The difference between US and Belgian Retirement plans
The FIRE movement in the US is a big supporter of all kinds of retirement plans such as 401k, IRA, Roth IRA and many others. Retirement plans have a good reputation mainly because of their tax benefit. Sometimes that’s justified (as in most US schemes) but Belgian schemes are not all in the same boat.
Let me compare popular plans in both countries. I take my personal situation as an example: 52 years old, retirement age is 67, 15 years to save before retirement.
Comparison table
| BE VAPZ | BE IPT (TAK21) | BE Pension Saving | BE index fund | BE IPT (Stock. Fund) | US index fund | US 401k | US IRA | |
|---|---|---|---|---|---|---|---|---|
| 1000 from employer (pre-tax money) | 1000 | 1000 | 1000 | 1000 | 1000 | 1000 | 1000 | 1000 |
| Net income | 500 | 500 | 500 | 500 | 500 | 700 | 700 | 700 |
| After-tax money | 768 | 650 | 500 | |||||
| Saved into plan | 744 | 970 | 631 | 500 | 970 | 700 | 1000 | 1000 |
| 15 years pass by... | 890 | 1160 | 1511 | 1586 | 2325 | 1878 | 3172 | 3172 |
| Final tax | 227 | 203 | 121 | 0 | 407 | 170 | 170 | |
| Final tax (on dividends) | 57 | 113 | ||||||
| Net result | 663 | 957 | 1390 | 1529 | 1918 | 1878 | 2889 | 3002 |
| ROI (on employer pre-tax) | 66.3% | 95.7% | 139.0% | 152.9% | 191.8% | 187.8% | 288.9% | 300.2% |
| CAGR (on employer pre-tax) | -2.7% | -0.3% | 2.2% | 2.9% | 4.4% | 4.3% | 7.3% | 7.6% |
| CAGR on Net income | 1.9% | 4.4% | 7.1% | 7.7% | 9.4% | 6.8% | 9.9% | 10.2% |
| CAGR on Net income inflation adjusted | -0.9% | 1.6% | 4.3% | 4.9% | 6.6% | 4.0% | 7.1% | 7.4% |
Plans
These are the plans I compare. They are actually sorted from worst to best for each country:
For Belgium:
- BE VAPZ. See post here
- BE IPT (TAK 21 = “Safe” interest savings account ). See post here
- BE Pension Saving: individual pension savings plan: post here
- BE index fund: outside of any tax beneficial plan, investing your after-tax money in an index fund
- BE IPT (Stock. Fund) (TAK 23 – agressive stock fund). See post here
And for the US:
- US index fund: outside of any tax beneficial plan, investing your after-tax money in an index fund
- US 401k: retirement savings plan, where you and your employer can contribute (up to 19 k / year (2019))
- US IRA: generic retirement savings account, comparable to BE Pension Saving, up to 6 k / year
Let me walk you through the rows of this table.
1000 from employer (pre-tax money)
Some of these plans deal with money contributed by your employer. The employer can choose to pay a part of your salary as salary or bonus or as a contribution to a savings plan. In order to make all plans equal, I start from a bag of money from your employer. At the bottom line, I can compare the end return of each plan compared to the employer’s initial input: ROI (on employer pre-tax) and CAGR (on employer pre-tax). In each plan, your employer has 1000 (EUR or USD) available for you.
Net income
A very rough approximation of what is left for you after income taxes. In Belgium there is actually much less left because of a huge social security tax. Income taxes in Belgium will be 45 or 50 %, plus other taxes; and probably 30 % in the US.
After-tax money
Some plans allow to get a tax refund; examples are Belgium VAPZ and Belgium Pension Saving. You actually receive the tax refund 1,5 years later but in the scope of a 15 years retirment savings plan I count that as ‘immediatly’ and give you the tax refund at the start of the plan.
Saved into plan
This is the money actually going into the piggy bank account. There are bank commissions going to the bank (typically 3 %) before the money reached your account.
15 years pass by…
This is what is in your account after 15 years. I add your initial contribtion and all increases of 15 years together.
Final Tax & Final tax (on dividends)
This is what is going to taxes at the end, when you take the money out your account. In some cases, a seperate taxation is raised on dividends. Obviously, this is all generalised and simplified, each case is different, depending on the specific content of your account, your specific personal situation, the return of your funds etc.
