Why I’ve stopped buying VWRLs

Schloss

After comment-chatting with Richard from Banks Germany, I’ve decided to stop buying Vanguard’s All-World fund (aka VWRLs) for our index ETF strategy.

The big reason being that VWRLs are domiciled in Ireland, and I live in Germany. As a non-Irish resident, it would cost me too much on taxes compared to other funds domiciled in Germany.

In case you live in Germany and are thinking of buying European Vanguard products (domiciled in Ireland), consider these points first.

Capital gains taxes in Germany and Ireland:

  • In Germany, you can earn up to €801 (or €1602 for a married couple) a year in capital gains tax-free. After that your gains will be taxed at 25%+ .
  • In Ireland, there is a 10% withholding tax for non-Irish residents from first EUR.

Compare different capital gains scenarios in Germany (DE) and Ireland (IE):

If you earn €1000
DE: No tax
IE: €100

If you earn €1602
DE: No tax
IE: €160

If you earn €2000
DE: ~ €100 (i.e 25% of €398 (amount above €1602)
IE : €200

If you earn €2500
DE: ~ €230 (i.e 25% of ~€900)
IE : €250

If you earned €2650
DE : ~€262
IE: €265

Credit: Richard @ Banks Germany. 🙂

Earning more than €2650 as capital gains from VWRLs is when taxes paid to Germany will be higher than taxes paid to Ireland.  In all other cases, you actually pay higher taxes in Ireland as withholding taxes – plus you’re not using your free-tax room of €1602 per married couple.

Lessons learned:

If you and your fund do not share the same domicile, there will be tax issues! Learn what they are beforehand so you can make tax efficient decisions. I was rushing to buy VWRLs because I’ve been putting off investing for several years. Turns out, Irish VWRLs are not the best choice for German residents like me. While my intent is not to search for ‘the best fund’ (index trackers are very similar to each other), I don’t want our taxes to be so complicated either. Especially when there’s plenty of good options in Germany, the richest country in the EU.

Thanks again to Richard for saving us so much time, money, and frustration! :mrgreen:

Earning dividend income + German tax issues

Flag-Pins-Germany-Ireland

We’ve collected our first dividends from our VWRL investments!

I’m very very excited about that!!!!

Surprisingly, so is Mr. German! :mrgreen:

Yay for passive income!

As Richard from Banks Germany pointed out, investing in European Vanguard products (that are domiciled in Ireland) may not be the easiest tax-wise for German residents. Even though Ireland and Germany are in the EU, they have different dividend tax rates, and just because part of the VWRL dividends are withheld in Ireland as tax, doesn’t mean we don’t have to pay the difference in taxes to Germany (Germany has higher taxes than Ireland).

*big sigh*

But thanks Richard for pointing it out! It’s so much better to know about it now, than to figure it out during tax time next year.

German domicile

Of course, none of this would matter if we are expecting to make less than 1608 EUR in dividends over the year, which is the tax-free cut-off for married couples in Germany. However, we’re planning to continue investing 100% of my income, and will hopefully earn more than the cut-off in dividends.

So now I’m on a search for a Germany-domiciled broad based index ETF that gives dividends. Do all ETFs give dividends? I’m not sure. 😕

Chun Yi from Smart Kohle pointed me to the Deka DAX UCITS ETF, which is a very low cost ETF with 0.15% TER. Sounds good, and from the looks of the Deka website, all of their products appear to be domiciled in Germany. I don’t know that for sure, but their website is entirely in German except for the phrase “Made in Germany” – a tell-tale sign. 😛 When Mr. German is less occupied, I’ll ask him to grammar & spell check my draft email to Deka asking them for their domicile; or maybe I should just send my awful version, since obviously someone who doesn’t know German would ask such a question.

