How a government can screw up your FIRE plans

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

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.

The Changes

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!

How a government can screw up your FIRE plans – I’m now depressed….

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:

Just when you think you know how to do it?!

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

The results

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.

Discussion

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?

P.s. also published updates on the 2022 tax proposal and impacts on real estate. And a post on comparing the tax impact for real estate versus a portfolio of stocks & bonds.

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49 Comments

  1. Hello guys,
    I live in NL and I know how demanding is box 3 :/
    Can you explain the BV option?
    I understood you can setup a BV and move your savings as company capital?

    Thanks

    1. There are certain situations where a BV might work, especially if you already do Freelance work and can create income for the BV.
      That being said, for most small private investors, Box 3 is more interesting, as a BV also costs money to setup and run. You also pay profit tax and subsequent dividend tax to get your money out of the BV for private use.
      I’m not a tax professional, so I would strongly suggest you try finding a specialist that can help you trying to figure out if a BV is suitable for your situation!
      Cheers

  2. Uff!

    In the context of moving, as an alternative to Belgium, you might also want to consider Germany. It’s close and relatively FIRE friendly. In particular, you get around 9-12 k€ per year of tax free income per person and there is no note-worthy assumed or imputed income. That should easily cover your 24 k€ as a family. Health insurance would be around 2400 € per year for the entire family (including mandatory long-term care insurance). – While there are certainly lower cost of living countries in Europe, Germany isn’t too bad for FIREes.

    Remarks:
    1. The tax-free yearly allowance is pretty much on a constitutional level, so this bit of legislation should be quite stable.
    2. In contrast to FIREes, German legislation is not overly attractive to get to FI in the first place. High taxes and social deductions on working income and no useful tax sheltered options for retirement savings.

    Also, I hope you will find time to organize another (castle) meetup next year? 🙂

    1. Ups, I need to correct that health insurance figure. It’s income dependent and currently around 18% ( i.e. around 4300 € @ 24 k€ income) with a minimum around 2200 € per year. However, if you earn as little as 500 € a month of employed (!) income, investment income is not considered, the minimum is not applicable, and your family’s health insurance drops to below 1000 € per year (because, obviously 😉 ).

    2. Hey Blubber, great to hear from you again. Yes, Germany is indeed a pretty good place to FIRE as an alternative to here. I probably would do it in a heart beat, especially since there are also some nice castles for sale 😉
      As to the meetup, work in progress, but we do still have to get together again to make the next steps. Cheers!

  3. Like mentioned before: indeed swap bonds for deposits in this new proposed tax system 🙂 Then it already is a bit less worse. Say you have 400.000 with 75% in stocks (300.000) and 25% in deposits (100.000). If I’m correct that totals up to ~4500,- of taxes with two persons. If there is no income you need to pay 0,- since there is 4954,- (2x 2477,-) of ‘algemene heffingskorting’.

    Algemene heffingskorting does go up. Indeed hard to find the new numbers. I found 2753,- per person somewhere. You can then then seek the max spot of no taxes with a 75/25 stocks/deposits asset allocation. If I’m correct this is around ~475.000,-.

    Is this effect that you don’t need to pay taxes anymore after some years when your portfolio goes under a certain amount considered in you calculations?

    1. Hey Gerben, the whole point of FIRE is that you do not run out of money at any given time. Your wealth has to indefinitely supply you with sufficient passive income to live. And unless you get a fixed 10% net return (so after inflation) on that €300.000, FIRE is not happening for us 😉 But if you are also considering income from pensions, lijfrentepolis and AOW, you are right!

      P.s. I only get to about €414.231 total wealth without any taxes to be paid, based on €2.753 algemene heffingskorting. Based on 2019 numbers, the wealth goes down to €374.473 for a 75%/25% allocation mix as proposed for a couple.