Net result
Simple: your savings account after 15 years minus all taxes. What you receive in your hand when you retire.
ROI (on employer pre-tax)
Return On Investment = (Net Result / 1000 of your employer)
CAGR (on employer pre-tax)
Growth Rate per year: this is the ROI, but per year (during the 15 years). Compounding Annual Growth Rate.
CAGR (on employer pre-tax)
Growth Rate per year, but compared to the net amount. This is more meaningful for money you already have post-tax, for example your net savings invested in an (taxable) index fund.
CAGR on Net Income inflation adjusted
This is the above number, but after inflation correction. This is the real return you have, the real increase in purchase power. It’s expecially meaningful if the number is below zero: this means that you actually LOSE money using this savings plan.
Conclusions
| BE VAPZ | A horrible return! Despite the tax advantage, you don’t even get your money back and actually lose money. |
| BE IPT (TAK21) | Also pretty lousy results. These ‘tax beneficial pension savings plans’ show that the tax treatment and interests received on these plans is actually in your disadvantage; Do your homework, don’t believe what banks tell you! |
| BE Pension Saving | A minimal protection against inflation, but hardly a savings plan. You basically keep your purchase power and receive what you have set aside. |
| BE index fund | Good return on your after-tax investments. Low return on before-tax money because income taxes are so horribly high. Still the second best in Belgium, which tells a lot about the other ‘advantageous’ plans |
| BE IPT (stock fund) | Best return on employer money, mainly because (1) you van save in a TAK23 stock market fund and (2) because it is pre-tax, not taxed before it goes into the piggy bank and moderately taxed (10 %) when it comes out. |
| US index fund | Good returns, both on after-tax money (because cap gain and dividend taxes are a moderate 15 % in the US) and pre-tax money (because income tax is a moderate 30 % in the US) |
| US 401k | Excellent returns because of stock marrket returns and tax advantages |
| US IRA | Excellent returns because of stock marrket returns and tax advantages |
To make it visually clear: three plans illustrated
The worst: BE – VAPZ
You start by paying your 50 % income tax. Then you get a tax refund of 50 % on the remainings, which leaves you with a bit less than 75 % of the original gross income. You lost 25 % before you even got started. Then you lose purchase power each of the consecutive 15 years. As if that wasn’t enough, you lose to additional taxes at the end. It’s a series of red bars from start till end.
A fair investment in BE: after-tax index fund
You lose a horrible income tax at the start, but from then on you gain average 5 % per year after inflation. Dividends are taxed. No taxes at the end.
The best: US – IRA
No taxes at the start – taxes are deferred till the end. No taxes during 15 years. High returns in a good index fund. Taxes at the end, but usually at a much lower tax bracket.
General conclusion
We shouldn’t copy the advice of the US – FIRE community that all pension plans are very useful and must first be ‘filled’ before anything else. It’s valid for the US, not for Belgium. Belgium is a champion in taxes and is fooling us with some of their pension plans. Do your homework and check what makes most sense.
at these tax rates, I can’t help but ask: how come there is still anybody left in BE?
Actually its because we get almost every basic need for free. College is 110 euros ($128,94) per year for me (our education is known to be one of the best in the EU so I think thats a fair price compared to the average of about $40.000 in the US;) and I get 2000 euros ($2344,30) a year to pay for my books, student room,… Healthcare is practically free, I pay 6 euros for a doctors appointment. Tbh Belgium is just really nice to live in financially so we don’t mind paying a lot of taxes at all! In the US 2% of the population lives on less than $5,5 per day. In Belgium this is 0.02% of people. In general we are a pretty rich country with very little poor people and this is weirdly enough, trough our taxes that keep most public needs almost free or at a very low price!
You are right about a lot of things. But that does not mean that the system is OK. E.g. compare to many other European countries, where healthcare, studies etc are also cheap or free. In Spain and Denmark doctors visits are free, just to name two I have experience with. But the taxes in Belgium are amongst the highest, according to OESO we are number one in income taxation and number two in capital taxation (taxes on inheritance, dividends, real estate, etc). You would expect nothing but the very best in return. Take a bike and try out the cycling infrastructure to find out exactly the opposite. Most of all, taxation is a incomprehensible mess. It is nearly impossible to understand which taxes, deductions, and expenses are going to be withheld from your retirement savings and investments. That’s my main argument. Anyway, thanks a lot to mention the positive side!
