Set up a child custody account and
tax advantages
How to invest money wisely for children
Imagine your child celebrates his or her 18th birthday and you ceremoniously hand over almost 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. Very few parents realize that children enjoy enormous tax advantages before they come of age, which they will probably never get again. Smart parents therefore take care of the opportunities to build up assets for their offspring at an early stage - be it as a hedge 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. This is why we have put together a detailed summary of what you should look out for, how to set up a children's portfolio and what you need to bear in mind when it comes to taxes in order to get the most out of it.
How to easily invest money for your children
Many parents are faced with the question of how best to invest money for their child. The answer is actually quite simple. Not only the parents' money should be invested in Aktien but also that of the children. So please don't let your bank or other parties with limited options and conflicts of interest tempt you into a savings account or even an insurance product (keyword: "child protection letter" or "education insurance")!
High-yield investments in shares make particular sense for children, as children have a very long investment period and therefore benefit greatly from the compound interest effect can benefit from the compound interest effect. Children also benefit from enormous tax advantagesthat only apply to them.
These advantages can be used if a custody account is set up in the child's name. As the child's legal representatives, parents can open a custody account for their offspring. To do so, the parents must sign the custody account application and enclose a copy of the child's birth certificate. In addition to their own Steueridentifikationsnummern those of the child. Every child is "welcomed" by the state as a future taxpayer at birth and receives a lifelong tax identification number (in accordance with Section 139b of the German Fiscal Code).
Saving early pays off
With an ETF savings plan, you can build up a small fortune until your child's education or studies. Up to the age of 18, parents must manage the custody account in trust, i.e. they may only use the money for the benefit of the child and not misuse it for their own needs and purposes. Early withdrawals in favor of the parents are expressly prohibited. If the tax office discovers misappropriation of the assets by the parents during an audit, there is a risk of substantial back tax payments.
When the child reaches the age of majority, the parental power of disposal over the child's assets ends.
Why does it make sense to set up a custody account in the child's name?
A child custody account has tax advantages above all. If the parents already have their Sparer-Pauschbetrag (801 euros for singles or 1,602 euros for married couples), the child's saver's allowance can be used.
As children generally do not earn any income of their own, the investment income (interest income and Dividenden) is not only tax-free up to the saver's allowance, but far beyond.
What tax advantages does a child enjoy and to what extent?
In addition to the saver's 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 in full (EUR 801) with the (direct) bank, this will be taken into account by the (direct) bank in the tax calculation in favor of the child. This also saves you having to reclaim the capital gains tax for the custody account via the child's income tax return, as this is no longer automatically paid to the tax authorities.
To ensure that the investment income above 801 euros remains tax-free, you must apply for a so-called Nichtveranlagungsbescheinigung 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.
This results in a total tax-free allowance of a whopping EUR 10,821 (EUR 801 + EUR 9,984 + EUR 36) per year for the child custody account. In order for these enormous tax-free amounts to be utilized, the child's custody account would have to reach a size of over 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 your child's investment income nevertheless exceeds the total tax-free allowance of EUR 10,005 per year, you must submit a simple tax return for the child.
Don't be put off by the non-assessment certificate and possible tax return! As a rule, an exemption order deposited once with the (direct) bank for the child's custody account is completely sufficient for normal savings amounts.
Caution with statutory health insurance
If a child is insured free of charge in the statutory health insurance scheme via a parent (keyword: Familienversicherung), their income must not exceed €445 per month (as of 2019). 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 statutory health insurance, not to any private health insurance the child may have.
You should therefore not only consider any profit distributions that may initially seem very high, but also possible sales of ETF shares, which could cause you to exceed the maximum limit.
In any case, when selling units, you should make sure that the profit does not exceed the limit of EUR 6,141 per year. In such a situation, partial sales over several years, each of which is below the annual limit, are recommended in order to avoid falling into the health insurance trap.
What's in it in the end? This is how much final capital you can achieve for your child by the time they come of age
If you want to open a custody account for the new addition to the family and invest until the child comes of age, you have an investment period of 18 years. For such a long period, investing in shares is the ideal solution. The investment horizon is long enough, and the normal price fluctuations on the stock market can be weathered over such a period. After all, there has never been a 15-year period (or longer) in the past in which a loss was made. marktbreiter Aktienindex would have made a loss. In times of low and negative interest rates, there is no way around investing in securities if you want to generate a significant return. Over the long term, the average return on a global Aktien-ETF around 6 % per year!
