Today a rant about the strange myths of investing.

Just yesterday I had another one of those who claim that dividends are what "compounding" is all about, not growth. Only with dividends does the investment outstrip the demand. They even cited education and Warren Buffet. He can't be wrong with his millions in dividends, can he?

You constantly read about dividend strategies and that you will need them in old age or to pay your rent at some point. Free Money. Financial Freedom. Realty Income, even though their dividends plus growth lags behind a Worl Etf. So flexible, even though you're tied to a dividend day. More growth than without dividends, even if otherwise the companies would be the same if you just reinvested them in said company. Taxes and trading costs, who cares. And compared to partial sales: but you keep your shares. And if they grow, you make more profit than if you had made partial sales. And in a crash, you have cash flow as if nothing had happened.

Now the question: this free money has to come from somewhere, right? Or the misconception. Because in purely technical terms, a dividend is a partial sale (only induced by the company). If dividends were to generate added value, this would also have to be a partial sale plus re-investment. Of course it doesn't. But people believe it does. Why? And what are other myths that are actually nonsense.

Dividend snowballs: I wish it weren't true, but there really are people who believe that a transaction that negatively impacts the value of an investment is somehow magically positive in the same amount of withdrawal if you reinvest that withdrawal. 1000 Euro share value minus 1% is unfortunately 990 Euro share value and a dividend of 10 Euro. Reinvesting these 10 euros leaves you with an investment of 1000 euros. Wait, no, of course not. Taxes and trading costs. You have lost money. And since taxes are incurred by the company and yourself, more than if you had done nothing at all. Dividends reduce the investment (even if you reinvest them). People confuse the effect of growth (which should at best exceed the dividend) with the effect of the dividend. 1000 Euro share value + 1% growth = 1000 Euro share value + 1% growth - 1% dividend + 1x dividend reinvest.

The only interesting thing is that companies pay dividends or not. So there are definitely companies that have more growth + dividend deduction than companies without dividends. But this is not an effect of the dividend. Go figure.

Growth does not change either, as the dividend does not add value. Compounding comes from growth alone.

The number of shares does not change the growth either. 1 share worth 100 euros that grows by 10 % is the same money as holding 0.75 shares in a share worth 100 euros that grows by 10 %.

Flexibility is also nonsense. Partial sales do the same and are more flexible. With dividends, you have the trading costs when you build up the portfolio (you have to reinvest the dividends), and when you sell as and when you need to save. On the other hand, selling without the detour of dividends gives you the flexibility of time that you don't have with dividends. Dividends are paid (and reduce the value of the investment) regardless of what the market is doing. And no, they do not protect you in the event of a crash. 1% of a 50 euro share value is not the same as 1% of a 25 euro share value. Strange that you have to explain this to "educated people".

That's where you end up if you think about it for three seconds: pure dividends are a simplification of de-investment, not saving. Apart from motivation and better companies that pay dividends, a dividend avalanche is complete nonsense.

What else I can think of in terms of misconceptions worthy of Merkel:

Market predictions on "worthless speculation assets" like coins: talking to people who are invested in crypto, they all have a strong opinion on where some coin is going right now. Without any basis. They see a bull run, then a bear market, then a strong sign of a decline (after the fact). Why this should be happening right now: Silence. Or reference to what the coin is doing on a daily basis. You could be looking into a cloudy crystal ball.

After 100k it goes up faster: A confusion of the onset of a noticeable compound interest vs. the investment amount. If you were to save 10k per month or win 100k somewhere, the point where it no longer depends on the savings rate would still be 7-10 years later. Go figure. Nevertheless, hundreds of YouTube videos by mathematical dyslexics on this topic.

Value of a collection: Unfortunately, family affected myself. The collection is worth so much!!!1111!!! Stamps are the little man's shares!!!1111!11 Pick them up. Unfortunately, contact with reality only comes for the heirs when they no longer want to keep umpteen albums. Worthless fuss. If you want to do something good for your heirs: Hard Cash. Meissen porcelain, circulation coins from a vacation, collector's dolls: as long as it is not in its original packaging and has never been scratched, it is worth less than the money that was spent on it. And even if it is: It yields less return than if the money had been invested. So when it comes to succession: invest, don't spend.

What do you think about this?

It has just happened!

It's so incredible.

We have invested so consistently over the last few years and actually started off quite conservatively, but with the rise of crypto and gold, things went faster than we dreamed.

For us investors, investing has become easier in recent years and many things have become simpler in terms of tax, even if they are not cheaper. In the best case scenario, the custodian bank or broker takes care of calculating and paying the taxes. As it is sometimes not so easy to make a rational decision and the "compound interest" effect should not be ignored, here is a short report. I hope it helps some of you with your decision.