The only thing that ‘bothers’ me about the Deka DAX ETF is that it only tracks the DAX, and I want a broad based all world fund like my beloved VWRL. The other Deka products are also region specific. Also, I don’t know if they give dividends and when. Need to poke around their site a bit to find out.

iShares also has some ETFs domiciled in Germany. I’ve found two: iShares Core DAX UCITS ETF (0.16% TER) and iShares STOXX Europe 600 UCITS ETF (0.20% TER). But again they are region-specific and the all world funds are domiciled in Ireland (surprise surprise!).

To not lose steam, I’m planning to buy the Deka DAX UCITS ETF with my next pay cheque. I figure I can’t go too wrong with it.

In conclusion, we gotta move to Ireland! :mrgreen:

UPDATE: JustETF has a great list of all the dividend (and non-dividend) ETFs in Germany here.

UPDATE 2: Excuse my novice-ness to the investing world. I think I understand a bit more the concept of growth stocks vs dividend income. I used to think this did not exist in the index ETF world, but lo and behold, it does! There are dividend and non-dividend yielding ETFs that track an index. Non-dividend yielding stocks are growth stocks and should have higher growth rates compared to the dividend yielding group. I’m in the process of deciding whether to focus on growth or dividend as a strategy, the former being easier with taxes (at least in the short-term).

My investment journey so far

journey

My investment journey extends as far back as age 7, when my savvy Mom transferred my brother and I some of her stock options from work.

She explained to us what the stock market was, how to look up share prices in the paper, and how to buy and sell. Transactions were made through phone and cost $40 each!

Getting paid!

From then on, I received dividend cheques and annual reports in the mail.

It was my first brush with passive income, although I didn’t appreciate it. Not only because the numbers were small, but because I’m an INFJ which means I tend to care very little about money.

I didn’t contribute to my portfolio either, because I didn’t have income. I just held onto my stocks in certificate form. They were kept in a safety deposit box and far removed from me.

Once bitten, and twice shy

Ten years later at age 17, I transferred my holdings to an online broker. That’s when I could watch the activity in my account, though I rarely ever did. I did see when Nortel separated from its parent company, which I owned.

Nortel was a big Canadian tech giant and at $100+ per share, it was the most net worth I had ever had up until then. Yet watching it dwindle to $0 still barely interested me. Why? As I mentioned, the INFJ thing (how long can I use this excuse? about 15 more years!!!!). :/

In hindsight, I think Nortel going bankrupt did affect me, by making me nervous to invest in stocks thereafter.

Failing out of university – sort of

My mid-twenties rolled around and I was still a student because I switched majors after studying the first major for 3 years! While my parents had paid for my first run, they weren’t willing or able to pay for me to basically repeat university all over again. Plus they didn’t agree with my vision and thought I was being irresponsible and impulsive!

*That’s* when I started caring about money.

I had a new goal, and I needed to pay for it myself. Having barely worked at all, I was a bit nervous but also stubbornly determined.

It worked out well! I overcame my job-fear and ended up landing high paying student jobs, which enabled me to put myself through school, including paying rent in one of the most expensive cities in Canada. I was able to graduate with the average Canadian student debt, but in savings. It still surprises me how well it worked out – like, did I really do that? YES I did!

Let’s try out this investing thing

During this time, I also tried again with stock investing. I had taken out a student loan to keep as an emergency fund, assuming I wouldn’t be able to cover tuition from my income in subsequent years. I used a small part of this loan to invest into 2 companies.

One company ended up going bankrupt, and I didn’t even notice until a year later when I re-logged into my account. The other company went up 35% in the first week I bought it, so I cashed out immediately. I ended up netting a small gain, but only because I got lucky. Otherwise I didn’t learn anything valuable, nor did I develop any new investing skills.

Moving abroad

Before I left for Germany at age 28, I sold my stocks from when I was 7, and plunked it into my savings account (it wasn’t a lot). Then I closed my brokerage account, which in hindsight, I should not have done.

