Investing for your child(ren) - The U18 Juniordepot

Set up a custody account for your child and enjoy

tax advantages

How to invest money wisely for children

Imagine your child celebrates his or her 18th birthday, and you ceremoniously present him or her with nearly 80,000 euros. How do you do that? By investing the child benefit from the child's birth and letting it work for 18 years. die Macht des Zinseszinses for 18 years. Few parents are aware that children enjoy tremendous tax benefits before they reach the age of majority, benefits that they will probably never get again. Smart parents therefore take care of the opportunities for building up assets for their offspring early on - whether as a safeguard for emergencies or as a jump-start to a life without financial worries.

The whole topic of "investing for children" is often tackled far too late or even completely neglected. Therefore, here is a detailed compilation of what to look out for, how to invest a children's portfolio and what to consider when it comes to taxes in order to get the most out of it.

How to invest money easily for your offspring

Many parents are faced with the question of how best to invest money for their child. Yet the answer is actually quite simple. Not only should the parents' money be invested in Aktien but also that of the children. So please don't be tempted by your local bank or other parties with limited options and conflicts of interest to invest in a savings account or even an insurance product (keyword: "child protection bond" or "education insurance")!

For children, the high-yield investment in shares makes particular sense, as children have a very long investment period and thus benefit strongly from the compound interest effect can profit. In addition, children benefit from enormous tax advantagesthat apply only to them.

These advantages can be used if a securities account is set up in the child's name. Parents, as legal representatives of the child, can open a securities account for their offspring. To do so, the parents must sign the deposit application form and attach a copy of the child's birth certificate. In addition, they must, in addition to their own Steueridentifikationsnummern indicate those of the child. Every child is "welcomed" by the state as a future taxpayer as soon as he or she is born, and receives a lifelong tax identification number for this purpose (in accordance with Section 139b of the German Tax Code).

Saving early pays off

With an ETF savings plan, you can build up a small fortune until your child's education or studies. Until the age of 18, the parents must hold the deposit in trust, which means that they may only use the money for the benefit of the child and not misuse it for their own needs and purposes. Early custodial withdrawals for the benefit of the parents are expressly prohibited. If the tax office should discover misappropriation of the assets by the parents during the audit, there is a risk of substantial back tax payments.

The parental power of disposal over the child's assets ends when the child reaches the age of majority.

Why does it make sense to set up a custody account in the child's name?

A child's custody account has tax advantages above all. If the parents have already paid their Sparer-Pauschbetrag (801 euros for singles or 1,602 euros for married couples), the child's saver's allowance can be used.

Since children generally do not earn their own income, investment income (interest income and Dividenden) is not only tax-free up to the saver's lump sum, but far beyond.

What tax advantages does a child enjoy and in what amount?

In addition to the savers' lump sum (801 euros) and the Grundfreibetrag (9,984 euros in 2022), the child is even entitled to the Sonderausgaben-Pauschbetrag in the amount of 36 euros. Once you have deposited the exemption order with the (direct) bank in the full amount (801 euros), then this will be taken into account by the (direct) bank in the tax calculation in favor of the child. This also saves having to reclaim the capital gains tax for the custody account via the child's income tax return, because it is no longer automatically paid to the tax authorities.

In order for the capital income to remain tax-free even above 801 euros, one must apply for a so-called Nichtveranlagungsbescheinigung certificate of non-assessment from the relevant tax office and then submit it to the (direct) bank. The non-assessment certificate is valid for 3 years and must only be obtained again after this period.

For the children's custody account, this results in total tax allowances of a whopping 10,821 euros (801 euros + 9,984 euros + 36 euros) per year. In order for these enormous tax allowances to be utilized, the child's custody account would have to reach a size of more than 700,000 euros - assuming a distribution rate of 2% per year and taking into account the partial exemption of 30% for equity funds. In the event that the investment income of one's own child should nevertheless exceed the total tax allowance of 10,005 euros per year, one must file a simple tax return for the child.

Do not be deterred by the non-assessment certificate and possible tax return! As a rule, for normal savings amounts, an exemption order for the child's custody account deposited once with the (direct) bank is completely sufficient.

Caution with statutory health insurance

If a child is co-insured free of charge in the statutory health insurance through a parent (keyword: Familienversicherung), then his or her earnings may not exceed 445 euros per month (as of 2019). The earnings also include the child's investment income, such as interest and dividends (profit distributions). The maximum limit is currently 6,141 euros per year (12 months x 445 euros + 801 euros saver's allowance). Otherwise, there are additional costs for health insurance. However, this only applies to the statutory health insurance, not to a possible private health insurance for the child.

Therefore, one should not only consider possible profit distributions that may seem very high at first, but also possible sales of ETF shares that may cause one to exceed the maximum limit.

In any case, when selling shares, one should make sure that the profit does not exceed the limit of 6,141 euros per year. In such a situation, partial sales over several years, each below the annual limit, are recommended in order to avoid falling into the health insurance trap.