The question of whether to invest in a distributing or an accumulating fund or ETF alone should give us a basic understanding of the tax treatment.

What has changed as a result of the Investment Tax Act

When the Investment Tax Act (2018) came into force, a number of things changed and even simplified matters for fund managers and investors. Since then, not only units in domestic and foreign funds are to be treated equally for tax purposes, but also accumulating and distributing funds.

Treatment of domestic and foreign ETFs and funds

Before 2018, the withholding tax for foreign funds was credited against the final withholding tax. For example, if I invested in a share from the USA, the USA was considered the source state - i.e. the country where the taxes were levied. Each state set its own tax rate.

Thanks to double taxation agreements, the withholding tax was limited to 15 percent. However, investors had to pay directly and in advance. Depending on the country in which the share was issued, the withholding tax could amount to more than 15 percent (for example, 30 percent in the USA). Investors were often only able to reclaim the difference retrospectively.

In the case of funds and ETFs, the respective capital management company takes care of refunding the excess withholding tax paid. Investors were still required to make a declaration in their tax return.

Domestic funds are now treated in the same way as foreign funds. Since 2018, 15 percent corporation tax has been levied at fund level. This means that the fund management company pays this directly from the fund assets, which means that dividend payments, for example, are lower than before.

To compensate for this, the law provides for relief for investors. Depending on the composition of the fund, they can expect a partial exemption. Partial exemption means that a certain percentage of the distributions is tax-free. For funds with an equity component of more than 50 percent, the partial exemption is 30 percent. This means that only 70 percent of the distributions are taxed.

The partial exemption also applies to foreign funds. Investors no longer have to declare the withholding tax in their tax return; the data is automatically sent to the tax office.

Treatment of accumulating and distributing ETFs and funds:

As a result of the new Investment Tax Act, accumulating and distributing funds are now also treated equally for tax purposes. Before 2018, distributions were taxed immediately after payment and capital gains were only taxed when they were sold.

This resulted in a tax deferral effect. Although German accumulating funds had to report income equivalent to distributions and pay tax accordingly, foreign funds and ETFs did not have to do so. It was again up to the investors to declare this income in their tax returns.

As these accumulating funds reinvest distributions directly, no tax payments were triggered. Until they were sold, investors could benefit from non-tax-reduced compound interest, while investors in distributing funds could only reinvest the amounts for which tax had already been deducted.

The new law was intended to abolish the tax deferral effect. With the introduction of an advance lump sum, which we will look at in more detail below, a lump sum is paid annually on capital gains.

Accumulating versus distributing ETFs and funds

Distributing funds

With distributing funds, equity and bond income such as dividends and interest are paid out on an ongoing basis. As a rule, the fund value is then reduced by the amount distributed. Depending on the fund rules, income is therefore transferred to my clearing account on a monthly, quarterly or annual basis and the invested assets decrease at the same time. I can then transfer the income to my current account or reinvest it in the fund. The latter may incur transaction costs.

No matter what you choose: The distributions must be taxed.

Accumulating funds

In the case of accumulating or reinvesting funds, income from shares and bonds is not paid out but reinvested. The fund company buys back shares on a pro rata basis. Investors therefore do not receive any extra payouts and no taxes are payable on the distributions. Compared to the distributing fund, which otherwise pursues the same investment strategy, my fund units tend to be worth more with the accumulating fund, as the entire basket of shares is worth more. If, on the other hand, I want to reinvest the distributed taxed amounts in the fund, I own more fund units, each of which is worth less.

This comparison illustrates once again where the tax deferral could arise before 2018. By reinvesting the distributions within the funds, the tax could be saved. Although a higher tax amount was then incurred on sale, the compound interest effect of accumulating funds was previously higher than for distributing funds, whose income could only be reinvested after tax.

In order to establish equal treatment here, the Investment Tax Act introduced the advance lump sum. However, as we will see, this only partially eliminates the problem. In the following, we will take a look at why this is the case, what interest has to do with it and how the tax-free allowance plays a role here.

The advance lump sum

In this section, we will look at some formulas and calculations. It is important to know that investors do not have to calculate and pay the taxes themselves. The custodian bank takes care of this and pays the tax amount directly from the investor's settlement account to the tax office.

Nevertheless, it can be useful to look into the calculation of the advance lump sum. On the one hand, it helps when choosing the respective fund or ETF type, and on the other hand, it is always good to know what has been calculated and how - banks can also miscalculate. However, we have yet to meet an investor who has actually calculated this for themselves.

The key figures

The custodian bank requires four key figures to calculate the advance lump sum and the resulting taxes to be paid. Before 2018, investors had to provide 33 different details in their tax return. Now the following information is sufficient:

• Amount of distributions,
• Fund value at the beginning of the year
• Fund value at the end of the year
• Type of fund

The basic terms

Before we start calculating, let's clarify a few basic terms to help us understand the advance lump sum and its effects.