Now at age 33, I have finally started paying attention to investing. This time, in a slightly more informed way. i.e. I read Jim Collins’ stock series and feel equipped and ready!

Of course, life has gotten a lot more complicated now that I’m a married expat with stuff going on in 2 high-tax countries – 3 if I include Ireland where VWRLs are domiciled.

For years I’ve felt disappointed in myself for never caring about investments, despite having the chance and the environment to get into it. I mean, I held the same stock for 20 years! Yet the journey was mostly lost on me.

But, let’s move forward and not dwell on the past.

It did take me a while to come into it, but I’m here now, and feeling great.  I’m so glad there’s such thing as an index investing strategy that matches my no low maintenance approach. :mrgreen:

Mistakes I’ve made / things I’ve overlooked when moving to Germany

Canada-Germany

While I was planning my move to Germany 4.5 years ago, I focussed more on the Germany parts rather than tying up lose ends in Canada.

Which has come to bite me in the @ss now.

That’s why when my dear friend recently asked me for advice on moving to Europe, I centred my advice almost entirely on finances. I didn’t mean to, it’s just that I overlooked so much before moving abroad and wanted to shield her from that.

Most of the advice I found online for moving to Germany for North Americans, were to: 1) leave electronics behind since the voltage is different in Europe; 2) bring peanut butter/baking soda/brown sugar/vanilla extract; 3) bring English books, and 4) LEARN GERMAN!

That list is only mildly important (asides from the Deutsch sprechen). This is the advice I wish I *had* followed before moving to Germany:

1. Set up passive income streams! Preferably from low maintenance dividend generating equities. It’s hard to earn a living in Germany as a fresh off the boat expat. Having passive income can’t hurt, and will help soothe the pressure of being unemployed abroad. Keep some cash for emergencies, but otherwise put that money to work!

2. Open RRSP and TFSA accounts with a discount online broker. For tax-sheltered, tax-free passive income, this is so important!!! Trying to organize this from abroad is so much more difficult, and possibly even illegal. So do it while you’re firmly on Canadian soil. Don’t put it off.

3. Then max out your RRSPs and TFSAs! Once you have #2 set up, max out everything. For various reasons, mainly attributed to laziness, I did not do this. I even closed my brokerage account. 😦 Now it gets tricky because I may not be considered a Canadian resident anymore. While I’m allowed to max out for the years I lived in Canada, I don’t have the accounts set up in the first place and it’s illegal to open off-shore accounts. Boo! Don’t be like me. I had to write to the CRA to ask them to help me determine my residency status, and after months, am still waiting for their response. If the CRA determines I am still a resident, I may have to return to Canada to open my accounts – or at least pretend I’m there. If they’ve decided I’m not a Canadian resident, I won’t be able to open any accounts until I move back. 😦

4. Understand the Canada-Germany tax treaty. This should probably be #1, but as I haven’t read it myself, I feel embarrassed advising other people do it first. I merely glanced at this treaty before moving abroad, and carelessly determined that I would only need to pay tax in either country, but not both. While in general this is the jist of the treaty, my interpretation is far too simplistic. The devil’s in the details!  Richard from Banks Germany has brought this treaty to my attention again, and I know it’s time to delve into it.

5. Make a list of tax-efficient or tax-free investments in both Canada and Germany. Another suggestion from Richard, and a very good one! Assume you will retire in either Canada or Germany, and go through the different scenarios from a tax/pension perspective. Mr. German and I will do this research over the next several weeks, and I’ll blog about it (don’t all rush here at once!). We need to inform our investment strategy so it isn’t overly tax-complicated.

While this list is for Canadians moving to Germany, it could be applied broadly to all expats. Moving abroad can be so stressful, and having financial problems/complications doesn’t help. It’s worth it to think about where you want to retire, to read the tax treaties if any, and to set financial structures up before you leave.