What's in it at the end? This is how much final capital you can achieve for your child by the time he or she reaches the age of majority

If you want to open a custody account for the new addition to your family and invest it until the child reaches the age of majority, you have an investment period of 18 years. For such a long period of time, investing in equities is an obvious choice. The investment horizon is long enough, and the normal price fluctuations on the stock market can be weathered over such a period. After all, in the past there was no 15-year period (or longer) in which a marktbreiter Aktienindex loss would have been made. In times of low and negative interest rates, there is no way around investing in securities if you want to earn a noteworthy return. Over many years, the average return on a global investment is Aktien-ETF is about 6 % per year!

If you should decide, for example, to invest a monatlichen Sparplan in the amount of the child allowance (204 euros per month since July 2019) for your child, then by the age of 18, with an average return of 6% per year, a final capital of 78,115.89 euros will accumulate after all - and that without initial capital!

Source: https://www.zinsen-berechnen.de/sparrechner.php

Note: The low cost of the savings plan was not taken into account in the calculation.

Since the child does not have to pay taxes in this amount due to the exemption order and the non-assessment certificate, the capital income is gross as well as net!

The clearing account of the child's custody account can also be used (alternatively or additionally) as a capital collection point for monetary gifts (birthday, christening), e.g. from relatives to the child. On such occasions and similar, the donors can be asked to transfer the money to the clearing account of the children's depository. From there, it can be used directly for investing in ETFs, for example.

If the child earns his or her own money at some point and wants to use the securities account for retirement planning, then the money can be invested for as long as 67 years or longer until retirement. During this enormous investment period, the compound interest effect can fully unfold its impressive effect.

How should you specifically invest the money for your own child?

If you decide to invest your child's ETF-Portfolio investment, then you should keep in mind that there can also be sudden price losses on the stock market or book losses. It is important as a parent to keep a cool head in this situation and not realize the pure book losses by selling! It is better to ride out the bottom of the stock market and wait for better times. In its centuries-old history, the stock market has always recovered from crashes and reached new highs.

You can also protect yourself and your child from the effects of a stock market crash by putting only part of your money into your securities portfolio and the other part into overnight money, for example in the ratio: 80% ETFs and 20% overnight money.

Another option is to start with a share quota of 100 % and only later to continuously shift into safe overnight money. The closer you get to the age of 18, the more you should have shifted. This is called "lifecycling". If you do not want to withdraw anything at all on your 18th birthday, for example because the portfolio is intended to serve as a retirement provision, you can also leave the share quota at 100% and ignore the price losses in the meantime.

Tax aspects of the use of income from ETFs

In a children's custody account, distributing ETFs have the advantage that their regular investment income is already taxed without the need to pay final withholding tax here. This is due to the already mentioned high tax allowances for children. The distributed investment income can - depending on the agreement with the (direct) bank - also be automatically reinvested again immediately. Alternatively, the distributions are used for the next scheduled savings installment.

Conversely, the accumulating ETF has the disadvantage that the actual taxation (apart from the small upfront lump sum) only takes place when the child's enormous tax advantages no longer apply - for example, after the child reaches the age of majority or with the child's first income in education. Therefore, we neglect to consider accumulating ETFs in the context of a securities account for children, who fortunately can benefit from the aforementioned advantageous taxation. Even if the tax-free amounts should be exceeded one day, a distributing ETF does not bring any significant disadvantage.

The distributions are automatically reinvested at finvesto (see below for a presentation of the provider), which is very convenient for the investor and is recommended. An accumulating ETF does nothing else - apart from the tax differences. If desired, one can object to the automatic reinvestment of the distributed income by sending a simple "two-liner" by mail or scanned in by e-mail.

Which ETF should you invest in for your child?

I advise the broadest possible Diversifikation, which is easiest to achieve with an established global equity ETF. This makes the investment high-yield and relatively safe at the same time. ETFs In principle, equity ETFs offer the opportunity to participate in the development of the stock markets at very low cost. However, especially with an investment horizon of 18 years (or more), one should auf die Kosten sehen and choose a ETF select a fund with the lowest possible total expense ratio. This is usually shown by the ETF provider and can thus be compared. An equally interesting and important indicator in this context is the tracking difference. This shows the difference (difference) in the performance of the ETF compared to the underlying index.

The current tracking differences can be viewed at www.trackingdifferences.com view.

For such an ETF savings plan, the following ETFs are suitable, which fulfill all essential criteria:

Vanguard FTSE All-World UCITS ETF (Distributing):

WKN: A1JX52 / ISIN: IE00B3RBWM25

Total Expense Ratio (TER): 0.22

ComStage MSCI World TRN UCITS ETF (Distributing):

WKN: ETF110 / ISIN: LU0392494562

Total expense ratio TER: 0.20

iShares MSCI World UCITS ETF USD (Dist) (Distributing):

WKN: A0HGV0 / ISIN: IE00B0M62Q58

Total Expense Ratio (TER): 0.50%

Note: All three world ETFs mentioned above can be purchased at finvesto via direct investment and/or savings plan.

Conclusion:

With a children's custody account, parents have the opportunity to start building wealth for their offspring at a very early stage and to use one of the most important elements of wealth building for themselves: time!

Your child will thank you for it later on and will be happy about your foresighted actions as a parent. By investing in shares for the long term, you ignite the turbo for a financially carefree life for your child.

A children's custody account is therefore a fine thing: take advantage of the tax benefits and the long investment period of the child to ultimately be able to fully benefit from the compound interest effect as a family. Wealth accumulation (for children) can be this simple!