401(k): is there an equivalent in Belgium?

What's a 401(k)?

A 401(k) is a type of retirement savings plan that is offered by employers to their employees in the United States. The name "401(k)" comes from the section of the Internal Revenue Code that governs these plans. Under a 401(k) plan, employees can contribute a portion of their pre-tax income into a retirement account, which is then invested in a variety of funds. The contributions and earnings in the account grow tax-free until the employee withdraws the money in retirement.

Employers may also offer matching contributions, which means they will contribute a certain percentage of the employee's contribution to the plan, up to a certain limit. This can be a valuable benefit for employees, as it effectively increases their retirement savings without requiring additional contributions from their own pocket. For 2023, the annual contribution limit for a 401(k) is $20,500 for individuals under the age of 50. There are also rules governing when and how the money can be withdrawn.

It seems like the 401(k) is a great system for Americans to retire comfortably. Unfortunately, you're unable to open a 401(k) in Belgium. So is there an equivalent we should go with instead?

The Belgian equivalents to a 401(k)

The Belgian pension system is different and more complicated than in the US. The most direct equivalent are the group insurance plans ("groepsverzekering" in Dutch or "assurance-groupe" in French). We discuss them further in the next section.

However, there are two other ways to save for your retirement:

1. Pension saving plans ("pensioensparen" or "épargne-pension"). This is a way to save for your pension outside of your employer, and it comes with a tax break. There are limitations though, as we'll see later.
2. Investing in accumulating stock ETFs. This has huge benefits in Belgium as you aren't taxed on the capital gains. There are several ways to do this.

Equivalent 1: group insurance plans (groepsverzekering / assurance-groupe)

The employer usually pays a contribution towards your pension and often the employee must also contribute to the plan. The employer then deducts part of the salary and pays it to the pension organisation. This is done through a group insurance, also known as a "groepsverzekering" in Dutch or "assurance-groupe" in French. Essentially, it's quite close to a 401(k) as you're investing via your employer with pre-tax money. Another term is complementary pension, or "aanvullend pensioen" or "pension complémentaire".

The maximum contribution that can be made to a group insurance plan is €3,402 per year or 3% of the employee's pensionable earnings, whichever is higher. These plans have to ensure a "guaranteed return" of 1.75% and if they don't, the employer has to cover the difference. This is good for you as it ensures your money doesn't drop in value. But there are better returns than 1.75% to be had especially over the long-term.

There are downsides compared to a 401(k):

• Limited contributions. It's capped at only €3,402 a year.
• Limited investment options. They are often run by insurance companies and thus have limited options for you to put your money to work.
• Vesting requirements. You may have to work a number of years before you're entitled to the full amount of your employer's contributions to the plan. You may not be able to switch jobs easily as it's not a very flexible plan.
• Withdrawals are taxed as income. Although you may be saving for the long-term and you'll be contributing with pre-tax money, when you start withdrawing your money, it will be taxed as income thus removing many of your original benefits.

If you're not registered to a group insurance, you can get your own plan through a Belgian pension saving plan. In Dutch it's called the "vrij aanvullend pensioen voor werknemers" (VAPW) or in French "pension libre complémentaire pour les travailleurs salariés" (PLCS). We cover options for freelancers in another article.

Equivalent 2: pension saving plans (épargne-pension / pensioensparen)

Pension saving ("épargne-pension" in French or "pensioensparen" in Dutch), is a pension saving scheme offered by the Belgian government. It's a way to put aside extra money for your pension, on top of the state pension that every Belgian worker receives when reaching retirement. It is voluntary, meaning that you’re free to choose whether you want to contribute to a pension saving account. Furthermore, you do it on an individual basis and not through your employer.

Every year, the Belgian state defines a maximum amount that you can contribute towards your pension saving account for that year. The government set this amount to 1,270€ in 2023 and it grows every year with inflation. What's good is that you get up to 30% of the contribution back in tax breaks.

There are downsides compared to a 401(k):

• Limited to small yearly contributions set by the government.
• Limited in what they can invest in. For example, there are two options of investing your pension saving plan: either through an insurance (branch 21) or a fund (branch 23). You can't choose specifically what funds to invest your money and the returns aren't substantial. These funds also charge high fees in the form of entry fees, exit fees and running costs.
• Investments are made post-tax. Even with a tax break, you're not getting the advantages of a 401(k).
• Your money is locked until the age of 60, with a high penalty of 33% of the total value if you withdraw early .

Unfortunately, there's a good chance the pension saving plan won't be sufficient for your retirement, either based on the funds they invest in or the limited contributions.

