Charitable giving in religion

The first piece of this puzzle came to me on a financial independence facebook group. A muslim member of the group was asking about how the concept of zakat fit in with reaching financial independence.

Zakat is a religious duty for all Muslims who meet the necessary criteria of wealth to help the needy. It is a mandatory charitable contribution, often considered to be a tax. Zakat on wealth is based on the value of all of one’s possessions. It is customarily 2.5% of a Muslim’s total savings and wealth above a minimum amount known as nisab.

The member of the group was trying to figure out how financial independence is possible while still following zakat. Their interpretation was that they would need 2.7 million in investments to cover their family’s living expenses of 40,000€/year as well as to pay the 2.5% to zakat if they were to use the 4% safe rate of withdrawal. For them, this means they will never reach FI in their lifetime.

A very interesting discussion followed.

Some compared this to tithing in Christianity which says to give 10% of your income to the church/charity.

One reader said that they personally try to look at the spirit of the law and the intention/culture at the time it was written. The spirit of the law was to look outside yourself and help those in need. When that law was written, the culture likely didn’t have taxes to the extent we have now. Today, part of our taxes go towards the poor through social assistance, welfare and disability programs as well as to education and recreation programs. If the government is collecting from you to give to the poor, could zakat be reduced to 1% for example. They also asked that if someone is volunteering and giving in time in lieu of money how does that play out?

There were many more ideas shared on how to interpret the spirit of this law if you want to read the full thread here but this concept sat with me and then I was presented with another piece of the puzzle.

Why don’t we donate more to charity

I know someone who is a nurse in the COVID ICU ward and I heard morale was very low just after Christmas when they were inundated with very sad cases. I wanted to do something to make them feel more hopeful so I ordered them a food hamper as a small token of appreciation. They were so touched and reciprocated by sending us some books for our son as I had mentioned we were sorely missing the library for having to re-read the same books at bedtime over and over and over. They also included a book for me. I never would have read or bought this book on my own but when offered it, it seemed interesting and ended up being really good.

It’s a book by an Irish professor called “Never mind the bollox, here’s the science – A scientist’s guide to the biggest challenges facing our species today”. It covers topics like free will, the anti-vax movement, the cost of medicine, dieting, depression, drug legalisation, gender differences, racism, climate change and so on. It includes a bit of history as well as a scientific viewpoint on each topic based on fact and scientific studies. Not one bit of fake news, so refreshing.

One chapter asked “why we don’t donate more to charity?”. It talked of various motivators for people to donate to charity. One study found that 85% of donations were made “because they were asked”. Another study found motivators to include:

• trust in the charity
• the need to help others
• to contribute to a cause important to them or someone they know
• to get a tax break
• to look good to other people

It also gave some very stark stats demonstrating how badly divided the world is (and perhaps always has been) when it comes to wealth:

• As it stands half of the world’s net worth belongs to 1% of the world’s population
• The collective net worth of the world’s poorest half (3.6 billion people) is equivalent to that of just eight of the world’s wealthiest men
• The top 10% of adults hold 85% of all the wealth, with the other 90% holding the remaining 15%

It covered how most of the super-wealthy actually do a lot of good with their excess cash through donations and philanthropy but that the decision on what cause to donate to is left up to individuals and what might be important to them personally. This spreads the wealth ineffectively.

More than half of billionaries are involved in philanthropic giving either through organisations that they themselves established or by other means. 35% of them have their own charitable foundations.

66% of billionaires give towards education (scholarships, educational support, outreach programs and teacher training) with

• 29% of all billionaire donations going to education
• 14% goes to healthcare
• 10% goes to arts, culture and sports
• 8% goes to environmental issues and
• 5% goes to religious organisations

Enter taxation

While it’s easy to complain about our governments wasting taxpayer money where money is seen not to have been spent effectively, it’s also important to look at the bigger picture and see what our taxes actually pay for.

First let’s see how much of our government’s revenue comes from which taxes.

In 2016 (I was too lazy to dig out a more recent report), 31% of the annual government revenue came from income taxes including USC, 21% came from VAT, 14% came from PRSI, 11% came from corporation tax and 9% came from excise duties. Only 1.4% combined came from dividends and CGT.

Looking at the 2020 Ireland Expenditure Report the country had 70 billion to spread across various departments. Below is the breakdown by department for all expenses of 2% or above.

• 32% went towards employment affairs and social protection
• 28% went to health (twice as much as the billionaire donation trend)
• 17% went to education and skills (12% less than the billionaire donation trend)
• 7% went to justice

Below is the detailed monetary breakdown per department including core and capital expenses.

Core expenses is money spent by the government on a regular or ongoing basis. The majority of government core expenditure involves the day-to-day provision of essential public services. Operating costs and wages for public sector workers account for a large portion of government core expenditure.

Capital expenses are ‘once-off’ projects or on infrastructure that will have long-term benefits for the country. Infrastructure refers to basic facilities, structures and services needed for the country to function including water, power lines, transport, communications systems, schools and hospitals.

This might start to sound familiar for anyone that’s ever played anything like Sim City or Tropico.

If you’re interested in the detailed split for each department you can check out the related sections in the full report. To give an idea of what each department pays towards:

Employment and Social Protection

• old-age pensions
• working-age income support
• working-age employment support
• illness, disability and carers
• child benefits
• jobseekers’ benefits
• supplementary payments

Health

Core expenses include:

• public healthcare hospitals and services (day to day running costs of hospitals and healthcare facilities eg: staff wages, buying medicines, light and heat
• primary and community services
• mental health services
• disability services
• services for older people
• palliative care
• health and wellbeing initiatives
• ehealth
  • electronic health records
  • infrastructure upgrades for national systems such as national medical lab information system, medical oncology clinical management system, national integrated medical imagining system

Capital expenses include:

• building new hospitals
• buying new equipment and ambulances

Education and skills

Core expenses include:

• expenditure to enable schools and colleges to operate eg: teachers salaries, light, heat and maintenance of school buildings
• national training fund
• higher education
• skills development

Capital expenses include:

• building or extending schools
• buying furniture and ICT equipment for schools

Justice

Expenditure to ensure our legal and judicial systems operate, e.g. judges’ wages, garda wages and operating costs of prisons.

Agriculture

Expenditure to help farmers and ensure the sector is maintained, e.g. income supports to farmers and funding for a wide variety of rural development schemes.

Defence

Expenditure to maintain defence of our country, eg: wages to members of the defence forces and civilians working for the sector, maintenance of facilities, training costs, etc

Transport and tourism

Money spent on maintaining our existing transport systems as well as providing funding for tourism promotion agencies such as Fáilte Ireland.

How to feel better about taxes

The book ended the chapter talking of the role of taxation.

Instead of the approach taken by most of the super-rich, which is to avoid taxes as much as possible to grow their wealth well beyond what they could ever spend in a lifetime, then to turn around and give most of it disproportionately to charities of their choosing, why not pay taxes to a government who democratically decide how best to distribute that money in the best interests of the country that you are living in?

Imagine how much better off we’d all be if corporations did not have ways of avoiding taxes? If the government had more money from taxes, could we live in a community with universal basic living income for all? Which has a whole range of benefits from better work conditions, fewer working hours, more time with family and friends, less money stress allowing people to be more creative and innovative to solve big world problems like climate change, gender inequality and racism for example.

While I’ve always had it in the back of my head, that taxes pay for our infrastructure and services, it never really made me feel better about handing my money over to the taxman but when I think about the bigger picture and of the path to financial independence I feel like I’ve had an aha moment.

What is the path to financial independence?

1. Keep your expenses (and taxes) as low as possible without compromising happiness
2. Invest 50%-80% of your income for 10-15 years
3. Have 25 times your annual expenses invested to cover an annual withdrawal of 4%
4. Reach financial independence and spend your time as you wish which could include earning even more income if you chose to continue working on projects that interest you
5. If you continue earning once you’ve reached FI like I intend to do, it means I will have more than enough money to remain financially secure and continue to build wealth beyond what I need to sustain my family until death.

What will I do with that extra money that I will possibly never fully spend? Will I donate to a charity of my choosing? Will I leave it all to my kid?

Personally, I’m not looking to build a legacy. I want just enough to be financially free to spend my time as I wish without worry of money and eventually to be able to make a contribution to the world and my community by advocating for financial literacy and security for all. I hope to impart financial literacy to my son so that he can build towards his own financial freedom. I do not want to hand it all to him as I think it’s important to instil a good work ethic and self-sufficiency.

So if my end goal in financial independence is to have more time to contribute more value to society (remember maslow’s hierarchy of needs?), why not contribute to society along the way in the way of taxes?

Instead of trying to avoid or optimise paying taxes as much as possible on the way to financial independence, pay as I go knowing that a good portion of those taxes is going to those less fortunate than me. Paying more taxes along the way may take me a bit longer to get to full financial independence but I’m not going to feel angry or annoyed when paying my investment-related taxes going forward and instead look at it as a way to give back to the community I’m living in. It’s actually been a really liberating change in viewpoint.

What do you think?

If you have any non-PAYE income in Ireland you will need to get used to filing taxes each year. This can seem daunting at first but once you take the time to do it once, it becomes much easier the second year AND you save accountancy fees.

Step 1: Determine if you need to sign up for ROS

PAYE earners

From Revenue guidance, it seems you should be able to report non-PAYE additional income through MyAccount under Review Your Tax -> Income tax return.

You should only need to file a form 11 through ROS if you have a taxable non-PAYE income of 5,000€ or more.

Another reader mentioned their experience was that there was no set place to enter ETF income on the MyAccount filing. They were told by Revenue to calculate what was owed, make a payment and then submit a note to let them know what the payment was for. Read step 2-3 for more info on when taxes are due and where to get your base figures.

For dividends simply multiply the dividends paid out in a given year by .41 to get the exit taxes due on them. This is the amount you’ll pay to Revenue.

For gains and deemed disposals see sections below for more details as these get a bit trickier and need some additional calculations. I’ve made a calculator available for these in my member’s area if you are selling ETFs and need to calculate what to pay revenue.

Self assessed/Form 11

If you are not already registered for Income tax you may need to login to your MyAccount first and go to Tax Registrations in the Manage my Record section.

Once you are registered for Income tax then you need to sign up for a ROS account.

Apply for your ROS access number, select individual, income tax and enter your PPS number.

The help text on Revenue is a bit confusing where it says if you have PAYE and LPT only, then you should sign up for MyAccount instead. If you have any non-PAYE income from any investments (rental income, rent a room scheme, stocks, ETFs etc), you will need a ROS account to file your non PAYE taxes annually.