The prime rate: This is published by the Deutsche Bundesbank at the beginning of each year for the current year. It is based on the long-term yield achievable on public-sector bonds. Using the interest rate structure data for German government securities with annual coupon payments and a remaining term of 15 years, a was calculated and published for 2023.

The base yield: To calculate the base yield, the fund value at the beginning of the year is multiplied by 70 percent of the base interest rate. This is a fictitious calculation. Multiplying this by the prime rate calculates the "safe" return that can theoretically be generated by a low-risk investment. The 30 percent reduction is intended to offset the costs at fund level.

The formula is therefore as follows: Base yield = fund value at the beginning of the year x base interest rate x 0.7

The base yield is the maximum taxable amount. This means that if the price growth of the fund at the end of the year is higher than the base yield, only the base yield is used. If the price growth is below the basic income and no distributions have been made, the lower value is used. The base yield can never be less than zero.

The advance lump sum: This forms the basis for the taxation of income growth of funds and is calculated as follows:

Advance lump sum = basic income - distributions

The basic income is reduced by the distributions, as these are taxed separately. In the case of accumulating funds, they are generally zero. If the price appreciation at the end of the year is below the basic income, the capital gains are recognized.

If there is a negative result when calculating the advance lump sum, this is set at zero.

Taxes: A final withholding tax is calculated on distributions and the advance lump sum. This means that income from capital gains is taxed at a flat rate and then no longer has to be included in the income tax return - it is settled with this tax rate, so to speak.

The final withholding tax is made up of the capital gains tax (25 percent), the solidarity contribution (5.5 percent) and, if applicable, the church tax (8 to 9 percent). Excluding church tax, it amounts to 26.375 percent.

Example calculation 1: Funds with low total income growth

In this section, we look at how the advance lump sum and the taxes payable are calculated using a specific example. We have illustrated the scenario in the following diagram:

We compare a distributing fund with an accumulating fund. The fund value for both is EUR 1000 on 01.01.2023. At the end of 2023, both funds have a total return of EUR 1,005. The distributing fund will still pay out a dividend of EUR 20, which will reduce the fund value to EUR 980. Compared to the start of the year, both funds have recorded an increase in income of EUR 5.

The calculation is as follows:

Basic yield = 1000 euros x 2.55% x 0.7 = 17.85 euros

Advance lump sum

Distributing = 17.85 euros - 20 euros = - 2.15 euros = 0 euros

Accumulating = 5 euro - 0 euro = 5 euro

Taxes

Distributing = 0 euro x 26.375% x 0.7 + 20 euro x 26.375% x 0.7 = 3.69 euro

Accumulating = 5 euros x 26.375% x 0.7 + 0 euros x 26.375% x 0.7 = 0.92 euros

What can we conclude now?

In the case of the distributing fund, the advance lump sum is zero, so it is not taxable. However, there is also the taxation of the dividend, which is set at 70 percent due to the partial exemption. Accordingly, EUR 3.69 will be debited from my clearing account at the beginning of 2024.

In the case of the accumulating fund, the advance lump sum amounts to the increase in income of EUR. This is because the basic income is higher and no distributions are deducted. In this case, it is not the notional profit potential that is taxed, but the actual income. And the taxes payable on this amount to 0.92 euros.

As an investor in distributing funds, I initially have to pay more tax due to the dividend payment. On the other hand, less tax is payable when the fund is sold at a later date, as the increase in income is generally lower.

Ultimately, the tax burden should be the same for both types of fund.

Example calculation 2: Fund with high total income growth

We are again comparing a distributing fund with an accumulating fund. The fund value for both is 1000 euros on 01.01.2023. Both funds have a total return of EUR 1,500 at the end of 2023. The distributing fund will still pay out a dividend of EUR 20, which will reduce the fund value to EUR 980. Compared to the start of the year, both funds have recorded an increase in income of EUR 500.

The calculation is as follows:

Basic yield = 1000 euros x 2.55% x 0.7 = 17.85 euros

Advance lump sum

Distributing = 17.85 euros - 20 euros = - 2.15 euros = 0 euros

Accumulating = 17.85 euros - 0 euros = 17.85 euros

Taxes

Distributing = 0 euro x 26.375% x 0.7 + 20 euro x 26.375% x 0.7 = 3.69 euro

Accumulating = 17.85 euros x 26.375% x 0.7 + 0 euros x 26.375% x 0.7 = 3.3 euros

What can we conclude now?

The tax payments are similarly high for both fund types. This is because the basic income is used for calculating the accumulation fund and this is almost as high as the dividend of the distributing fund.

In the event of a subsequent sale, the difference should even out again.