Use MyPension.be to see how much you'll retire with

Belgium does provide a handy overview of your pension situation. Head on over to MyPension.be to see how much you'll be retiring with, as it will group together all your existing plans to give you a clear overview of where you stand. You'll most likely realise that you need to "close the gap" when it comes to how much you wish to retire with.

Let's explore why investing yourself in ETFs makes the most sense for your future, and how it comes close to 401(k) plan.

Best equivalent: investing in accumulating stock ETFs

Investing in accumulating stock ETFs has huge benefits in Belgium as you aren't taxed on the capital gains. This is real bonus to putting your money to work and will get you closer to a 401(k). Let's unpack how accumulating stock ETFs work.

What's an ETF?

An ETF (or exchange-trade fund) is a collection of tens, hundreds, or sometimes thousands of stocks or bonds. This diversification is one of the most attractive aspects of owning an ETF compared to individual stocks and bonds. By investing in a single ETF, you become invested in thousands of companies in one go. The majority of ETFs are designed to track a market index, which is why they're sometimes called "trackers".

The style of investing based on indexes is called index investing (also called passive investing), as you typically purchase and hold your investments over the long-term. When passively investing, you choose to ignore day-to-day price changes knowing that the market will keep growing long-term. Data shows that this strategy is most likely to give you the highest return.

Why invest in ETFs?

There are several reasons why ETF investing is one of the best ways to grow your wealth.

Low cost

Index investors pay low fees because ETFs are very cheap to run. It's simple to track an index: all that is required is buying the stocks in the index, and update when the index changes. It doesn't require expensive analysts or other specialists.

Diversified

One of the goals of index investing is to diversify as much as possible. Through diversification across many countries and sectors, you eliminate unnecessary risk. And you also benefit from the growth of the best companies in the world, not just the large German, French or American companies you know. By investing in as many companies as possible, you're almost sure of including the winners, namely the minority of stocks that are responsible for the majority of the returns.

It works

One of the most famous indexes is the S&P 500, which contains the 500 largest American companies. Large companies such as Apple, Google or Amazon are represented in the S&P 500. The graph below shows the growth of the S&P 500 index since 1992. A €10,000 investment in 1992 in an ETF that tracks the S&P 500 index would have resulted in over €210,000 by the end of 2022, or an average 10.4% return per year!

Invest with low amounts

An advantage with ETF investing is that you don't need a lot of capital to get started. You can even invest with as little as €50. This makes ETF investing possible for everyone, especially young people who just started their career and want to grow their wealth by putting their savings. In contrast, real estate is much less accessible. Just the down-payment for a property requires several tens of thousands of euros.

We suggest you read through our guide for index investing if you wish to learn more on the topic.

Why accumulating stocks ETFs are tax-advantageous

First, most companies distribute a dividend to their shareholders, usually every quarter. This is a way for them to share the profits of the company. The same happens for an ETF that invests in many stocks. As an investor in the ETF, you earn a portion of the dividends issued by the different companies in the fund. But Belgium taxes dividends at 30%. Accumulating funds are a way around this: they directly reinvest the dividends into the fund. You never actually perceive the dividend, so you don't have to pay the dividend tax. This means that just like with the 401(k), you don't have to pay any taxes as the investments are growing (except the stock transaction tax).

Note that you don't lose the dividend with an accumulating fund. It is simply reinvested in the fund. An accumulating fund will grow faster than a similar fund that distributes all dividends.

Secondly, the investment should be in stocks because they are exempt from a tax on the profits. This is different for bonds, where the Belgian state will take 30% of any profit you make when selling.

You also don't need to declare income from investments to the Belgian taxman as long as they are considered "normal". This is a vague definition and open to the interpretation of the taxman, but roughly it means that any investment that is not speculative is exempt. Generally, investments that you've held for longer periods of time, like you would with a 401(k), are considered "normal" investments. Always discuss with a tax advisor though if you are unsure.

These two last points means that withdrawals are also tax-exempt. This is even more advantageous than a 401(k) where your withdrawals are taxed as income.

I can understand that this may sound confusing to you especially if you're not familiar with the Belgian system for taxing investments. In that case, you can learn more on the topic through our guide on taxes for investing in Belgium.

Comparing a 401(k) and investing in accumulating stock ETFs

Investing in accumulating stock ETFs is not a complete equivalent as the contributions are pre-tax and you'll also have to pay the Belgian transaction tax. The Belgian state levies a tax for every purchase or sale of an ETF and it varies between 0.12% and 1.32% of the transaction amount, depending on the characteristics of the ETF.