When the sign up form asks for your registered tax number this will be your PPS number.

Enter your contact details on the next page and wait for your RAN in the post. Once received you can complete the process of setting up your ROS account by setting up your digital certificate on your personal computer. You will only be able to login to ROS from the computer you have this certificate installed on.

Step 2: Know when taxes are due

You need to file taxes for ETFs when:

• You buy ETFs (no taxes due, just need to inform Revenue of the purchase)
• You receive dividends from your ETFs (taxes due)
• You have owned your ETFs for 8 years (taxes due as deemed disposal)
• You sell your ETFs (taxes MAY be due if you had a gain, losses or nil payments also must be filed, you also can claim back a credit for any deemed disposals you have paid at this time)

Taxes on ETFs must be PAID (if taxes due) and FILED by October 31st, the year following the event (as per list above)

Step 3: Download tax documents from brokerage

In January/February, your broker should have some annual tax reports breaking down all the details you require for filing your return. Degiro includes your gains and dividends broken down by source and also all transactions from the year.

For example:

Dividends

This is how dividends are listed in Degiro’s annual tax report.

Purchases

This is how purchases are listed in Degiro’s annual tax report. This shows all the information you need to file your tax return and track your purchase price and costs for exit tax calculations when you actually sell or need to file deemed disposals.

Step 4: Enter the information into ROS

Log into your ROS account and go to File a return -> Income Tax -> Form 11/Form 12 -> File a return

Complete the information on the next few screens until you open up your Form 11/Form 12

You need to complete the Personal Details tab before you can access any of the other tabs. Once complete, if you only have ETFs to file, you can go straight to the Foreign Income tab.

When trying to find where to input information it’s very useful to refer to the paper/PDF form and guide from revenue. I click on control+F to bring up the search function in the browser and search for specific terms I am looking for help with. This helped me to find where to input the information.

The only place I could find to enter details with a 41% tax rate was under Foreign Income Offshore Funds.

The online form doesn’t have the numbering on the form but you can find the equivalent space to input this information.

Purchases

I filed purchases under section 322 (e), (f), (g) and (h), in the online form you can add more than one.

You need to log EVERY purchase of ETFs through the year on your tax return so this may influence your purchase strategy. If you want a portfolio of 4 ETFs and you purchase 4 ETFs each month, you will have 48 entries to make. The better approach might be to purchase 1 ETF each month, spreading your 4 ETFs over the year, limiting your purchases to 12. This also reduces purchase costs as Degiro charges a flat fee of 2€/ETF trade saving you 72€ in trade fees/year.

Dividends

If you have distributing ETFs that pay dividends out, you can get the figure from your broker tax report and input it in 322(a)

If you have accumulating ETFs, I believe the taxes on these get paid out on sale or deemed disposal only (whichever comes first).

Gains

If you have sold ETFs with a gain (where the difference between your sale price and purchase price is above zero), you input the gain in 322 (c).

This makes it more like a data entry exercise as ROS does all the calculations for you.

Deemed Disposal

I haven’t had to do this yet myself and do not have a definite answer on how it works but here is my understanding.

• In year 1 you buy an ETF, in October of year 9 you file and pay taxes on any gains on the purchases you made in year 1 (as per their value in year 8)
• In year 2 you buy an ETF, in October of year 10 you file and pay taxes on any gains on the purchases made in year 2 (as per their value in year 9)
• Every year after year 8 requires filing and paying deemed disposal in a laddered first in first out (FIFO) approach.

Example:

• You buy an ETF in 2020 worth 100€, in 2028 it is worth 200€
• By October of 2029, you need to file and pay the taxes due as if you had sold the ETF you bought in 2020 (deemed disposal).
• 200€-100€ =100€* 41% = 41€ due
• In 2021 you bought another ETF worth 120€, in 2029 it’s worth 220€
• By October of 2030, you need to file and pay the taxes due as if you had sold the ETF you bought in 2021 (deemed disposal).
• 220€-120€=100€ *41% = 41€ due
• In 2031 you ACTUALLY sell the ETFs you bought in 2020 and 2021, they are now worth 205€ and 225€
• Your ACTUAL gain is:
• sale (205+225=430) – purchase (100+120=220) * 41% = 86.10€ – deemed disposals already paid (82€) = 4.10€ due.

If you’re buying and selling on different dates, I think ETFs work the same as stocks in that they operate on a first in first out basis (FIFO), and in this case, you’d need to keep track of all of these purchases and sales in a spreadsheet. I have developed a tracker for this which is available in my paid member’s area. The subscription cost will more than cover the cost of your time should you want to build this calculator yourself (trust me).

This spreadsheet helps to track deemed disposals as well as calculate exit taxes due on actual sale using the FIFO method, taking into account any deemed disposals you can use as a credit.

Screenshots below.

Note: ETFs purchased through financial advisors are called Unit linked funds and their deemed disposal works differently under what is called a gross roll up scheme, in that in Year 9, you pay taxes on ALL the gains you made from year 1-8. In year 16 you pay taxes on ALL gains you made from year 9-16. I have not found a definitive answer as to how ETFs bought as an individual investor are taxed but from all my digging I think my first example is correct, though happy to be corrected. I must get around to emailing Revenue on it to get a clear answer.

Step 5: File your return and make payment

Final steps for submitting the return and making the payment can be found here. 

I hope this demystifies some of the administration and tax filing questions some of you may have had. I certainly had to dig through online forums to find some of these answers as it is not clearly defined on Revenue’s guides.

Screenshots of Deemed Disposal Tacker

And here are some screenshots of my deemed disposal tracker available on my paid member’s area.

Deemed Disposal Tracker Tab

First In First Out Purchase Price for Exit Tax Calculations Tab

Exit tax calculator on sale of ETFs Tab

Mr. MH used to get shares from his company and we both found the taxes really hard to understand at the time. We have since figured it out and once you do it once, it makes a lot more sense. I’m hoping that by writing down our experience we can de-mystify the filing of taxes.

Filing taxes can be scary and frustrating. Tax guides use all kinds of technical jargon and you often cannot get the right answer unless you ask a very specific question which you already half know the answer to based on hours of trying to decipher tax language.

That said, it has taken me some time to come to this conclusion but in all my years of filing my own taxes (in Canada it is not PAYE and all individuals file taxes every year), I have finally come to be less afraid of the taxman and of getting something wrong.

My latest ethos is: as long as you file and pay what you think is due based on your best assessment, then at least you will not have any penalties for late filing and you will have less interest due if you get the calculations wrong.

Also Revenue can be very helpful if you have some specific questions that you need help with. Either write to them in your MyEnquiries in ROS or call them to get validation that you are on the right track.

What is an employee share purchase plan (ESPP)?

As a benefit or bonus, your company might give you shares, either at a discount or in their entirety as a bonus. I’m not sure if the bonus shares are taxed at source but the discounted shares usually aren’t.

As far as I know, these are classed as “ordinary shares”. If you are awarded shares of any other class (preference, redeemable, deferred etc), this article may not give you what you are looking for. For information on other stock classes and tax calculations, check out the linked articles.

The issue with receiving these shares in a pay as you earn (PAYE) tax culture is that many people avail of these share options and are oblivious to the need to file and pay taxes on them not only when they are sold but also when they are purchased.

How discounted shares work

I suspect different employers work this differently but in our case, Mr. MH set aside a percentage of his gross salary each month to go towards the purchase of company shares at a discount.

This money did not purchase shares each pay period. Instead they go into a savings pot and the company purchases shares under this scheme at a set schedule, typically twice a year.

When the company purchases the shares under this scheme it is called “exercised”.

The price you get is a set percentage lower than market value. Let’s say 15%. BUT the benefit of the purchase once every 6 months is that you get the LOWEST market value in that 6 month period minus the 15% discount.

So if you set money aside once a month out of every pay, and the value of the shares in January was 100€ and by June, when your employer goes to purchase the shares, the value is 200€, you get to buy them for 100€ minus the 15%.

You cannot by fractional shares so if you have any money left over after the purchase this will be carried over to the next exercise period.

The only downside is, this discount is NOT tax free and is classed as income in terms of taxes.

When your company “exercises” your share purchase, you need to file and pay taxes within 30 days of the purchase.

Unfortunately, these details or guidance on what to do are not typically shared by the employer (at least in our case).

If you have been part of a share scheme for a long time and you have NOT filed and paid these taxes along the way, firstly, check to see if your employer is doing this for you (some do but not all). If they aren’t you may want to get on this as soon as possible. If you are upfront with Revenue, they can be forgiving of your ignorance and can be open to negotiating on penalties and interest you may have incurred.

Where Revenue are less forgiving is if they catch you or audit you and you have not made it look like you have made any attempt to be compliant.

Revenue are starting to crack down on these, and audit people working for big companies, who they know offer these share schemes as many employees are not aware of their tax liabilities.

Worth noting is that a penalty will only be applied if you have not FILED what is due, and interest will only be applied to the amount owed for as long as it is not PAID. So if you do not have ALL have the money to pay what is due, you are still better to file and pay as much as you can to eliminate penalties and reduce interest. You may also be able to work out re-payment options with Revenue if you are struggling to pay off your full amount upfront.

Tax rates on share options

There are 2 types of taxes that apply to shares bought on discount.

1 is on the discount itself. This rate is your marginal income tax rate including PRSI and USC. As your income tax credits are usually used up by your payroll, this is straight forward enough to calculate. It’s typically either 52% if you are in the higher tax band or 21% if you are in the lower tax band.

The second are the capital gains taxes due or losses incurred when you actually sell. CGT is currently taxed at 33%.

How/When to file

Firstly, before I go into all the details below. I have built a calculator to help with all of these calculations which is available in my paid member’s area.

That said, as I say in my detailed disclaimer, I want to reiterate I am not a tax specialist and the views in this post and calculations in my calculator are based on my own experience and research. Please refer to Revenue directly for the latest rates and guidelines. If any tax specialists do read this and have any feedback on things I may have gotten wrong, please do let me know in the comments below so I can update and benefit all who read.

Gains on discount at time of purchase

The gain you make on the discount needs to be filed on an RTSO1 form. This needs to be FILED and PAID within 30 days of purchase/exercise.

To complete this form you need:

• Name
• Address
• PPSN
• Date the share was exercised (purchased by your company)
• Total gain made on the discount (this is different to the gain on sale)
• Total liability (taxes due)

If you have multiple purchase periods to report, I think you’ll need a separate RTSO1 form for each purchase period.