      1. Thanks for your reply. The 475k was indeed incorrect. I deducted the 800,- on the wrong moment like you did before 🙂 But I also can’t get to your 414.231. Berekenhet.nl has a calculator up now. 435k seems to be the amount for no taxes with a 75/25 asset allocation. That gives 326.250 in stocks and 108.750 in deposits. You should pay 5.506,- tax on that in the proposed system. That exactly matches the probably new 5.506,- heffingskorting.

        Ok. Thought you where talking about a 30 year period since the 4% rule is generally based on that. Anyway in this new proposed box 3 system it is even more interesting to put the max amount possible in pensions and lijfrente first. Make sure that gives enough income after AOW age. Fill up the gap until AOW age with money in box 3.

      2. Hey Gerben,
        As to your second part, yes, that’s absolutely an option too. But, we have not worked that long and we have worked abroad. We won’t get much after AOW age (will be discounted on the AOW too by 14%). So for us it is more imperative that we have our duck in a row before AOW age (everything we get thereafter is a bonus/backup).

        As to the first part:
        326.850 * 0.0533 = 17.421
        108.750 * 0.09 = 979
        Couple deduction = -800
        Total taxable income: 17.600
        Total tax @ 33% = 5.808 (or 2.904 per person)
        Why can’t I get it to match the Algemene Heffingskorting?

      3. If I’m not mistaking:

        (2*2.801)/(100/33) + 800 = 17.775,76 (2.801 being the number for 2020)

        Assuming 75/25 invested/saved:
        17.775,76 = A * 0,75 * 0,0533 + A * 0,25 * 0,0009
        = A * ((0,75 * 0,0533) + (0,25 * 0,0009))
        = A * 0,0402
        A = 17.775,76 / 0,0402 = 442.183 euro

        With AHK at 2.753 euro I find 434.946 euro

        With 100% invested and 2.801 euro I find 333.504 euro
        (which was 484.000 euro last year with the old tax method)

        With 100% saved and 2.801 euro I find 19.750.842 euro 😉

  4. Hi CF,

    What you describe here in your post is one of my worries. Tax legislation could change at any moment, sending our plans for FI to the dust bin.

    However, I would like to be positive. Many Spanish and Italian expats say that “the North of Europe is great for working [better conditions, higher salaries], and the South of Europe is great for holidays [weather, food]”. I consider myself in the accumulating phase in Germany, very likely to come back to Spain in the future. I think we can manage this problem with geoarbitrage, taking the advantage of each place.

    In fact, I would suggest that you have a look to your numbers, because very likely you could be already in Financial Independence in case of living in a middle size city in Spain or Portugal. Living in Malaga costs 50% of living in Amsterdam. See https://www.numbeo.com/cost-of-living/comparison.jsp

    Let me highlight the advantages of living in the South of Europe. You know them all, but let me repeat 🙂

    * You could take a low cost flight to travel to The Netherlands easily (due to tourism). I think a flight Madrid-Amsterdam takes 2h. Basically the same as (for example) Groningen-Breda by train or car. It would take to you the same time to visit your family and friends.

    * You can manage many aspect of your live online (for example your blog). You know, it does not matter where you are.

    * The Mediterranean coast of Spain is full of expats. It is very international, English and German are common languages, you would not feel alien there. Service providers there have plenty of foreign customers, they are used to it (example: tax advisors).

    * You know, you only need your EU passport, there is no difference with being a local.

    * Taxes are always tricky, but I think there are advantages. Portugal is famous to being friendly for expats. In Spain dividend taxes are about 20%, and 5.5kEUR income per person are exempt (ummm… this requires a better explanation). The “Deloitte tax highlights” PDFs are a good starting point.

    * If needed, you could declare yourself freelancer in Spain. It costs 300 EUR/month (a fraction of the 25kEUR/year) and gives you access to health insurance (for the family), pension (when you pay the minimum, the return of investment of the public pension is not that bad…), and business-related expenses (telephone, travel, office, etc.) are tax free.

    * Regarding local fruits and vegetables, it is a paradise. And for sure you could have a garden and plant yourself.

