How to optimise taxes in investment? We analyse differences between IKE and IKZE, payment limits, payment rules and the impact of the Belka taxation on our capital.
When we build our assets in the financial markets, we usually focus all our attention on the choice of appropriate companies, ETF funds or bonds. We are looking for assets with the lowest management costs (TER) and we negociate commission rates with brokers. However, we frequently forget about the largest, silent partner of our investments – the fiscal. The standard capital gains taxation (the alleged Belka tax) is 19% in Poland. It collects a powerful part of our profits, drastically reducing the magic of the compound percentage.
Fortunately, the Polish legal strategy offers us full legal and highly effective tools for taxation optimization: the Individual Pension Account (IKE) and the Individual Pension Insurance Account (IKZE). Although in the name they have the word "elemental", in practice they are simply taxation vehicles, within which we can buy precisely the same shares and ETFs as on a simple brokerage account.
Let us look profoundly at the mechanics of both accounts, refute the most popular myths about “cash freeze” and see how to integrate them into a comprehensive wealth management strategy.
Why isn't a simple brokerage bill enough?
Before we decision to the differences between IKE and IKZE, we request to realize the scale of the problem of the Belka tax.
Imagine that we invest regularly on a standard brokerage account. We buy an ETF fund that accumulates dividends by investing in a global stock marketplace that historically generates an average yearly return of around 8%. After 20 years of regular deposits, our capital will grow significantly. However, if we decide to close the position and make a profit, the strategy will automatically charge us 19% of the surplus achieved. With large capital this means a failure of respective dozen, and sometimes even respective 100 1000 zlotys, which go back to the state budget alternatively of our account.
This is why IKE and IKZE (the alleged 3rd pillar) were created. These are peculiar “packaging” for our investments that defend our capital from this 19% burden.
What is IKE?
IKE is the simplest and most flexible tool for optimization. Its mechanics are based on 1 key principle: a full exemption from capital gains taxation at the end of the investment.
What are IKE's rules?
- Payments: all year, the State sets a maximum limit on payments to IKE (which is 3 times the projected average monthly remuneration in the economy). Payment is made from our already taxed money (after taxation on our salary).
- No Belka tax: All transactions inside IKE (purchase, sale of shares, receiving dividends from Polish companies) are completely exempt from the 19% taxation of Belka. We can rebalancing the portfolio (sell costly assets and buy cheap) without generating any taxation burden.
- Exemption condition: In order to pay all the funds without paying the tax, we gotta meet 2 simple conditions: to scope 60 (or 55 years if we have acquired pension rights previously) and to make payments to IKE in at least 5 any calendar years (or to pay more than half of the value of the payments not later than 5 years before the date of application for payment).
IKE is the perfect environment for aggressive, growthable assets (e.g. shares or ETFs for global indices), where we anticipate the biggest absolute profits we want to avoid 19% of the taxation in the future.
What is IKZE (Individual Pension Insurance Account)?
IKZE is simply a small more complicated, but for many people much more profitable IKE brother. Its mechanics are based on the current income taxation relief (PIT) and flat-rate taxation at the very end.
What are IKZE's rules?
- Payments and taxation relief: The IKZE has a lower deposit limit (1.2 times the average wage forecast, or 1.8 times for non-agricultural persons). The top magic of IKZE is that we number all euro there from our taxation base in our yearly PIT statement. If we are in the second taxation threshold (32%), then from each paid 10,000 PLN, the taxation office returns to us as much as 3 200 PLN!
- Tax at end (10%): Since we receive a taxation refund from the taxation office at the deposit stage, the State must taxation this capital on payment. If we meet the statutory conditions, at the very end we will pay a flat-rate taxation of only 10% of the full amount paid (both on capital and profits earned).
- Payment condition: To benefit from the preferential 10% rate, we must scope 65 years of age and fund the account for at least 5 years.
IKZE is simply a powerful mathematical tool. The key to making full usage of its possible is simply a consistent reinvestment of the return from the taxation office back into our investment portfolio (e.g. on IKE or average brokerage account).
Read More: ]]>IKE or IKZE? How legally not to pay Belka's tax]]>
]]>Portfeo - the best investment portfolio monitoring application]]>