How to calculate

To calculate the gain made from discount you’ll need the details from your employer. In our case these were made available in an employee portal. What you need are:

• Fair market value on exercise date (purchase)
• Exercise period price (price you bought at a discount)
• Number of shares purchased
• Exchange rate on exercise date (on date of purchase)
• Your marginal income tax rate inc PRSI and USC

To calculate, you take the:

• Fair market value on exercise date (purchase)
• –
• Exercise period price (price you bought at a discount)
• x
• Number of shares purchased
• x
• Exchange rate on exercise date (on date of purchase)
• x
• Your marginal income tax rate inc PRSI and USC

Example

• John contributed to his company’s ESPP scheme from Jan-Jun 2020 and built up 1,000€ in his pot.
• In June, when the company purchased the stocks, the shares were at a market value of 150$USD
• The lowest value of the stocks in the last 6 months was 117.65$USD.
• John’s company gives him a 15% discount on the lowest price.
• This means John gets the shares at a cost of 100$USD each.
• The exchange rate at the time of purchase was .84 making his 1,000€ worth 1,190$USD
• This means his 1,190$USD buys him 11 shares for 1,100$USD.
• The remaining 90$ (75.60€) is kept in the pot for the next purchase date.
• John is in the higher tax bracket.
• As the company purchased the shares on June 1, John has to file his RTSO1 form AND pay the taxes due by June 30 (30 days).

The taxes due in this scenario would be calculated as per below:

Follow the steps on the RTSO1 to file the form and make the payment.

Gains on sale

When you eventually sell the stocks, you will incur a capital gains tax (if the shares are worth more than when you bought them) or a capital loss (if it worth less than what you bought it for).

Again you will need the details from your employer or share platform.

Capital gains taxes (CGT) are filed on your Form 11 or Form 12, depending on which applies to you. Whenever you have ANY income outside of your employment income (non-PAYE) you need to file additional tax forms each year to file and pay any additional taxes or record any losses incurred throughout the year which can be used against future gains.

When and how do you pay and file CGT?

The dates you pay and file CGT are based on the date you sold the shares

Your payment for CGT is due before you file your return.

If you sell your shares between January and November, payment is due by December 15th of the year you sold the shares.

If you sell your shares in December, payment is due by January 31st of the next year to the year you sold the shares.

BUT you only need to file the details of this payment by October 31st of the next year to the year you sold the shares.

How to calculate

What you need to calculate your CGT due will be:

• Purchase price (if you are selling shares that were bought at different dates and rates see the next section)
• Total fees (allowable expenses) incurred in the purchase and sale
• Exchange rate on date of purchase
• Value of shares sold
• Exchange rate on sale date (if applicable)
• Current capital gains tax rate
• Current capital gains tax annual credit rate
• Information on any allowable losses from previous years

The high level calculation will be:

• Total sale costs converted to Euro
• minus
• total paid for purchase including any allowable expenses like purchase or sale costs converted to Euro
• minus
• any individual capital gains annual tax credits and any allowable losses from previous years or other reliefs, other reliefs MAY include withholding taxes that were applied by different governments so check with your employer if you have any credits here to apply against your taxes due
• x
• 33% (current capital gains tax rate for shares)

To get this you need to do the following:

Total sale costs =

• Total sale value
• x
• Exchange rate on sale date (if applicable)
• =
• Total sale value in Euro

Total purchase including expenses =

• Purchase price (I believe this is the fair market value NOT the discounted value you paid as you already paid tax on those gains on the RTSO1 form)
• +
• Total fees incurred in the purchase and/or sale (such as brokerage fees)
• x
• Exchange rate on date of purchase
• =
• Total purchase costs and expenses in Euro

Taxes due =

• Sales
• minus
• Purchase and expenses
• minus
• individual capital gains annual tax credit and any allowable losses from previous years or other reliefs
• x
• 33%

Example

Building on the above example, let’s say that by June 2021 John wants to sell all of his 11 shares that he bought 1 year earlier.

• John bought his original 11 shares for 1,100$USD as per the example above BUT as he has already paid the taxes due on the discount he can include the fair market value of the stock at time of purchase which for this example let’s say was 200$USD (*previous example used 150$USD FMV but upped to 200 for this example to simplfy calculations). So his fair market value purchase price for the purposes of calculating the gain is 200$x 11 shares = 2,200$USD (purchase price) x0.84 exchange rate from date of purchase = 1,848€
• The shares are now worth a market value of 230$USD/share.
• John sells his 11 shares for 2,530$USD.
• The exchange rate on date of sale is 0.87 coming to 2,201.10€
• The current annual CGT tax credit for individuals is at 1,270€
• The current capital gains tax rate is 33%

As John has no taxes due, no payments need to be made, however, John still needs to FILE his CGT by October 31, 2022. If John had taxes to due he would have needed to PAY his taxes due by December 15, 2021. If John’s chargeable gain was less than 0, this would constitute a loss that could be applied against other gains for John or his spouse in the same year or carried forward to another tax year. If John did not FILE his form 11 or form 12 on time, he could be liable for penalties for late filing but no interest as no taxes were due.

Selling shares bought on different dates

If you have shares bought on different dates, this calculation gets a bit more complicated.

When you sell off some of the shares, the oldest shares are treated as being sold first. This is known as the First-in First-out (FIFO) rule.

As I mentioned above, I have built a calculator to help with this which will be made available on my paid member’s area which you can access here.

When you sell shares your broker MAY calculate your purchase price for you based on this methodology but I’m not 100% sure.

Using the purchase example above, we saw that in June 2020, John bought 11 shares for 100$USD each, the fair market value at that time was 200$USD each. This is the figure to use for CGT. By Jan 2021, John had built up another pot and bought another 10 shares for 120$USD each with a fair market value of 220$USD each.

In June 2021, John wants to sell off 14 shares (some of which were bought in June 2020 for 200$ and some were bought in Jan 2021 for 220$).

To calculate the purchase price to calculate his CGT due, using the FIFO method, John takes the first 11 shares at 200$ and 3 from the second pot at 220$.

This means his purchase price for calculating CGT is:

• 11 shares from Jun 2020 purchase x 200$ FMV = 2,200$ x .84 exchange rate = 1,848€
• 3 shares from the Jan 2021 purchase x 220$ FMV = 660$ x 0.87 exchange rate = 574.20€
• 1,848€ + 574.20€ = 2,422.20€

This is simple enough to calculate for the first sale, but as John continues to buy more shares on different dates and sell off shares on different dates, you’d really need to maintain an ongoing spreadsheet to help with this. Unless of course your broker does this for you.

How to pay CGT

If you are:

• registered for CGT, you must pay your CGT online using Revenue Online Service (ROS) or myAccount
• not registered for CGT, you must register for CGT and then make a payment using ROS or myAccount

Revenue have some other details on this while topic if you need to read more here.

A while back I did a post on all I’d learned to date on investing in Canada. This post will summarise how to invest in Ireland.

Investing your hard earned money can be scary! I read up on investing extensively for 2 years before I took the plunge.

I suffered from something called analysis paralysis. The more I read the more I was unsure how and where to start.

By hesitating I lost out on 2 years of having my money work for me. Instead I lost money to inflation in my account.

My hopes for this guide will be to help people get off the fence and start investing.

Warning: This is a LONG post but I wanted it to be a one stop shop. You can check back and re-read all in one place, as you need to, instead of keeping track of multiple links.

To help you skip around, here is a table of contents

Preamble

This post covers a high level summary of investing concepts. A lot of the concepts could have full blog posts of their own. If you want to know more about any of them, you can research further. However, this post should give you the overall concept at a high level.

There are tons of resources out there for US folk but very few in Ireland. This guide will focus what I’ve learned on investing in Ireland to date. That said, aside from the tax specifics and investing platforms, a lot of what I talk about here is applicable anywhere.

This guide includes references to reaching financial independence. This is where your portfolio is large enough (25 times your annual expenses) to cover your annual expenses by withdrawing only 4% per year. While this may not be your goal, this guide applies to everyone who wants to start investing.

Start by paying off existing debt

If you have existing debts, it’s best to focus on those first as they typically have higher interest rates than you will achieve in an investment account. For example: If you have 100€ and you pay down your credit card you will save 21€ of interest (at 21%). If you invest that 100€ instead you may only make 7€ (at 7% real rate of return after inflation). So that same 100€ is making you 14% more by paying down your credit card.

Focus on the debt with the highest interest rate first – typically in this order

• credit cards
• car loans
• student loans

Mortgages are usually lower than what you can get in an investment account. This means that mortgages can be an exception to this rule. A good rule of thumb is if your mortgage rate is over 4% you would be better paying it down before investing.

See if you can consolidate your debt into products with lower rates. There are a lot of credit cards that offer 0% interest for the first 6 months. Or get a line of credit with a lower rate (say 5%) to pay off credit cards with a higher rate (say 21%).

Remember the power of compounding is working against you when you have existing debt. Using the rule of 72 (a calculation used to figure out how many years it will take for your money (or debt in this case) to double), a typical credit card of 21% left unpaid will double every 3.4 years or quadruple every 6.8 years!

What to invest in and why

Why traditional investments aren’t great

A lot of people (including me before I found a better way) think of their home as their retirement plan or invest in products sold to them by the bank or their employer. There are major downsides to this approach.

Your home can certainly go up in value over time but it can also go down. There are also plenty of costs associated with owning a home that you wouldn’t have while renting. I’m not going to go into the rent vs. own debate here as that warrants a post in itself but banking on your home as an investment puts all your eggs into one basket which is very risky. It’s also very illiquid and doesn’t give you many options should you need to free up equity.

Your home also doesn’t generate passive income. Unless you avail of the rent-a-room scheme which allows you to generate 14,000€/year tax free. By far the most tax efficient “investment” option in Ireland at the moment.

Bank and employer investment products are usually products that work out best for the bank or employer rather than for you. They typically have much higher fees or lower returns than you could get on your own using something called index investing.

Fees are often brushed over but they become very important when compounding over time. For every 0.25% of a fee you lose out on 5% of your overall portfolio’s value. So if you pay the average 2.18% for an Irish pension fund (as per a 2012 report which has since been archived), your portfolio will be worth almost 43.6% less than it would be if you had invested in a fund with lower fees! This means the fund manager is taking almost half of your profits regardless if they have made you any money.

A common misconception is that management fees are charged as a percentage of your profits. This is not the case. They are charged as a percentage on your total portfolio whether you make any money or not. So in a year where the markets are down and you lose 5%, the fund manager still takes their 2.18%. This means that you are down 7.18% that year instead of 5%.

What is index investing and why is is better?

Index investing is a way for you to essentially bet on the whole stock market.

