#012: Tax-deductible pension-fund contributions
Be aware of the year-end deadline
(Almost) everybody with an income needs to file an income tax return once per year.
At that moment everyone thinks about how to optimize tax returns.
However, the optimization-thinking should be done earlier.
The problem is: the topic seems nasty, boring and nontransparent.
Yet, spending half a day per year thinking about it can save you tens of thousands of $$$ in taxes !
Plan your tax return
When you file your tax return you usually only have limited options to optimize it.
The reason is that you file your tax return after the fact, i.e. with respect to the previous year.
Thus, if you significantly want to minimize taxes you should understand your game plan the year before filing your tax return.
Unless you don’t care about potentially saving tens of thousands of $$$ you probably do want to minimize the taxes you owe the authorities.
Early December is a good (and last) moment to think if you want to make some last-minute optimization.
Shift your money to the right account and you save taxes
Many countries’ tax systems “offer” incentive plans so that people can save taxes if they increase their retirement fund contributions.
Typically, these contributions can be deducted from your declared income and thus, you pay less income taxes.
In short — provided you have the money — you can simply transfer it from one of your accounts (e.g. your savings or investment account) to another account of yours (i.e. your pension fund) and by doing so you save a ton of taxes !
A common rule attached to pension fund accounts is that you can only withdraw the money under certain conditions, e.g. when you reach retirement age or to buy real estate.
In any case, it is your account and your money.
Through those pension fund accounts your money is typically invested in bonds or stocks, thus, probably in a very similar way you would invest it anyway.
How much should you pay into your pension fund?
The following points need to be considered:
- There might be several options and accounts to make voluntary pension fund contributions in the country you file your tax return. The individual options usually all have upper limits regarding how much you are allowed to pay in in a particular year.
- Understand how that money can be invested once paid in. Is it invested in bonds or stocks? I personally take into account the split-rules described here to decide how much I want to pay in.
- Understand how much taxes you can save depending on the amount you may pay into your pension fund. Then, think what you would do with the money you saved through taxes. — Invest, spend, save?
Next steps?
As the pension fund system in a given country might be hard to understand, I suggest the following straight-forward way to quickly become aware of your options without wasting time browsing through endless google-search results:
- If you are employed: contact and schedule an appointment with the person at your company in charge of employee’s pension funds. Do this ASAP ! That person will tell you about the options linked to your employer as well as additional options available in your country that are unrelated to your employer.
- Talk to 5 people in your local network about it: You will be surprised how much or how little some of them know regardless of their level of education or industry they work in. You might get the best advice from these people as they have solved this hidden pain point for themselves already.
- Google-search.
(If you are self-employed I assume you are already familiar with the topic.)
Additional hint: There might be several options to contribute to (different kinds of) pension funds. You should be aware of all of them as you might want to take advantage of all of them.
Never forget: Long-term thinking always beats short-term thinking.
Key takeaways
- Be aware that you can make voluntary contributions to pension funds while saving taxes.
- Find ASAP somebody with knowledge about it and talk to that person.
- Take a decision and save taxes !
Don’t miss the next newsletter if you want to get more actionable insights on how I optimize my life.