If, for example, you decide to invest monatlichen Sparplan in the amount of child benefit (204 euros per month since July 2019) for your child, then by the age of 18, with an average return of 6% per year, you will have accumulated a final capital of 78,115.89 euros - without any initial capital!
Source: https://www.zinsen-berechnen.de/sparrechner.php
Note: The low costs for the savings plan were not taken into account in the calculation.
As the child does not have to pay tax on this amount due to the exemption order and the non-assessment certificate, the investment income is gross and net!
The settlement account of the child custody account can also (alternatively or additionally) be used as a capital collection point for gifts of money (birthday, christening), e.g. from relatives to the child. On such occasions and similar occasions, you can ask the givers to transfer the money to the settlement account of the child custody account. From there, it can be used directly to invest in ETFs, for example.
If the child earns their own money at some point and wants to use the custody account for retirement provision, the money can be invested until retirement, even 67 years or longer. During this enormous investment period, the compound interest effect can fully unfold its impressive effect.
How should you actually invest the money for your own child?
If you decide to invest in a pure ETF-Portfolio you should bear in mind that there may also be sudden price losses on the stock market or book losses. It is important for parents to keep a cool head in this situation and not realize pure book losses by selling! It is better to ride out the trough on the stock market and wait for better times. In its centuries-long 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 only putting part of your money into your securities portfolio and the other part into call money, for example in the ratio: 80% ETFs and 20% call money.
Another option is to start with an equity allocation of 100 % and only gradually shift into safe overnight money later on. The closer you get to the age of 18, the more you should have reallocated. This is known as "lifecycling". If nothing is to be withdrawn at all on your 18th birthday because the portfolio is to be used as a retirement provision, for example, you can also leave the equity allocation at 100% and ignore the interim price losses.
Tax aspects of the use of income from ETFs
Distributing ETFs have the advantage in a children's custody account that their regular investment income is already taxed without having to pay withholding tax. This is due to the aforementioned high tax allowances for children. Depending on the agreement with the (direct) bank, the distributed investment income can also be automatically reinvested immediately. Alternatively, the distributions can be used for the next scheduled savings installment.
Conversely, the accumulating ETF has the disadvantage that the actual taxation (apart from the small advance lump sum) only takes place when the enormous tax advantages of the child no longer apply - for example, after the child reaches the age of majority or with the first income of the child in education. We therefore neglect the consideration of accumulating ETFs in connection with a custody account for children, who fortunately can benefit from the aforementioned advantageous taxation. Even if the tax-free amounts are exceeded one day, a distributing ETF does not bring any significant disadvantage.
The distributions are automatically reinvested by finvesto (see below for an introduction to 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, you can object to the automatic reinvestment of distributed income by sending a simple "two-liner" by post or a scanned e-mail.
Which ETF should you invest in for your child?
I recommend the broadest possible Diversifikationwhich is easiest to achieve with an established global equity ETF. This makes the investment both high-yielding and relatively safe. ETFs In principle, global equity ETFs offer the opportunity to participate in the performance of the equity markets at very low cost. However, especially with an investment horizon of 18 years (or more), you should auf die Kosten sehen and one ETF with the lowest possible total expense ratio. This is usually indicated by the ETF provider and can thus be compared. An equally interesting and important key figure in this context is the tracking difference. This shows the difference in the performance of the ETF compared to the underlying index.
The current tracking differences can be viewed at www.trackingdifferences.com view.
The following ETFs, which meet all the essential criteria, are suitable for such an ETF savings plan:
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 from finvesto by direct investment and/or savings plan.
Conclusion:
With a children's custody account, parents have the opportunity to start building up assets for their offspring at a very early stage and to take advantage of one of the most important elements of asset accumulation: time!
Your child will thank you later on and will be pleased with your foresighted actions as a parent. By investing in shares for the long term, you can kick-start your child's financially carefree life.
A children's custody account is therefore a great idea: take advantage of the tax benefits and the child's long investment period to ultimately benefit fully from the compound interest effect as a family. Accumulating wealth (for children) can be that easy!