An example of an index fund is the S&P500. This is an active index where the value of the 500 largest US publicly traded companies is calculated and tracked. Over 15 year time periods, the S&P500 has never lost money, and has had a median return of 12.2%.

There are many passive funds with lower management fees which try to mimic and track these underlying active funds. There are also many other funds which track other sections of the market. You can pick and choose a diversification you are comfortable with.

Since the inception of the stock market, it has always recovered from every downturn given enough time. If you have time to leave your investments grow, you don’t need to overly worry about market downturns. You do need to have the confidence to leave your money invested, especially in a downturn. That said, there are ways to mitigate losses which I will cover below.

Main selling points of index funds are:

• lower fees
• they outperform actively managed funds by 85%
• they allow for passive investing, in that you can invest and forget. Aside from re-investing dividends and rebalancing once a year
• you can access them as needed without penalty

Figuring out your comfort with risk

The two main elements of a balanced portfolio are stocks (equities) and bonds (fixed income).

• Stocks are shares in a specific company usually with higher risk and higher gains
• Bonds are essentially loans where the investor (you), loans governments or corporations money and they agree to pay you back in fixed income by a certain date. These are lower risk but also lower return. Bonds are used to balance out the risk of a stock heavy portfolio. They are one of the ways to mitigate against stock market crashes.

A typical investment rule of thumb is to keep bonds in the percentage of your age. So if you are 30 years old you should have a portfolio with 70% stocks and 30% bonds. This reduces your risk as you near retirement but keeps your portfolio growing with higher percentages in higher performing stocks.

I have read mixed reviews of this for early retirees with some maintaining 100% stock portfolios to achieve maximum gains. Even in early retirement they maintain higher risk knowing they will keep working and therefore do not need a mitigation strategy.

Others are more risk averse and even though they are retired in their 30s, maintain a 60% stock/40% bond split for the first 5 years of retirement. Even after 5 years they will only go as high as an 80% stock/20% split even though they are continuing to make money from passion projects.

At the end of the day you need to figure out which split works for your own risk tolerance.

You can see my portfolio, which indexes I have invested in and why here. Summary below (though stay tune in coming months as I plan to start shifting this to more accumulating funds):

I currently have no bonds but think I will up this percentage to at least 10% after reading how useful it is to weather any stock market crashes. More on that below.

Words of warning against 100% stock portfolio

It’s not all a sure thing and like any investments you need to be ok living without the money you’ve invested. As quoted from Your Money or Your Life here are some stats and recovery times on historical market crashes:

• Great Depression: Down 86 percent, 27 years to recover
• Mid 1970s: Down 46 percent, almost a decade to recover
• Late 1987: Down 32 percent in just 3 months, 4 years to recover
• Great Recession, 2007–09: Down 50 percent, 6 years to recover (or 14 years if you count from the matching dot-com peak in 1999, which had just been regained in 2007)

The two events within the lifetime of young investors, the dot-com crash and the 2007–09 crisis, were exceptions in that they took less than a decade to recover—but that doesn’t mean the cyclical nature of the market has been suspended. By contrast, bond funds are far less volatile, losing only a few percentage points when they falter.

How to Invest

Setup a brokerage account

In order to invest yourself you need to setup an online brokerage account. I use Degiro. There is also Interactive Brokers which you can check out.

Degiro offer free commission trades on some ETFs. Vanguard S&P 500 is one and Vanguard All World is another.

The Vanguard All World differs from the high yield world fund I am in so I must weigh up the fees and performance of these and may switch.

Here is the full list of commission free ETFs. You get one free trade per free ETF listed per calendar month (meaning you can make more than one free trade per month as long as it’s one per listed ETF).

If you are trying to copy my portfolio you don’t have to worry about timing it as you could buy the S&P and all world ETFs for free and the rest in my portfolio have commission so they could be bought at any time.

As per the usual disclaimer, do not invest any money you can’t live without. All investments can incur loss of some or all of your money.

I buy the Amsterdam market ETFs as they are in Euro and not subject to currency exchange fluctuations. That said, all of my dividends except VEUR are paid out in USD and converted to EUR. This means you will still have some currency exchange exposure if you want to consideration this for your own portfolio.

Degiro have an app as well which is quite good.

I went with a basic account vs custody. The main difference is that basic has lower fees and the shares in a basic account can be lent out by Degiro to 3rd parties. This can’t happen in a custody account.

Fund your account

You can transfer money to your Degiro account by adding them as a direct debit payee on your online banking, this should avoid any banking fees. Test with a small amount first just to make sure it’s setup correctly.

Buy your ETFs

Once you figure out the ETFs you want to buy and the allocation you want, you’ll need to figure out how many of each you can buy with the money you have to invest. Say you have 1,000€ to start with, I did up a spreadsheet with some basic formulas where I entered the current unit price of each ETF and figured out how many shares of each I would need to buy to make up my desired allocation split. This way each time I have money to invest I just update the unit price and it calculates what I need to buy.

For example: For the All-World ETF I wanted that to be 33% of my portfolio so 33% of 1,000€ = 330€. If the unit price is currently 48.43€ then I can buy 10 shares (330€/48.27$ = 6.81 shares). As you cannot buy portions of shares you need to round down all of your numbers in the last column.

This actually only buys you 889€ worth of shares leaving you with 111€ to buy say 2 more of the All-World.

To test the waters you can choose to buy 1 or 2 shares and watch it grow for a while to help ease your concerns. In my case, in both my portfolios (Canadian and Irish), I saw a drop in value more or less straight away but over time the market has recovered. You need to be comfortable with your portfolio losing money from time to time and rest assured that the market goes up twice as frequently as it goes down over long periods of time.

Investment options in Ireland

I did a whole post on investment options in Ireland including pros, cons, tax rates, and estimated real rates of return if you want to check that out and see what you think you’d be interested in.

Personally my investment portfolio currently consists of a property in Canada, retirement funds in Canada (invested in self directed ETFs), and self-directed ETFs in Ireland. A good chunk of money is also in our home in Ireland but I’m not counting that as an investment as we plan on staying in the home after retirement and it will not generate passive income.

I am now looking at simplifying our portfolio and selling our Canadian property at some stage in the near future. We think that we will use those funds to pay down our mortgage in Ireland. Even though mathematically it makes more sense to invest it and use the passive income to pay down the mortgage we want to reduce our cost of living so that we have more flexibility and options around staying home with our son should we wish to. It will also hedge against a recession if one of us should lose our jobs, we will be more comfortable having lower expenses.

In the coming years we plan on investing more into ETFs in Ireland.

Taxes on investments

I’ve done a number of posts on taxes on investments in Ireland.

• Investment options in Ireland
• Why taxes in Ireland get too much flack
• Tax loopholes for Irish investors

Unlike Canada and the US, there are very few ways to legally avoid taxes on investments in Ireland. Believe me I’ve scoured the internet trying to find similar withdrawal options.

I’ve now come to terms with the fact that if I want to retire in Ireland, I need to accept the limitations of where I am and suck it up. I will pay higher taxes on my investments in order to retire where I love to live. My investments will still generate enough income to cover my expenses. I will just need to work a few extra years to get there.

The other benefit of this approach is that if, later in life, we choose to move somewhere cheaper with better tax options, we will already have the most tax inefficient portfolio and larger portfolio and will have more freedom to move around.

Tax efficient options in Ireland

Rent-a-room scheme

The most tax efficient option is the rent-a-room scheme as mentioned above.

Pensions

Next to that, pensions are currently the most tax efficient, though like anything, depends on a number of factors.

Tax deferral

Pensions are a tax deferral tool which means you pay reduced taxes now in your (typically) higher earning years and pay lower taxes on the withdrawals later in your lower earning years (in retirement).

Limited tax savings

If you are already in the lower tax band and will continue to be on the same band when you retire then pensions, while savings you taxes now, only kicks the can down the road as you will pay that same tax amount back when you withdraw.

Similarly if you are already in a higher tax band say earning 50,000€ and will continue to be in a higher tax band in retirement and withdrawing 50,000€ then same concept applies. You save now but pay later.

For example:

If you earn 50,000€ and don’t contribute to a pension you effectively pay 26.4% in income tax (13,213€).

If you contribute the max 20% for someone aged 35 (10,000€) to your pension that brings your tax rate down to 18.4% (9.213€).

A savings of 8% now.

Then when you retire you withdraw 50,000€/year, and you pay 26.4% then.

Which shows that your 8% savings has just been deferred to when you retire. Albeit after age 66 you no longer pay PRSI which would reduce your taxes so it depends when you plan to retire.

In both cases though, your investments do still grow tax free until you withdraw so that is a bonus.

Some tax savings

If you are earning the higher tax band, you do save in taxes now, but Revenue have rules that ensure you are paying higher taxes on pensions withdrawals after a certain age and when your pension goes above a certain amount whether you need the income or not.

Even if you only need to withdraw an inflation adjusted 40,000€/year for a couple you will still end up paying an average of 15% or so over 40 years. This is still a savings of 25% but worth keeping in mind. If you plan on living off more than 40,000€/year and plan on using your 200,000 tax free lump sum for anything other than more investments, the savings are even less.

My case against pensions

Even though pensions are the most tax efficient, I’m still not convinced for a number of reasons.

Lack of control

Depending on your pension type, you typically don’t get a say in what it’s invested in nor can you negotiate fees or government levies.

This can have a major impact on your end portfolio.

Looking at Irish pension trends from 2007-2017, the average pension growth was -4.82% after fees and inflation based on historical average, though the report only has data from 2007 (-7.3%), 2008 (-35.7%), 2015 (4.5%), 2016 (8.1%) and 2017 (6.3%).

Even if you take out the crash in ’08 it’s still only 2.9% (or 6.98% if you add back in the 2.18% in fees/levies and 1.9% in inflation instead of 10% in the stock market).

In which case investing in an ETF portfolio, even with 41% exit taxes and deemed disposals every 8 years would have fared far better.

Your pension needs to be earning a real rate of return of 5.95% or more in order to outweigh the higher taxes of a self directed ETF portfolio. This is based on a number of assumptions fully detailed in this post.

A real rate of return is the difference between your annual return (performance) minus your management fees and inflation.

The last 30 year average inflation for Ireland has been 1.9%.

In the last recession the government also implemented a levy on pensions to get access to some of that money themselves which further reduces your growth potential. This has since been removed but would worry about it being added back again if/when the next recession hits.

Limited contributions

Depending on your pension type, you are also limited to the contributions you can make per year. The limitations are as per below:

Early retirement issues

If early retirement is your goal, pensions present 2 problems:

• You likely need to be investing more than your limited amount per year in order to reach your goal
• You can only access a pension at age 50 at the earliest (again depending on the pension type)

If you are self-employed you have quite a few more pension options in that you can contribute much more but still limited to access at age 50.