It’s a very legit question. Apparently, according to the OESO we are the second – most taxed country of the world when it comes to income taxes. I think most Belgians still consider that as acceptable because of the ‘boiling frog’ syndrome. See here: https://en.wikipedia.org/wiki/Boiling_frog. After 50 years of gradually increasing taxes, you find it ‘acceptable’ if there are another 5 taxes added or increased somewhere. It doesn’t go from zero to 75 % in one year, it creeps up all the time.
How bad! In a few months I’ll start as a paramedic in Belgium. And we recieve from the RIZIV/INAMI an amount as a ‘thank you’ to comply with the tarification they agreed upon. But that amount will be transferred directly to an RIZIV-SVAPZ, but it’s roughly the same as the VAPZ you mentionned performing poorly. Too bad for us!
The most irritating thing is that precisely the VAPZ is promoted as the most beneficial of all, because “You get this huge tax benefit, you can subtract it from your personal taxes!!!” After that there is radio silence. Nobody cares to explain all the disadvantages: only save in a TAK21 – no risk – guaranteed loss formula, 5,5 % tax at the end, and 10 years (!!!) of additional income taxes after retirement.
An interesting alternative to consider (for independents that incorporated) is investing VVPR-bis dividends into an index fund. In this scenario the high income tax downside of the ‘BE index fund’ scenario is tempered a bit: 32% VVPR-bis dividend tax rate (20% cooperate tax rate & 15% withholding tax) vs. 50% income tax rate. This scenario would be closer to the US 401k scenario.
That is a correct alternative, but there are a number of conditions attached and therefore it is only possible in a very limited number of cases. Conditions are that you can only apply it in a small enterprise, you have to add to the capital, then wait a couple of years, then the VVPR-bis is applicable on your added capital. Thanks for highlighting this!
Thank you for your clarification. Indeed these conditions must all be met, making it somewhat of a corner case. Though ‘high revenue’ independents will typically them in such a corner case, as from a certain revenue one is best to incooperate in BE.
As an addendum, from my understanding the 3-4 years waiting period only applies ‘at the start’. After that initial period has passed, the incorporation can provide vvpr-bis dividends on the profits of the last fiscal year.
Nice post.
I think that due to capital gains for stocks not being taxed in Belgium, as well as income from investments not being taxed (as long as the investments aren’t of a speculative nature), an equivalent for the Roth IRA in the US is simply accumulating stock ETFs:
– accumulating so no dividend tax –> investments grow tax-free
– no capital gains tax and no taxation as income –> investments are withdrawn tax-free
The question is for how long capital gains for stocks aren’t going to be taxed. Belgium is one of the few countries in Europe to not have this tax!
We also did some research on the topic of pension planning for Belgian freelancers, and wrote down our findings in “How Belgian freelancers can retire on their own terms”: https://curvo.eu/article/how-belgian-freelancers-can-retire-on-their-own-terms. Maybe a nice addition to this post.
Hi Yoran, the curvo post is a good summary. The addition of the four pillars of retirement income is demonstrated very nicely there. However, in the high-inflation environment of today, all contributions with fixed income (VAPZ into TAK21 etc) are quickly losing there value. The 37-year old example won’t have much fun with his savings when retiring at 67, if these are locked up in some pension savings scheme at fixed returns. And so your reasoning above is even more valid. BUT… the best saving in that tax-free ETF schema, is still OUTSIDE of the imposed retirement plans. You pay taxes once when going from gross to net income, but from then on the savings are growing fastest and taxfree. All Belgian pension savings schema’s give some tax advantage at the start, then lock the money, then let you pay lots of expenses and taxes afterwards.
> You pay taxes once when going from gross to net income, but from then on the savings are growing fastest and taxfree. All Belgian pension savings schema’s give some tax advantage at the start, then lock the money, then let you pay lots of expenses and taxes afterwards.
That’s a nice way of summarising it.
I think there are some situations where a combination of VAPZ / IPT / pensioensparen can be advantageous. But:
1. There are very few of them: certain age category, certain income, etc.
2. Because the rules on those pension schemes are so freaking complex, it’s almost impossible to analyse well without making too many assumption. And every assumption you add makes the analysis less predictive.
Belgium is horrible fiscally, except for investing in the financial markets (and stocks specifically). Let’s hope they don’t take that part away from us as well 🤞