). In the current system the people whom just parked their money in a savings account are (still) being taxed at a higher rate of return than they are actually making. This was not deemed fair, as you effectively would be losing money again on your saved (and already taxed) earnings.
Changes are now proposed to limit this effect. Which is great news for savers. However, the side effect is that if you invest a relatively large portion of your money, your investments will be taxed more heavily. This because the assumed return on investment will be a flat 5,33% for 2022, and taxation is increased to 33% of this return. If you will cross the tax exemption threshold (€30.846 per person in 2022), your wealth will be taxed as of first Euro you have invested. A triple whammy!
For now I’m not going to write down the proposed changes in more detail. This might be done later when things mature. The current details on the changes and reasoning (in Dutch) can be found see here and here.
My buddy Geldnerd has also written a good post about the changes with some examples of how much one would pay (in Dutch). However, what I’m more interested in is how this proposed tax change affects the total amount of wealth you need to FIRE!
The impact on your journey to FIRE
So just when you think you have figured out what you need to become financially independent in this country, you basically get this with this new proposed tax update:
So what do these changes do to the amount of money you would need to become FIRE in this country. Some boundary conditions for these calculations:
- You only have income in Box 3, so you can use the entire “Algemene Heffingskorting” (a general tax exemption applicable to all taxes to be paid from Box 1, 2 and/or 3). I will use €2477, which is the rate for 2019. It should go up in 2022, but it’s unknown by how much. It is however subject to your income, I’ve ignored that at this time and kept it fixed (so perhaps slightly too optimistic in some scenarios!)
- These examples assume you would have no savings/cash at all, every cent you have is invested (to reflect worst case taxation – with some cash/savings, your tax burden will reduce)
- These examples assume you have shares/bonds (in Index/ETF form or otherwise) and apply the 4% rule; real estate will be reviewed in another post at a later date!
- You have no debts in Box 3
Below is a graph with the various wealth targets you would need now (2019) and in 2022, to give you a certain net income after all taxes and tax exemptions/reductions. I’ve looked at both singles as well as couples for this comparison.
Holy f*ck, this is not looking pretty! Based on the example of wanting €25.000 net per year, you will now need a whopping €201.415 more in net worth for a couple. See also the detail below of the extra wealth required in 2022 to maintain the same net disposable income as in 2019 based on box 3 income only.
Where in the good old USofA, you can pretty much tax shelter and tax defer all your money for FIRE purposes. This allowed for the 25 times your income rule of thumb to work relatively well (ignoring potential lower market returns in the future for now). This was never an option in the Netherlands because of the taxation of your wealth (assuming wealth tax as an expense here in addition to your household expenses).
When you need €25.000 as a couple (assuming a 4% safe withdrawal rate), you would need about 27.3 times your yearly household expenses in wealth to make that work (in 2019). Now, with the proposed changes you would need a whopping 34.3 times your yearly household expenses! Just to be able to cover that increased tax portion.
Based on some preliminary calculations (ignoring our real estate and the associated effects, purely looking at our net worth) we would also need another €200.000-ish from 2022 onward to sustain the same net income after taxes during FIRE. In the next post I’ll look more closely at the effects on a portfolio with real estate.
What’s your take on this proposed tax change? How does it affect your FIRE plan?