Complicated withdrawal options

There are also a number of options to consider when you’re ready to withdraw from your pension. You can convert it to an approved retirement fund, purchase an annuity and so on. Each has their own sets of conditions. Some require minimum guaranteed income from other sources. Some “die when you die” meaning that the money remaining in the pot does not go onto your family. And so on. These conditions can change over time.

With ETFs you take out the money when you want, how you want and leave it to who you want. Albeit you may need to look into estate planning either way as there are ways to reduce the capital gains taxes your children will pay.

There is a great podcast on some of your inheritance consideration options here.

Transfer pension to another country

There are options to transfer your pension to another country if you have a bonfide reason to do so (ie: you are from that country and are returning home), though it has to be transferred into that country’s approved retirement fund.

So for example I could contribute to a self-employed pension here and transfer it to Canada when I’m ready to retire. In Canada, you can access your retirement fund (RRSP) at any age as long as you pay the taxes. You will be charged withholding taxes immediately on withdrawal but you get back any overages when you file your annual return. You also lose your contribution room.

But in order to do that I’d need to move back to Canada which is not in my plans. I also haven’t looked into the full ins and outs of it and what fees may apply, but an option to keep in mind should our plans change. It’s also possible the approved fund wouldn’t be an RRSP (which I wouldn’t have enough contribution room to take my full portfolio anyway), it may need to be an annuity or some other form or retirement fund which I really haven’t looked into.

All that said, I’m personally looking at implementing the KISS method and to keep it simple silly. All of these potential loopholes are overly complex and my preference is to go with a simplified portfolio that will have predictable taxes and returns which I have more control over.

How to maintain your investments

Don’t worry about timing the market

When it comes to investing, hindsight is a wonderful thing, if only you could know when the market was going to rise or fall. There are people who spend their days trying to predict this but save yourself some trouble and follow either one of two approaches depending on your comfort with seeing your portfolio drop in value from time to time.

Emotional option: dollar/euro cost averaging

If you are really emotional about seeing your portfolio decrease in value, you can rely on something called dollar cost averaging. The idea is that instead of investing large lump sums on any given day you average it out over time so that you can reduce some of the risk of buying high only for stocks to crash the next day. Instead you buy little and often and you will naturally end up buying some stocks at a high but some at a low and it will average out over time.

Rational option: time IN the market is better than TIMING the market.

If you have gotten to the point where you are comfortable with seeing dips in your portfolio then rely on the fact that time IN the market is better than TIMING the market.

Other interesting stats about the market – based on the Toronto stock exchange: (courtesy of www.retirehappy.ca)

I couldn’t find any Europe specific stats but if you’re investing in world funds then these stats won’t be too far off.

1. Markets go up more often than they go down
2. Not only do markets rise more frequently, but they tend to increase in higher magnitude than the drops.

Over the last 90 years:

• Markets have gone up 73.9% of the time
• Markets have gone down 26.1% of the time
• The market gained more than 20% in 33% of the time
• The market lost more than 20% in 4.5% of the time
• The gains in positive years produce more than double the losses in the negative years

(This data is based on calendar year returns of the TSX from 1920 to 2010).

In addition (courtesy of Rob Carrick of the Globe and Mail),

• In 34 of the 37 corrections of 10%+ since 1950, the stock market was up 12 months later by 26.8% on average.
• Average decline for the 37 market plunges of 10%+ since 1950 is 19.7% or almost one every 20 months.

Either way your money will be working for you so pick the approach that works best for where you are at in your investment journey.

Keep adding to your investments

Buy as much as you can, as often as you can and watch your investments grow.

Try not to look at your portfolio too often as it can be off putting to see market dips.

Reinvest your dividends every quarter

There are some funds and accounts you can get with robo-advisors that will automatically re-invest your dividends but I have yet to delve into those options. For now I’m keeping it simple and manually re-investing my dividends. All of my ETFs pay out quarterly (you can see this on the fact sheet of each ETF), so I check back once a quarter and buy more with the dividends that are paid out.

For an Irish ETF portfolio you need to pay the 41% exit tax on your dividends on the year you receive them.

You can also get accumulating funds which means your dividends are automatically re-invested and do not incur the 41% exit tax until the 8th year. See this post for more information on what deemed disposals are.

Rebalance once a year

Throughout the year your stocks will likely outperform your bonds or certain ETFs will outperform others and your asset allocation will shift.

Say you started out with a 70% stock 30% bond split. Through the year your stocks performed really well and now they make up 80% of your portfolios value and bonds have fallen to 20%.

In order to maintain the asset allocation you are comfortable with you will need to sell some of your high performing stocks and buy some of the low performing bonds to rebalance your portfolio back to the original allocation.

This can be done once a year (I read a really good article on why any more than that actually increased your volatility while reducing your return but can’t for the life of me find it again). Keep an eye on trade commissions and creating tax events from sales.

File taxes once a year

In Ireland most people do not file taxes if you are a PAYE earner.

If you start investing, you will need to file taxes each year whether you make money or not.

If you are purchasing shares through a company share scheme you also need to be filing each year as well as every time you purchase the shares.

I am due to file my own taxes this year on my investments from last year so once I figure it out I will do a future post on both of these scenarios.

Although I’m not including details on how to file in this post, it is something to keep in mind for your own circumstances.

Revenue are extremely helpful if you need a hand you can give them a call. I think you can even book an appointment and they will walk through things with you in person as well.

Weathering a crash

When the market is crashing, it is very hard to leave your money invested but based on the facts, the stock market always recovers so the best thing for you to do is wait, alternatively there are two things you can do to lessen the blow:

Sell bonds at a high and buy stocks “on sale”

If you hold bonds as well as stocks, a crash may be a good time to rebalance as during a crash, money flows out of stocks (risky) and into bonds (safer), this devalues stocks and increases the value of bonds. So if you hold bonds now would be a good time to sell (high) and buy stocks (low) and rebalance your portfolio to your desired split. This means that once the market recovers you will own more stocks which you got “on sale” and will benefit more from the upswing in the market. If you don’t own any bonds you will simply need to wait for the market to recover (usually 2 years) as per recent trends.

This is why it’s important to hold at least some bonds as you will be in a stronger position to benefit from market recovery than if you only held stocks.

Sell at a loss to offset future gains

This is something called capital loss harvesting (or tax loss selling).

This concept is only applicable to certain investments like individual stocks including company shares purchased through benefit schemes and UK investment trusts. Unfortunately you cannot do this with EU domiciled ETFs.

The idea is that you take advantage of the downturn by selling some of your assets which have lost value compared to when you bought them. At the same time you should buy back a similar asset/stock at the lower value so that you maintain your original market exposure to ensure you can take advantage of the future gains when the market does recover. The reason you wouldn’t buy back the same stock is because there is a stipulation where you have to wait 30 days before buying the exact same thing again, or it is dismissed as a “superficial loss (or gain)”.

Capital losses can be applied to your current tax year, 3 years in the past and indefinitely in the future. This means you can basically “buy tax credits” in the down years which you can use to lower your taxable income in future years when your income may be higher.

Capital gains credit

In Ireland you also get a credit of 1,290€/year of capital gains on which you do not need to pay capital gains tax.

Mr. MH gets discounts company shares for the company he works for, we considered selling just enough each year to avail of this credit as if you don’t use it you lose it. However, the potential gains we would be losing out on on these particular stocks would far outweigh the tax savings we would make from the credit.

Again it’s trying to keep your emotions in check around tax avoidance. For me I feel obsessed with trying to get money in or out of things in a way that I pay as little tax as possible but in the bigger picture, if that investment vehicle allows you to make large gains over the long term, even though you are paying taxes on those gains, they are still gains which you would not have made otherwise.

How long to financial independence?

For those of you interested in achieving financial independence, you may be wondering how long it will take using the above investment model of ETFs in Ireland. The chart below shows how many years it will take for you to reach financial independence depending on your current assets and different monthly savings amounts. Financial independence (FI) means your portfolio is large enough to withdraw a safe withdrawal rate of 4% to cover your annual living expenses, in this case we are looking at a portfolio of 412,500€ for an annual cost of living of 16,500€ for 1 person. To apply this chart to a couple simply double the monthly savings amount in the first column to reach FI in the same number of years.

Assumptions:

• Amount of time to grow portfolio to 412,500€
• Safe withdrawal rate of 4%
• Annual living expenses on withdrawal of 16,500€ for one person
• Deemed disposals/exit tax of 41% starting in year 8
• Real rate of return used is 7.91% (average stock market performance over its lifetime has been 9-11% so I took the 10% average minus the average inflation for Ireland over the last 30 years of 1.9% minus MER fees of my sample portfolio of 0.19% = 7.91%)

So for a single person starting from 0€ in assets and saving 500€/month it will take 29 years to reach financial independence compared to 12 years if you save 2,000€/month.

If you already have 100,000€ in assets and you save 2,000€/month it will take you 8 years to reach financial independence.

This just goes to show how much of an impact your savings rate can have. It can shave years off your journey to FI. Not fast enough? There are a few more options on how to reach FI sooner.

Ways to reach financial independence sooner

There are a few other options if your time to FI is too far away. This is a quick list but you can google more on each bullet point to find many resources on each topic.

You could:

• Make more money with a passion project in order to increase your savings rate and decrease your time to FI. Google side hustles for ideas. Or check out the book Financial Freedom for a great guide on figuring out profitable side hustles. One exercise in the book is to make a list of your hobbies and a list of your skills. Take a step back and see if any side projects appear that make use of a cross between your skills and hobbies.
• Cut expenses to increase your savings rate.
• Do partial FI where you increase your withdrawal rate beyond the safe rate of withdrawal with the caveat that you would need to earn a certain amount through the year. This would no longer require a full time job, offering you and your partner more flexibility. For example: say you and your partner want to live off 40,000€/year. For a safe withdrawal rate of 4% you’d need a portfolio of 1 million. If you decide to take out 6% per year you’d only need a portfolio worth 640,000€. BUT you’d also need to top up your portfolio/investments with another 15,000€ per year to ensure it wouldn’t run out. So you or your partner could work part-time or take on contract work for a few months rather then wait your full time to FI. This approach practically cuts your time to financial independence in half while still achieving the flexibility you may want.
• Take mini-retirements once you’ve reached some degree of passive income/savings and can afford to take prolonged time away from work to pursue other things. Be it travel, time with family, going back to school etc. This is a great option if you want a change sooner than later. It also gives you a chance to try early retirement to see if it’s something you’d like to do full-time.
• If your job allows you to work remotely 100% of the time, consider moving to a place where cost of living is much cheaper. I know someone who contracts for a company in London, earns GBP and lives in Malta where there is no corporate tax. Other stories I have come across are where a couple moved from San Fransisco to Mexico while still earning US dollar from their silicone valley companies and significantly reduced their time to FI that way.