However, you'll have to pay income tax with a 401(k) when you're withdrawing your investments. This is not applicable for accumulating stock ETFs in Belgium.

Curvo: the easiest way

There are two common ways in Belgium to do index investing:

1. Through a broker. A broker is a middleman that gives you access to the stock markets and allows you to buy and sell ETFs. It gives you the most flexibility because you're in control of what you buy. But it also means you're fully responsible for the management of your investments.
2. With an app like Curvo. The goal of Curvo is to address the challenges of managing your own investments through a broker. The work is done for you so you don't have to worry.

The difficulties of investing through a broker

Managing your own portfolio of index ETFs through a broker can be challenging. You need to choose the indices, build your portfolio as the right mix of indices that suit you and your goals, and choose the ETFs that track these indices. For each step, there are thousands of options. But that's not all. Understanding the Belgian tax system is also important, as well as learning how to use your broker, or knowing when to rebalance your portfolio.

You may not have the time, motivation, or simply interest in finance to climb over the learning curve. Or you'd rather spend time on things more important to you than the management of your investments.

Curvo, the easier way

We created Curvo to address the challenges of investing through a broker. We started investing through a broker ourselves. Our founder Yoran spent hours researching and figuring out how to build an optimal portfolio to prepare for his financial future. He read books, scoured the web and got lost on Reddit. Finding the right resources was challenging. From this experience, he realised why none of his friends were setting up their own investments through a broker: it's too complicated. At the same time, we've seen that index investing is such a powerful tool to grow our wealth. So it made sense to build something to solve this problem. Enter Curvo.

Diversified portfolio built for you

We understand that it's hard to build the portfolio of index funds that's right for you, so creating an account starts with answering a questionnaire on your investment goals and your appetite for risk. You’ll then be assigned the best portfolio of index funds that matches your goals and risk tolerance. Each portfolio is is managed by NNEK, a Dutch investment firm supervised by the Dutch regulator (AFM). The portfolios are globally diversified and invest in over 7,500 companies.

Tax-optimised

Each portfolio consists only of accumulating index funds of stocks and bonds and is tax-optimised for Belgians. This way, no dividend tax has to be paid. Also, the funds were chosen so that they're exempt from the Belgian transaction tax!

Sustainability at the core

Your investments focus on one guiding principle: don't invest in companies that are considered destructive to the planet. This means that sectors like non-renewable energy, vice products, weapons and controversial companies are excluded from the portfolios.

Built for monthly investing

You can set up a monthly savings plan where your selected amount is automatically debited from your bank account and invested in your portfolio at the start of each month. This way, it's easy to adopt the best saving habits. Also, you are not charged any transaction fees. Lastly, your investments with NNEK, through the Curvo application, support fractional shares meaning all your money is invested. So it's ideal for monthly investing.

No learning curve

Our goal is to solve all the complexities of index investing through a broker. This means you don't have to worry about:

• Understanding the Belgian tax system. The portfolios are already tax-optimised.
• Choosing a broker. There are many options available and it can be hard to pick the one that you feel most comfortable with.
• Rebalancing. It is made sure that your portfolio is kept in balance.
• Calculating and executing your orders every month. It's all set up for you.
• Keeping discipline. We help you stay the course!

Learn more about how Curvo works.

Summary

In conclusion, while the 401(k) retirement savings plan offered by employers in the US is not available in Belgium, there are still options available to help individuals save for retirement. Group insurance plans and pension saving plans are two of the most popular options, but both have their limitations and you won't really come close to a 401(k). Investing in accumulating stock ETFs is another alternative that comes closer to the benefits of a 401(k) and having a nice retirement.

However, it's important to consider individual financial goals and circumstances before choosing a retirement savings plan. The Curvo app is also a useful tool for managing personal finances and retirement planning. Overall, it's crucial to start saving early and make regular contributions to ensure a comfortable retirement.

Questions you may have

Can I transfer my 401(k) to Belgium?

Unfortunately you can't. If you decide to transfer your 401(k) outside of the United States, you'll face a US tax liability and most likely a 10% penalty for an early withdrawal. You also can't really transfer it to an equivalent in Belgium. You'll have to withdraw your funds and then invest it separately in Belgium.

What is the 401(k) equivalent in Europe?

There is currently no equivalent across Europe, although the Pan-European Pension Plan (also known as PEPP) is attempting to address this. It has yet to be rolled out across Europe by the member states but it's a promising evolution.