Also, use Skype to video chat with your Mom. 🙂

Saying goodbye to academia – and my piano

uni

Though I’ve been working in ‘the industry’ in Germany for the past 3 years, I’m only a year and a half out of grad school.

And despite me being pretty awful at school, I graduated at the top of my class.

This alone has kept me with one baby toe in academia.

I still [get asked to] submit papers to journals and conferences. Which I dread.

Now my most recent paper submission needs revising. While it was a lot of work to even submit, I don’t want to continue. I’m making the difficult decision to cut my time losses now by not re-submitting, and forgoing any academic-y opportunities I may come across in the future.

In general, I like the academic atmosphere but I also know it’s not for me. I’m not going to make any waves, or breakthroughs, or even any minor contributions to academia – so why bother.

Since I want to simplify and focus on what’s important, I have to prioritize.

Recently I even sold my beloved piano. It sat collecting dust, making me feel guilty. I could have made myself play more, but I realized that at this point of my life, I want my hobbies to be physical activity, not more sitting around (blogging is okay because it helps me stay on track!).

The proceeds of my piano will go to my next batch of VWRLs!

And my time spent working on academic projects will in the future, be used for physical activity.

I’m converting what held me back from my goals, to vehicles that will now support my goals. This makes me feel more focussed and healthy.

On track = less fights (hopefully!)

OI000045

Finally, we closed my Deutsche Bank Girokonto, Sparbuch, and MasterCard today! Basically, all my accounts with DB.

Although I had a good run with DB, I didn’t like having to pay for services that I didn’t use.

I much prefer the free online accounts that we’ve opened earlier this year.

We use comdirect for our joint account, Mr. German uses DKB for his personal account, and I use ING-DiBa for mine. We’ve talked about downsizing our personal accounts too, and only using the joint comdirect. But so far we feel comfortable keeping our personal accounts open and doing our own thing in there. One day we’ll consolidate but right now, our system is working well for us.

My ING-DiBa has a balance of 0 EUR! Which I’m very proud of because I sent all my cash to CapTrader to buy VWRLs!!

This is probably a very boring post but just wanted to say that I’m very happy with our progress!

We started off the year stressed out, when I announced I wanted to retire early and completely caught Mr. German off guard. Here Mr. German thought we were doing great and living well already, yet I was suddenly so displeased.

As we live in this fair country of his, I needed his help to get us set up. This caused lots of tension and wasn’t so fun. I cried a lot, Mr. German was at wits end a lot, and in general we argued a lot.

It doesn’t help that we’re both stubborn first born children, who happen to want our own way all the time without compromise. Fun times!!

But we needed to get over that hump and I think we have. There will still be hiccups I’m sure, but things should be smoother sailing now. At least from the administrative point of view.

Vielen Dank für die Hilfe, meiner lieben! ❤

Continuing to invest in VWRL

Ireland *swoon*

Ireland *swoon*

Just bought my 3rd installment of VWRLs – Vanguard FTSE All World ETF.

The prices keep going down!

Which makes me a bit nervous, as I’m still new at this whole investing thing.

But overall I feel very productive, and I’m excited that I’ve finally started investing #for #real.

  • In April I bought 1 big batch of VWRL @ 67.80 EUR
  • In May I used 90% of my April pay to buy VWRL @ 65.04 EUR
  • In June (today) I used 105% of my May pay to buy VWRL @ 64.40 EUR

I’m planning to continue investing 100% of my income now that Mr. German and I have decided to live on one income. Which is pretty much semantics because we’ve been living below one income already, but now are consciously sending my full pay cheque into stocks.

Our VWRL dividends will be disbursed in mid-June. So I’m very excited to see how it feels to finally get some passive income!

Apparently some of the dividend income will be withheld by the Irish authorities since VWRLs are domiciled in Ireland, and there is a dividend tax for non-Irish residents. Maybe one day if we earn enough dividend income from VWRLs, it may make sense to move to Ireland to off-set this tax. 🙂