You can also check out my post here where I explored many other options to quicken my path to FI.

There are probably lots of other ways but these are the main ones I’ve come across.

How to withdraw

Once you’ve reached your version of financial independence and you’re ready to start withdrawing from your portfolio there are a few things to consider in order to protect your portfolio from something called sequence of return risk.

Protect your portfolio in the first 5 years of retirement

Your retirement portfolio is at most risk of failing in the first five years of retirement. Even if you only withdraw at the safe withdrawal rate of 4% (which has a success rate of 95%) there is a 5% chance it will fail in the long-term and your portfolio will run out of money in 30 years time. This can happen if you retire right when the market crashes and you are forced to withdraw/sell at a loss and even in the upcoming “up” years your portfolio cannot recover and eventually over 30 years you will run out of money (unless you go back to work and top it back up again). This is something called the sequence of return risk. Never fear – there are ways to mitigate this.

1: Least ideal: Go back to work to top up your portfolio

2: Slightly more appealing: Cut expenses or move somewhere cheaper so that you don’t need to withdraw as much to live off of

3: Least impact: Hold a cash cushion of 1-3 years of living expenses that is invested in something outside of the stock market (like a “high” interest savings account). Using this cash cushion for your living expenses in the down years means you do not HAVE to sell at a loss and you can wait for the market to recover keeping in mind that stock market crashes tend not to last more than 2 years of continuous declines.

1-3 years of living expenses can be a lot (say 40,000€ – 120,000€), which would further add to the time to financial independence but there is a way you can reduce the amount needed with something called a yield shield.

The idea is that you temporarily pivot your investments to high yielding (though lower performing) assets for the short term. Things like preferred shares, real estate investment trusts (REITs), corporate bonds and dividend stocks. This can mean that your portfolio goes from returning dividends of something like 2.3% to closer to 3%, which if you have 1 million in your portfolio means the difference between 23,000€ to 30,000€. So if you need 40,000€ to live on you can use the 30,000€ from your dividends and only withdraw 10,000€ from your cash cushion meaning you only need 30,000€ extra as a cash cushion to weather 3 years of a market downturn.

Holding a yield shield means your portfolio is slightly more complicated to maintain as you are invested in a larger number of asset classes but once you have passed your first 5 years in retirement you can pivot your assets back to a simpler spread of ETFs.

Taxes on withdrawal

In an ETF portfolio, as mentioned above, you will need to pay exit tax on dividends every year as well as exit tax on gains every 8 years (whether you have sold or not). Once you do actually sell/withdraw you will get a credit for the deemed disposal rate you paid on the 8th anniversary.

To clarify some terminology:

A dividend is an amount of money a company pays out to its share/stock holders at a set schedule (usually quarterly or annually). Dividends are paid at the set schedule identified in the fact sheet of the fund.

A gain is an increase in value of shares you own compared to when you bought. So if you bought something for 10€ and when you sell it it’s worth 25€ you have a gain of 15€ which you need to pay exit tax on. Typically you only realize a gain or a loss once you sell the share/stock . However in an ETF in Ireland you need to pay the tax on gains as a deemed disposal on the 8th anniversary of owning the stock/ETF.

Deemed disposals

I have not filed deemed disposals yet as I just started investing in ETFs in Ireland less than a year ago.

What I have gathered to date is that Degiro should provide an annual report showing your portfolio holdings, purchases and any gains or losses.

Keep this report until your 8th year of holding the investment. Using this report you could work out your gains for the year on those investments.

You then calculate your 41% on those gains and file and remit it to Revenue.

Repeat this process every year after the 8th year.

I believe it is a laddered approach where in year 8 you pay the exit tax on gains from year 1, in year 9 you pay the exit tax on gains from year 2 and so on.

You can pay the exit tax from your investments if you don’t have the cash to hand outside of the investments, though this will reduce your compounding effect over time.

I am not 100% on this so please correct me if I’m wrong.

Sense checking for the long haul

At the beginning of each year of retirement, it’s a good idea to re-check the chances of success of your current portfolio. There is a handy calculator called FIREcalc which cycles through 119 different scenarios based on criteria you enter and tells you the current rate of success where your portfolio will not run out of money in the next 30 years.

If the rate of success is lower than you’d like, you can always carry out some of the back up plans mentioned above in the “how to withdraw” section.

ANNNDDD that’s a wrap!

Hopefully this will be a post that you read and re-read through your investing journey. I actually learned more myself by writing it so I got something out of it too 

I’d love your feedback. If you found this helpful or if there is something you’d like me to elaborate on, please leave a comment below.

Spreadsheet templates

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This post goes into possible tax loopholes for Irish investors depending on residency and intention to live permanently in Ireland. A previous post highlighted why Ireland’s tax system gets too much flack. However, I am still on the hunt for any tax advantages I can get. I think I may have found some decent, legal options for people who do not intend to permanently live in Ireland.

Even if you do intend to stay in Ireland there may still be some info of use especially if you have foreign income.

A few months ago, I had come up with a number of questions I wanted to ask the tax offices in both Canada and Ireland but struggled to find a time where I could wait on the phone long enough to get through while the baby was asleep. Then I heard an interview on the Informed Decisions podcast with the company Expat Tax Services Ireland (ETSI) who specialise in taxes for people coming to Ireland from elsewhere and/or people coming back to Ireland after some time away, and I thought I’d chance reaching out to them to see if they could fill in my gaps. And that they did.

Below is an amalgamation of my findings which were kindly bolstered by Keith at ETSI.

Tax Terminology

Irish Tax Residence – you live in Ireland for more than 183 days from Jan to Dec or 280 days in the last two years, having spent at least 31 days in Ireland in each of the two tax years.

Ordinarily Resident – you have been a tax resident in Ireland for 3 consecutive years

Irish Domiciled – This one is a bit tricky – “Domicile” is not actually defined in Irish law, but in general it is understood to be the country where you intend to permanently reside indefinitely.

• If you were born in Ireland you are Irish domiciled unless you move to a different country with the intention of living there permanently. Revenue may ask where you plan to be buried as a determining factor for this
• If you become an Irish citizen through marriage or naturalisation, you do not necessarily become Irish domiciled unless your intention is to live in Ireland permanently
• That said, it is very hard to change your domicile one way or the other

You can find more detailed explanations in plain English here.

What this means from a tax perspective

Domiciled in Ireland but not living in Ireland with Irish income

Or Irish domiciled but not Irish tax resident

As an Irish domicile you will pay Irish tax on your Irish sourced income no matter where you live in the world (ie: you have Irish investments like rental income from a property or dividend income from investments). If the country you live in has a double taxation agreement with Ireland you may be able to get tax relief by way of credit or exemption in that country to ensure you are not taxed twice. An exception to this may be Irish domiciled ETFs where it is possible to be exempt from Irish tax on income from Irish domiciled ETFs (though I need to get clarification on this).

If you have purchased shares through an employee share purchase program for a US company that you work for in Ireland, the dividends and sale of shares may be taxable in the US as well as in Ireland. This one is a bit more complicated if you were to move to another country in retirement as you would need to look at the triangle of double taxation agreements and how they work (or don’t work) together. This is one we will need to seek more advice on once we decide where we want to live in retirement.

You will not pay Irish taxes on non-Irish sourced income. So if you moved to another country and are working there, you will just pay taxes there and do not need to report anything to Irish Revenue (unless you are ordinarily resident for a 3 year period).

Domiciled in Ireland and living in Ireland with foreign income

Or Irish Domiciled and Irish Tax Resident

If you are a tax resident in Ireland as well as domiciled you will pay Irish taxes on your worldwide income. So if lived abroad for a while and you have assets which are generating income in another country you will be liable for taxes on them in Ireland as well as possibly the country where you were living. Again you’d want to check out the double taxation agreement if there is one.

Living in Ireland but not domiciled in Ireland with foreign income

Or Irish Tax Resident but not Domiciled

If you are not from Ireland but currently living here and have assets generating income from another country, you are only liable for Irish taxes on any amounts you remit to Ireland.

Remit means any money you bring to Ireland, so this could be money that was transferred online or brought in in cash, but also means any money you spend in Ireland, so for example, if you have a foreign credit card which you load up with money from foreign assets and spend it in Ireland, that counts as remittance and you would be liable for tax on that portion.

If you remit cash which you have already paid income taxes on in your country of residence (not taxable on remittance) as well as foreign income from foreign investments (taxable on remittance) then Revenue will assume the total remittance is foreign income and therefore tax the while amount. In this case you may want to speak to a specialist or ring Revenue to ask how to classify the two sources separately.

Were living in Ireland for more than 3 years but not domiciled in Ireland and now living elsewhere

Or Ordinary Resident but no longer Tax Resident Nor Domiciled

If you were living in Ireland for 3 or more years and you built up some assets there but then moved elsewhere and are not domiciled in Ireland then you would still be liable for Irish taxes on any Irish sourced or foreign income for the 3 following years as you would still be considered ordinarily resident BUT only if that money is remitted to Ireland. Another note on this is that even if you remitted foreign income to Ireland, you can remit 3,810€ each year tax free.

After the 3rd year you no longer need to pay Irish taxes on any income, unless it’s Irish sourced (ie: Irish rental income). Foreign income would no longer be taxable and even Irish domiciled ETFs can be an exception if you are no longer an Irish resident.

How are these tax loopholes?

Canadian assets accumulation phase

For our Canadian investments, we may be able to legally avoid paying Irish tax on our Canadian investments if we invest as much as possible in my name rather than my husbands as he is liable for Irish tax on his worldwide income and I am not, as long as I don’t remit it to Ireland.

The only exception for my husband would be “income” or gains made in an RRSP. This is treated similarly to a pension in that income or gains are not taxable until draw down or withdrawal.

As investment options in ETFs are greater and with seemingly better performance (according to my two portfolio’s so far), one option for us would be to transfer our savings to Canada on a regular basis and invest it there, in my name only.

You can transfer money between spouses as much as you like without incurring any gift or inheritance taxes. You can also transfer after tax money from Ireland to Canada without incurring any taxes in Canada, once you have paid income taxes on it in Ireland (though I need to double check this with the Canada Revenue).

