LTF and RMF

Who wants some free money?

Are you just saying you want some free money, or do you really want some free money?

I’m sure you’re asking – what’s the catch?

The catch is patience, lots of patience, and the understanding it may not be a smooth ride.

Like I mentioned before, tax-deductible investments in Thailand may be some of the best investments in the world that are available to the average person.

LTF stands for Long-Term Equity Mutual Fund and RMF stands for Retirement Mutual Fund (details below).

Let’s take a look at how they work to save and make you money at the same time:

• Save money on taxes when you invest
• Stay invested long-term
• Pay no taxes when you retire and sell your investments

The amount you invest (subject to certain restrictions that are explained below) is deducted from your taxable income. Let’s say your taxable income before investments is 1,500,000B (48,000 USD). Anything between one million and two million baht is taxed at 25%. If you invest 100,000B (3,200 USD) in an LTF, your taxable income is reduced by the same amount which will save you 25,000B (800 USD) in taxes (100,000B x 25% = 25,000B).

So, you have only invested 75,000B (2,400 USD) of your own money (100,000B initial investment – 25,000B tax savings), but your total investment is already worth 100,000B from day one. That’s a 33% gain in the first year just from tax savings!

With the way the math works, the market could drop by 25% and you still haven’t lost anything (100,000B – 25,000B = 75,000B).

The real profits come from leaving your money invested long-term to take advantage of compounding returns. You have to keep your LTF investment for about 6 years, but the longer your money is invested, the more likely you are to make a profit. If you would have invested at the beginning of 2016, by 2018 it would have been worth 138,000B (4,400 USD). That’s an 84% gain in just two years from your original 75,000B (2,400 USD)! (Please note that past returns cannot predict future returns).

That my friend, is how the rich get richer!

But, we’re not done making money yet.

Leave that money invested long-term, like 10, 15, 20, or even 30 years to take advantage of the long-term gains in the market. If you have lost money after holding your investment for 30 years, which in our example means it is down more than 25%, that investment is going to be the least of your worries.

To take full advantage of all the free money the Thai government is giving you, invest the maximum amount allowable in LTF’s and RMF’s (30% of your salary) every year you are working in Thailand and leave it invested long-term. That way, you can take advantage of the instant 33% profit on your initial investment every year, as well as benefit from the long-term gains in the market. You will get tax forms by email or by regular mail from the asset management company at the beginning of the next year and you submit those forms when you file your taxes to confirm your purchases.

And guess what, we’re still not done!

Other countries have similar tax-deductible investments, but where Thailand really shines is when you retire and can withdraw your money tax-free. While other countries allow your tax-deductible investments to grow tax-free as well, you will have to pay tax on the gains after you retire and withdraw your money. Thailand does not tax capital gains on the stock market. So that means after your investments have grown for decades, any gains you make are tax-free.

And that is the closest to free money any of us will ever see in our lives!

Please note that stock markets do not go up in a straight line and past performance cannot be used to predict future returns.  There will be drops and it’s possible for the market to go down 30% to 50% or more in a single year, but the longer you are invested the more likely it is you will have a positive return. One way to smooth out that roller-coaster ride is to use dollar-cost-averaging, which means investing every month. If you are planning to invest 100,000B during the year, divide it by 12 and invest about 8,000B every month.  That way you can take advantage of lower prices and buy when the market is on sale.

Don’t listen to doomsday predictions about the Thai stock market that a lot of people enjoy talking about with anyone who will listen. I remember people saying they didn’t want to invest in LTF’s and RMF’s ten years ago because they were worried what would happen to Thailand when a certain major event occurred. When that event finally happened in October of 2016, absolutely nothing happened to the Thai market and all those naysayers missed out on huge tax savings as well as market gains.

There was a South East Asian financial crisis in the late 1990’s, but if you were investing regularly using dollar-cost-averaging over many years, you would have only put in a small amount of your total wealth at the peak of the bubble and you would most likely be fine long-term (you can diversify with international investments to decrease your exposure to any single market).

High inflation and missing out on gains are much greater risks than market crashes when you are in the wealth accumulation phase of your life. You need to invest long-term to protect yourself against inflation.

Let’s take a look at LTF’s and RMF’s in more detail.

Long-Term Equity Mutual Fund (LTF)

LTF’s invest primarily in stocks listed on the Stock Exchange of Thailand.

• Invest up to 15% of your gross income up to 500,000B (16,000 USD) per year
• Available through any asset management company
• Investments must be held for 7 years. Partial years count as full years (Dec. 31st, 2018 is the same as Jan. 1, 2018), and as a result, investments need to be held for about 6 calendar years (Ex. Dec. 31, 2018, to Jan. 1, 2024)
• Investments don’t need to be made every year
• If the conditions are not followed, the tax savings need to be paid back along with penalties

Retirement Mutual Funds (RMF)

RMF’s can invest in equities, bonds, commodities, and foreign stocks, but must be held for at least 5 years and until you are 55 years old.

• Invest up to 15% of your gross income up to 500,000B (16,000 USD) per year
• Available through any asset management company
• Investments must be made every year of at least 3% of your taxable income or 5,000B (160 USD), whichever is lower.  Some flexibility is allowed if you don’t have any taxable income
• Investments must be held for at least 5 years and cannot be redeemed until you are 55 years old
• If the conditions are not followed, the tax savings need to be paid back along with penalties

I like to think of LTF’s and RMF’s giving me almost an extra month’s salary per year. It’s almost like working 12 months but getting an extra month’s salary for free.

Life Insurance Deduction

It’s worth noting that many of the tax-deductible life insurance products sold in Thailand are a combination of life insurance and an investment wrapped into a single product. Typically, these are endowment policies or whole life insurance. These types of products are highly regulated in Western countries because they are risky and confusing. For most people, it’s best to keep life insurance and investments separate. It’s difficult to calculate the total return of those policies because there are inflows and outflows at the same time, but by using the internal rate of return function in Excel I came up with an average return about 2-3% per year, even after the tax savings were included. Salespeople receive large commissions on endowments, and it’s not uncommon to have these policies pushed on you when you are at the bank. If you need life insurance, by all means, buy a term policy, but keep your investments separate. 

Click here to find out how to invest in LTF’s and RMF’s.

Click here for our Thailand tax calculator.

 

Please read the disclaimer. Investments in LTF’s and RMF’s are not guaranteed and you may lose some or all of your money. Americans may need to pay tax on any gains to the US government. Obtain professional advice before making any investment or financial decisions.

References

Long-Term Mutual Fund Tax Benefit

Retirement Mutual Fund Tax Benefit