    Perhaps you could visit some interesting places during holidays, stay in airBnB or similar, have a look, and afterwards decide.

    In any case, good luck CF. Thank you very much for sharing this post. Good to know that these things happen and we have to be ready.

    1. Thanks Willyfog for you comment. I really like your thinking on the geoarbitrage. Too bad I’m not getting Mrs CF out of this country any time soon! That being said, I’ll keep working on it. Spain or Portugal sounds pretty good to me, especially in winter!

    1. We don’t have wealth tax either in the Netherlands. We do have capital return tax, as does Belgium I believe. People are talking about moving abroad to countries with more favourable tax regimes, but what countries are we talking about? I’ve been looking at the differences between the Netherlands, Germany and Belgium concerning the subject, but haven’t been able to figure it out. Can anybody recommend some good reading on this subject, preferably online and concise?

      But even if a country has a more favourable tax regime, who says it won’t change? They are changing it here right now.

  5. What we might be missing is that this plan is supposed to be budget neutral. Read the letter that was sent to our Second Chamber by Secretary of State Menno Snel. It is stated several times that it should be budget neutral.

    They calculated that using 0,09% for savers, 5,33% for investors and 33% tax, a tax free box 3 income of 400 euro makes it budget neutral. This results in 440.000 euro tax free savings, but only 7.500 euro tax free investments. If savings interest goes up and the budget stays neutral, the 400 euro must go up. Then the 7.500 euro must go up as well.

    I don’t know the budgets and I don’t know how much money is saved versus invested, so these numbers won’t be correct, but the mechanism would work as follows: If 0,09% savings interest goes to 0,9%, 400 euro will go up to 4.000 euro. This would mean that 7.500 euro goes up to 75.000 euro. This last number would change my prognoses significantly.

    1. It’s a bit more complicated with regards to staying budget neutral, but if the interest rate on savings goes up, the government may decided to start taxing heavier too. This would get this closer to the current state and could mean that investors are not hit as hards as now proposed for 2022. That being said, I don’r really care about the budget neutral as much as I can about my own situation. We will definitely be looking at Box 2 once again for real estate investments. But also other options wil be considered. We will change strategies to fit with the lowest possible tax regime we can find. I suggest you do too, unless you want to move abroad 😉 That’s about as much influence as you can get on your personal finances.

    1. Well, we were not FI to begin with. I could only try my hands at RE because Mrs CF was still working. That being said, either Mrs CF (or me) will need a job for a whole lot longer than previously anticipated. Or, both will need to work hard for a couple extra years to be in the same spot as we wanted to be in the first place. Either way, we will be royally screwed. It does not feel fair at all.

  6. Realy sucks. I live in the NL, my wife made <10k last year, but b/c of our combined assets, she had to pay a lot of taxes, on the "Assumed Income". (She also had nothing withheld so for her it was quite a bite, I had stuff withheld so it was not as bad)

    Also don't forget if you own your residence (in the Netherlands) outright, that is considered "Imputed Income"

  7. Hi CF, I commented a few hours ago, but I don’t see my comment here. Maybe something went wrong?

    Anyway, it’s obvious that the impact of this plan is huge. I am surprised that this is not all over the media, except for a few articles focussing on the positives for savers. Let’s see how happy these savers will be when interest rises to 1 or 2%.

    I have been trying to reproduce your calculations, but can’t seem to get it exactly the same. Could you explain how you came to a €178k difference for €25k/year at 4% SWR? I assume you are using 2x€2477 “algemene heffingskorting” for fiscal partners.

    1. I do have a life beyond my blog. I’m not keeping an eye on it every few hours, so comments may get delayed by up to a few days 😉

      Savers will indeed be happy, but everyone with investment (and especially those with investments that return less than 5.33%) us going to feel it sting. Heck, if you have bonds that return 2-3%, you might seriously want to consider getting “deposito’s”, they may actually make you more money after taxes!