The downside to this is the currency exchange and transfer fees. Revolut seems to be the cheapest way to do this but Canadian banks charge a flat fee for electronic fund transfers. I’d need to work out if the expected loss in gains by not having the money invested while it accumulates would outweigh the transfer fees.

I know I struggled with paying monthly bank fees until I realised that the minimum balance required to avoid them would make me more money by having it invested and so now I pay bank fees and let my “minimum balance” cover the costs and then some by having it invested elsewhere. The transfer fees may require a similar mind shift.

TFSA complications

TFSAs are a bit trickier in that when you leave Canada and you let Canada Revenue know you are leaving (by filing a specific form), your contribution room stops accumulating. If you do not file the form your contribution room continues growing but if audited you will owe a percentage on any overages as well as tax on any gains made on those overages.

From an Irish perspective, any income or gains arising from a TFSA may be fully taxable in both Canada and Ireland if you are no longer resident of Canada. From an Irish perspective a TFSA is considered an offshore fund for Irish tax purposes and income/gains from the fund may be taxable in Ireland regardless of whether you remit the funds to Ireland. If you have funds in a TFSA and are planning to return to Ireland, it may be best to reach out to a Canadian cross border tax expert for clarification on this. I have had great help from Trowbridge in the past if you want to give them a shout.

Canadian assets withdrawal phase

There are already bloggers who are retired early and have documented legal ways to pay little to no tax on portfolio withdrawals from assets in Canada, the same cannot be said for Ireland, so the more assets we have in Canada come withdrawal phase, the easier it may be to withdraw tax free using tried and tested methods.

The risk here is that if we decide we want to stay in Europe, which is our current plan, then we will be subject to market exchange rate fluctuations.

Irish assets accumulation phase

In Ireland, it also makes sense to invest in my name only as once we are ready to “retire”, and say, move to Portugal where they have no tax on foreign income for 10 years, then we could avoid the deemed disposals and exit tax on our Irish domiciled ETFs (if we retire before the 8th year – which is our plan). The same could not be said if the investments were in my husbands name – where even if we lived in Portugal, as an Irish domicile, he would still be liable for the 41% exit tax on gains and dividends on his Irish ETF portfolio indefinitely.

Another option would be to invest in both our names but restructure or move the funds at time of retirement depending on what route we take, the exit taxes due in 4-5 year’s time may not be that bad.

Irish assets withdrawal phase

Move to Portugal (at least for as many days as required to be considered tax residents) where we pay no taxes on our Irish and Canadian portfolio withdrawals for 10 years (or as long as the scheme lasts, which may actually be changing this year – stay tuned for a post on that).

Reconsider our options once the 10 year mark approaches. Though I’m not too worried about it as my plans in “retirement” are to continue this blog and perhaps continue making money through teaching financial literacy somehow, or getting paid to speak at events, or possibly getting certified as a financial planner and working as and when I feel like it, so although we will have our base expenses covered in the most tax efficient way possible, I still plan on earning money and continue adding to our investments. If, after the 10 years, we need to start paying taxes at a higher rate, then so be it. As long as our base needs and a bit more are covered then I don’t really care about the rest!

So what do Irish domiciled investors do?

Marry someone that wasn’t born in Ireland as they can more easily claim they are not Irish domiciled?

No, but really if you don’t expect to be retired by age 50 (or 60) depending on your pension, then the best, most tax efficient thing you can invest in is a pension (as long as the fees are 1.25% or less and the performance is on par with what you could get outside a pension).

If you plan to be financially free before then, then some combination of investing in a pension alongside self directed investing might work out best (where you draw down on your non-pension investments in their entirety to bridge the gap between getting access to your pension) and take solace in the fact that you are still earning investment income even if your taxes are higher than if you were from another country.

Disclaimer:  Although I received general guidance from ETSI from an Irish tax perspective, this blog is based solely on my own knowledge and opinions and should not under any circumstance be interpreted as tax or investment advice.  Where tax advice is sought, readers should seek such advice from a tax or investment professional. 

Some, but not all, of the below tools include affiliate links where I will get a small commission if you sign up. I only include tools I use and love so if you sign up, it will be a great support for me and the content on this blog.

Investing

Degiro – The online trading platform I use for non-pension self-directed investing (ie: my ETF portfolio). As usual do not invest money you can’t live without. Investing involves risk of loss.

Banking

Bonkers.ie – Depending on your banking habits (minimum through-put, minimum balance, number of contactless payments, number of ATM withdrawals etc), different bank accounts may suit you better. This comparison tool is handy to figure out which works out best for you.

Revolut – This is an online bank account. They are great for avoiding non-euro transaction fees (which I use for Amazon and other UK purchases) and other online purchases.

I considered using it as my main account but ruled against it for a few reasons. The biggest consideration is that I don’t think they are regulated in the same way as brick and mortar banks so if the company goes bankrupt, any money you have in the account is not protected. Smaller consideration is that there is no facility to lodge cheques (we still get the odd one, like from older relatives for wedding and baby gifts). I suppose you could use a friends bank to lodge them and have them transfer but the deposit protection thing is still an issue.

Utilities

Electricity/Gas/Broadband/Mobile/Insurance

Bonkers.ie – I use this tool to compare gas and electricity every year. It’s best if you look up your annual usage to put into the tool, an easy way to do this is to look at the “actual” readings on your first bill of the year and then look at the final bill of the year that has “actual” readings (rather than estimates). I have found the online reporting tools by various providers aren’t accurate and then retention teams quote off different figures to try and convince you into staying. I have a spreadsheet which includes standing order charges and VAT rates etc so that I can compare the full picture when being quoted various deals from retention.

This site also includes Insurance comparisons (Life, mortgage protection, serious illness and health), and broadband comparisons.

Switcher.ie – This is similar to bonkers.ie but doesn’t cover insurance or banking comparisons but does cover mobile, broadband (inc TV), and gas/electricity.

Mobile phone

We buy our phones outright and try to make them last as long as possible. This allows us to have SIM only packages. I currently use An Post (they use Vodafone’s network so I have found the coverage quite good) and pay 20€/month for 7GB and 250 minutes and texts. My husband uses Eir as he gets access to the Eir sports package on his phone (since we don’t have cable) and 30GB of data and unlimited calls and texts for 30€. These are 30 day contracts or pay as you go type deals.

There is a new company called GOMO (owned by Eir) who also offer unlimited calls, texts and data for 13€/month. 30 day rolling contract and port your number. Mixed reviews of customer service so holding off on switching to this for a bit.

TV

Netflix

Internet

We’ve been with Vodafone for a good few years as we always seem to get good deals with them. Though you need to call and ask. We upgraded to fibre this year and now pay an average of 37.5€ for 12 months. 30€ for 6 months, then 45€ thereafter.

Library

The library is an amazing resource that so often gets forgotten about. No longer just for books. When our son was born I bought a few board books and just assumed the library wouldn’t have any due to the slobbery nature of little ones but they have a great little selection. They also have printing facilities and events for teens, parents like book readings (all pre-lockdown). I also recently discovered that you can gain FREE access to magazines and publications on your phone using your library card. Download the press reader app, select your local library, enter your library card number and create a password. Access a wide range of popular magazines including Forbes, Men’s Health, Style at home, House beautiful, Highlights for kids and many more. If they don’t have a book you’re looking for, you can put in a request and they will order it in for you. They also have some digital content like DVD’s, music, audiobooks etc.

Online Shopping

Honey – A Chrome add-on which automatically searches for discount codes. You save money on purchases you were going to make anyway. You also gain points from certain websites (like booking.com) which you can exchange for vouchers for places like Amazon.

Parcel Motel – A great option for getting products off Amazon that don’t deliver to Ireland. Parcel Motel gives you a UK address and they deliver to a location near you (usually at petrol stations). Just be careful of orders which don’t group items together as you could end up paying for multiple parcel motel stays for 1 Amazon order. I’ve been burned by this before. Even though you select “group items together”, sometimes the items are coming from different warehouses and grouping is not possible. Anyway, parcel motel costs 3.95€/package so a great option if it’s something you really can’t get at home.

Mortgage

CPCC mortgage comparison – A great website for comparing mortgage rates come renewal time. They also have mortgage calculators which I use for a lot of my analysis when considering investment property costs or paying lumps off my mortgage etc.

If you apply the lump sum section it shows you how much your monthly payments will be reduced by, by the lump sum while keeping your mortgage term the same length. If you apply the extra monthly payments it shows you how many years your mortgage will be reduced by and how much less interest you will pay.

Expense Tracking

YNAB – This is the tool I use for expense tracking. It allows you to split expenses so I can easily track expenses between my husband and myself. It also allows multiple budgets for different currencies. The reports are handy too.

I used to use the desktop version which had a once off fee but now they’ve moved to a cloud based paid subscription of 84$/year (~75€). I struggled with this cost but I’ve also struggled to find an alternative that suits my needs. A way to make this easier to swallow is to convert the cost into your hourly wage and see if it will save at least that amount of time per year in maintenance as it has the auto syncing and our historical transactions from the desktop version.

That said, the only Irish bank that supports simpler imports is Ulster Bank. However, their current account fees are exorbitant, so updating does take a bit of file preparation. Apparently, Oath is on the way which is a secure method of auto-syncing with bank accounts so that feature may be coming in the new year.

Some other FIer’s use an app called Pocketsmith which has auto bank sync using the Salt Edge function. However, I haven’t figured out how to track expenses in it where I assign a certain portion to my husband and another portion to myself. You can split expenses but only into different categories and not between people as far as I can see, the reporting visuals were not as intuitive as YNAB so I ruled this one out.

Travel – Accommodation

Air B’n’B – Great site for finding cheaper accommodation. If you don’t already have an account – get 41€ off your first trip!

Booking.com – Another great accommodation site. I usually compare between both Air B’n’B and Booking.com. As mentioned above, if you use the Honey chrome-extension you can earn points which you can convert to Amazon vouchers. So far I’ve earned 40£ just by booking accommodation I would have booked anyway.

Travel – Fights

Google Flights – One of the quickest easiest ways to find flights with easy search filters for max duration, stop overs, price etc. Also really handy to explore destinations by putting in one or two starting airports and seeing where you can get to for little money. Great if you are just getting ideas of where you want to go, or where it’s cheap to get to from your airport. They also have price tracking notifications so you can be notified when prices increase or drop if you have a specific flight/date in mind.

Skyscanner – Similar to Google Flights, easy to search multiple airlines and sometimes has better prices than Google Flights.

Travel – Getting Around

Google Maps – Google Maps is great for showing how to get around a new place. It includes public transport, walking and even Uber prices and times. Street view is also a great way to explore an area before you get there.