      Anyhow, I’m going to cycle now, will get back to you on the breakdown of the calculations

      1. No problem at all. I can email you my own excel file for comparison if you are interested. I used berekenhet.nl to check my numbers. At 25k I have a 201k difference for couples and 189k for singles.

      2. Thanks for the note, I cannot find an error in my spreadsheet, but I do find the effective tax percentage shown on berekenhet.nl off from what I expect. I cannot get to the number they show. Basically, if you have €858.775 @ 1.759% effective tax is about €15.105 in total taxes before reductions. Reduce by €400 * 2 and 2477 * 2 = €9.351. 4% return over €858.775 = €34.351. Subtract aforementioned taxes and voila €25.000 net income after taxes. I got to that €858.775 by goal seeking in Excel. I do get the same amount for 2019 in terms of taxes as on the website. Which gives me a required wealth of € 681.277 to get €25.000 net after taxes for a couple. The difference is €177.498 or as noted ~178.000 in the blog. I have not rechecked the single wealth numbers.

        Am I missing anything?

      3. For 2022 you should first take 5,33% of the amount, then deduct 800 euro and then take 33% of the rest:

        0,33*(858.775*0,0533-800) = 14.841
        Reduce by 2*2477 = 9.887
        34.351-9.887 = 24.464

        Using 882.692 you get exactly 25.000 euro. For single people I have 809.727 (2019) and 999.108 (2022).

        I made an excel sheet, which took me more effort than I expected. All percentages and amounts can be modified and it can be used to calculate needed invested capital as a result of desired yearly spending. Let me know if you’re interested.

      4. Ah, well spotted! See where the error is in my calculations. The optimist in my looked at it the positive way, instead now I’m really disappointed, as the situation is thus even worse then expected! Thanks for screwing up my day 😉

        I’ve update the text, graphs and added some more details.

  8. You use 2477 euro algemene heffingskorting. For fiscal partners this should be double that amount, or am I wrong?

    But still bad news.

  9. Thats a nasty surprise, CF. The amount of taxes on already taxed income is insane. I think its bad here in Canada but compared to EU, its not so bad after all. Looking forward to see how this progresses going forward.

    Best
    R2R

    1. Now here is the kicker, they are actually not taxing already taxed income, just the returns that it’s making when invested. So it’s not double taxation (well, for just savings it is at the moment). Still, it sucks and does not feel good, I’ll give you that!
      Lot’s to consider, but first we need to see the actual plans when they are ready (anticipated before next summer).

      1. Based on some model, I drafted this weekend, the effective tax rate of (i) BV and box 2 compared to (ii) box 3 is 2-3 percent point less. This might be explained by the loss compensation in the corporate income tax, so losses can be used to offset part of the loss on your investment. No loss compensation in box 3, ie if you lose 20% of your portfolio, you still get taxed as if you achieved a 5+% return (ie additional 1.5% loss). And you only start paying box 2 income tax in case of a dividend payment, which only occurs after ten or so plus years (growth phase); in box 3 you also pay taxes in the growth phase. So I prefer incorporating a BV

      2. You might be right about that. It is indeed time again to start looking into the BV option if this goes ahead as planned. It’s just too bad that you first pay profit tax and then dividend tax (total 40% tax rate) on every euro that you would need to live off. That’s a very steep tax rate and the reason why Box 3 in it’s current state is much more preferable for the average FIRE adapt.

      3. That’s the problem with the Netherlands… I already for several years anticipated something like this. You should not have any box3 wealth….

        Next-up your house in box1…

      4. Looking at the bright side, we benefited from low taxes for years! Gues you should only move when financially interesting, that does mean you need to be on the lookout for tax changes on a yearly basis. For now, I’m going to enjoy the low taxes in Box 3!

    1. I know eh, and there is only so much buffer you want to include in your FIRE plans. But this is serious sh*t! We will need to continue working longer and/or go back to (part-time) work to add to our wealth (or pay for the taxes) to make this sustainable in the longer term.

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