Rome2Rio – Sometimes better at the public transport options than Google Maps. It even shows much longer journey price and booking options from country to country.

Ex-pat/Cross-border Tax Advice

ETSI – A great resource for cross border tax advice as well as other personal tax matters.

Income tax calculator

PWC tax calculator – I use this tool ALL the time for my analysis on take home after taxes based on various scenarios. It’s great as it takes into account various credits and pension contributions etc.

I recently got a question from a friend on how I plan to save towards my kids’ college years and so I thought I’d put my thoughts into a post in case it’s of some use to others.

How much do you need?

When I first discovered the FIRE movement I was talking with friends and colleagues at work about it and I mentioned my plans to save X amount to cover my living expenses, a colleague then asked how I had planned to cover my kids’ costs at college. She had read that you need 40,000€/child to cover the costs of 4 years of college – even though third level education is mostly covered by the government in Ireland, these costs are for housing and supplies etc. Of course these can be more or less but it’s a decent guide. At the time I was of the mind set that I would not pay for my kids college education if I was not in a position to as a result of retiring early and that they could work through college and take out loans if needed but since I’ve crunched the numbers and realise that it really won’t take much to save this kind of money if I’ve got 16-19 years to do it and so I have changed my mindset as this will not overly delay my early retirement plans. Now my original mindset may seem a bit heartless but I hope that I can teach my kid about money from an early age and that they will be able to provide for themselves rather than needing money from us.

How I plan to invest

In summary my main idea is that I’d like to find an online brokerage custodial account which I can put in my son’s name. I have asked Degiro if they offer this and they said it was on their to do list but do not have one just yet. If anyone has come across an online broker with custodial accounts please do let me know! The reason I want it in my son’s name is so that the growth and any dividends are in his name for tax purposes and he will not be liable for capital acquisition tax (CAT). If I were to invest in my own name and give him the money later then he would have to pay CAT on any annual amounts over 6,000€ (see below for more on the 6,000€ amount).

Once I can start investing on my son’s behalf I will invest 12,000€ as a lump sum over 2 years, the reason I will split this over two years is again for tax purposes. In Ireland there is something called a small gift exemption where any person can receive a gift of 3,000€ from multiple sources and each gift is exempt of capital acquisition tax (CAT) up to the 3,000€, so both myself and my husband can gift a total of 6,000€/child/year without triggering CAT. The other thing to note is that this gift amount does NOT reduce the lifetime inheritance limit of 335,000€ (as of 2020 budget). More info here.

By investing 12,000€ over two years and letting it grow for 16 years at an estimated growth of 7.91% (average stock market returns of 10% minus 0.19% ETF portfolio fees minus 1.9% inflation) and paying 41% exit tax every 8 years as a deemed disposal, you will have just over of the inflation adjusted 39,000€ in the 16th year aka the future amount will show 51,240€ but will have the buying power of today’s 40,000€.

If you don’t have that lump sum to invest you can invest 100€ month for the 16 years to end up with just under 39,000€ (for a total investment of 19,200€). This just goes to show the power of compounding interest over time – that you need to invest 7,200€ more if you spread if over 16 years instead of a lump sum at the start. With the current child allowance of 140€/month/child you could technically just invest that money and have your college expenses paid for by the government. My original post stated that the 140€ was taxed but a reader kindly pointed out that this benefit is not taxed regardless of income so if you invested the full amount you’d have (inflation adjusted) 54,560€ after 16 years (for a total investment of 26,880)!

What if you don’t have 16 years?

Ok so what if your kids are older and will need the money sooner? Here is a rough guide of how much you’d need to invest if you have 4, 5 or 10 years to college years following the same investment principals – though if you need the money in 4 or 5 years then a higher risk portfolio may not be the best option but up to your level of risk tolerance.

4 years to college

If you’ve got 4 years you’d need to invest 708€month for a total investment of 34,000€ to end up with (inflation adjusted) 41,277€ in 4 years. This is 8,500€/year so your child would be liable for CAT on 2,500€ if you followed my approach above meaning they’d need to pay 3,300€ back to revenue over 4 years meaning they’d only have 38,000€ instead of 41,000€ to cover their costs. That said, in the guide linked above it does say that any excess of 6,000€/year could be claimed against the inheritance lump sum so they could avoid taxes now but lower their overall inheritance amount in the future which is something you may consider.

Another approach here could be, instead of gifting upon investment to avoid taxes on growth, to invest in your own name and only gift the 6,000€ CAT exemption limit per year in the year they need it once they are in college. As you only had investments for 4 years, the extra CAT you would pay on gains would be lower than if you had invested over 16 years. Your kid would need to cover the remaining 4,000€/year themselves through part time work or living more cheaply but then at the end of their college years they would still have nearly 30,000€ left as an investment that you could either continue let grow or continue gifting the 6,000€ year until it’s depleted which they could either reinvest in their own name or put towards a downpayment etc. If they have a partner at that point you could also gift another 6,000€ to their partner as the small gift exemption is not limited to family.

5 years to college

If you’ve got 5 years you’d need to invest 521€/month for a total investment of 31,250€ to end up with (inflation adjusted) 39,496€ in 5 years. This is just over the 6,000€ limit so you could follow a similar approach to what I suggested above to avoid the CAT on the remaining 1,000€.

10 years to college

If you’ve got 10 years you’d need to invest 220€/month for a total investment of 26,400€ to end up with (inflation adjusted) 41,094€. This is under the 6,000€ small gift exemption per year so no need to alternatives for reducing CAT.

How does this compare to other estimates?

I read another article recently which quoted varying savings amounts for 4, 10 and 16 years by investing in varying lower interest savings accounts or in actively managed funds and the monthly amounts were nearly double in some cases as the fund managers would be taking their slice of the pie or the returns in lower risk investment account would be lower.

The 4 year estimate was 100€ more per month than my estimate at 808€/month.

The 10 year estimate was to invest 11,334€ more in total compared to my 26,400€ estimate which assumed a rate of 5.4% return compared to my 7.91% (likely as the active fund would be taking the 2.51% for their cut).

The 16 year estimate was 70€/month MORE than my estimate, again likely as the active fund would be taking that as their cut. 70€ on top of the 100€ means they’d be 41% of your investment for themselves (Or 13,440€ in total). This is why fees are so important to check and understand how they compound! Especially since the article mentioned they would likely just invest it in something like the vanguard all world fund ( VWRL), which you have access to invest in yourself at a fee of 0.25%!

Anyway that’s my initial thoughts on how to save for college but I’m still searching for the custodial account which I can put in my son’s name. In the meantime I will put aside money in my own account and allow it to start growing there.

Please do let me know if you manage to find a custodial account for investment purposes!

When I first came across FIRE, there was a lot of content focused on US and Canadian tax systems which on the surface seem much better in terms of investments and I scoured the internet to find similar ways to invest in Ireland as favourably to no avail. It seems that the Irish government has de-incentivized savings as they’d prefer people to stimulate the economy and spend instead. Every investment option is so punitively taxed that it almost seems worthless. I even considered moving my money back to Canada to invest it there but would have complicated matters from both a tax and foreign exchange perspective.

However… leave it to me to figure out a way to justify anything (just ask my husband), I think I found a way to put my complaints to rest based on 3 things:

1. Income tax rates are not as bad as they seem
2. Earning potential is higher in Ireland
3. Earning some interest is better than earning no interest

1. Income tax comparison

When I took a step back and compared my Canadian income to my Irish income I realised something interesting. The taxes aren’t that different.

Looking at my husband and I’s combined take home in Canada and dividing by the gross income as per our tax slips, the net effective tax rate was 29%. When I compared that to the following 12 months in Ireland, the net effective tax rate was 33%, so not much difference and we were earning more.

Income tax bands

One of the big differences that make the income taxes more comparable is that in Canada in 2019, an individual can only earn the equivalent of 8,238€ before you start paying taxes, but in Ireland you can earn 16,500€ before you start paying the 20% rate (this is the net effect of the 3,300€ and 1,650€ credits).

So while it seems that on the surface you are paying 52% income tax for anything over 35,300€ in actuality it looks something like this:

Looking at sample salaries starting with 20,000, which is just above minimum wage, here is what you actually pay in tax including PRSI and USC payments when you take into account your basic income credits and personal allowances, these figures do not include any other tax credits that may be applicable to you like medical or home carer credits which would further reduce the net tax rate:

Note that even at a salary of 100,000€ you are not at the 52% net tax rate that is so often quoted. In fact an individual would need to be earning over 2 million before their net taxes came to 52%.

2. Earning potential is higher

Now I know this won’t be the case for everyone but when my hubby and I were both working, we were taking home 60% more in Ireland than we were in Canada. This is due to higher paying contract roles and higher salaries in tech/pharmaceutical companies. Even when you take into account the additional 4% in income tax were we paying compared to Canada it still equates to a 56% increase in take home and I wouldn’t have considered our salaries to have been low when we were in Canada.

Just search the news for daily rate contract roles in Ireland and you will see how many more opportunities there are for those types of roles compared to Canada.

3. Earning some interest is better than earning no interest

In this case I’m going to look at the tax rates applied to Irish domiciled ETFs. There may be other options which have lower tax rates but based on my research, I’m happy to continue investing a large part of my portfolio in ETFs.

Even though taxes on dividends and gains for Irish domiciled ETFs is 41%, the fact remains that while the tax bill will be hard to swallow, it’s better than not investing at all.

For example: say you manage to save 100,000€ and that earns 8% over 10 years bringing in 115,000€ in growth. The tax man takes 41% (47,150€) which still leaves you with growth of 67,850€ and a portfolio worth 167,850€. Compare that to not investing and losing 1.9% to inflation each year, your 100,000€ would only be worth 82,545€.

So if you compare paying taxes on investments to not doing anything with your money, your opportunity cost would be 85,305€ or 8,530€/year.

I don’t know about you but I know which option I prefer.

Another silver lining to help swallow that tax pill, is that you are getting services and infrastructure for that money. It’s hard to stomach sometimes when you see it mismanaged but we need taxes to run a country and even if you are no longer earning traditional income, you will still be availing of the services provided by the state and so it’s only fair to contribute a portion of your passive income as well.

I’ll close by saying that, when you get your tax slip at the end of the year and you see how many thousands of euro have been taken in taxes, you don’t really think too much about it. It’s an unavoidable cost and part of working. The same outlook should apply to investing and although you should consult a professional to try and optimise your tax burden, hopefully looking at taxes in a different light will make it easier to start investing if you haven’t already.