Example 3: Fund with a total return loss

We are again comparing a distributing fund with an accumulating fund. The fund value for both is 1000 euros on 01.01.2023. Both funds have a total return of EUR 800 at the end of 2023. The distributing fund will still pay out a dividend of EUR 20, which will reduce the fund value to EUR 780. Compared to the start of the year, both funds recorded a loss of income of EUR -200.

The calculation is as follows:

Basic yield = 1000 euros x 2.55% x 0.7 = 17.85 euros

Advance lump sum

Distributing = 17.85 euros - 20 euros = - 2.15 euros = 0 euros

Accumulating = -200 Euro - 0 Euro = -200 Euro = 0 Euro

Taxes

Distributing = 0 euro x 26.375% x 0.7 + 20 euro x 26.375% x 0.7 = 3.69 euro

Accumulating = 0 euro x 26.375% x 0.7 + 0 euro x 26.375% x 0.7 = 0 euro

What can we conclude now?

In the case of the accumulating fund, there are no taxes at all this time. Due to the loss of income, the advance lump sum is zero. With the distributing fund, on the other hand, the dividend payments are taxed again.

What is important for investors

Although the tax burden should be the same, there are two effects that make the matter somewhat more complicated: interest and the saver's allowance.

The base yield as the basis for calculating the advance lump sum is calculated using the base interest rate that the Deutsche Bundesbank publishes every year. In 2021 and 2022, this interest rate was negative. For accumulating funds, the taxes on the advance lump sum were therefore zero. As a result, tax deferral effects occurred here again. The actual and untaxed income once again benefited from the full compound interest effect.

However, even with an interest rate of 2.55% for 2023, the taxes incurred are always lower for accumulating funds than for distributing funds. There is also a certain tax deferral effect here.

So should you always give preference to accumulation funds? No.

The second component that plays a role in the decision for one of the fund types is the saver's allowance. Every year, recipients of capital income have a tax-free allowance. In 2023, 2024 and now 2025, this allowance is 1,000 euros per person (2,000 euros for married couples). If the fund from the example above is my only investment, I can claim the tax-free allowance here and save a higher amount with the distributing fund than with the accumulating fund.

However, this only applies to smaller assets. For large sums of assets, the tax-free amounts are fully utilized for both types of fund and the effect disappears again.

A distributing fund can still make sense if I want to generate an ongoing income with my assets. I then don't have to constantly sell units and incur transaction costs. However, I should bear in mind that distributions are not guaranteed.

For all the calculators among you who have not yet received a statement for 2024, but still want to know what advance lump sum is due, the base interest rate on 02.01.2024 was 2.29%. 70 percent of the besis interest yield results in 1.603%.

#etfs
#etf
#etfkosten
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Is the establishment of a Treuhandverwaltung or Stiftung a good alternative for you?

• Moving into a care home: how much money can you keep?
• When do your children have to pay?
• How can you protect your assets?

There are various options and ways to ensure that you avoid spending your assets on care costs
spend costs. We explain how you can stay financially secure and how you can make targeted provisions so that your money is not touched by third parties in old age.

How much money can you keep?

Currently, a Pflegeplatz in Deutschland 2610 euros per monthafter deduction of subsidies. Je nach Pflegegrad und Pflegestufe können sich die Kosten erheblich unterscheiden - und auch die Zuschüsse. The costs are rising every year and are becoming an increasing burden for many families. To finance the care costs, you can private assets can be used to finance can be used to finance care costs. But only up to a so-called "protective assets limit".

For single people, this is 10,000 eurosmarried couples are allowed to double the amount keep twice this amount. In addition to this real estate is also protected as long as a spouse or relative lives there.

In addition, the protected assets are taken into account: Funds to carry out an appropriate funeral, for example 7500 euros in a death benefit insurance policycapital in the Riester-Rente or for an appropriate household and family heirlooms or work equipment

When do your children have to pay?

Your pension is always used first to pay your care costs. pension is always used first. Only if this is insufficient will the state use your savings. If this is not enough, then they look at the income of your children will be looked at. Relatives have been relieved since 2020: Children only have to pay maintenance for their own parents, wenn das Bruttoeinkommen pro Jahr eine entsprechende Summe übersteigt. Children's savings or property remain unaffected.

Care costs are only covered by the state if neither income nor assets are sufficientto cover the costs and no children can be involved. In these cases, the "Hilfe zur Pflege". Sinnvoll kann auch eine zusätzliche Pflegeversicherung sein.

An exampleYou have a monthly income of 1200 euros from your pension. After a fall, you are admitted to a nursing home and the care costs amount to 3500 euros per month. The care insurance pays a subsidy of 1500 euros. This results in a own contribution of 2000 euros. Your pension will now be fully offset against the care costs, leaving a remaining sum of 800 euros. However, you only have 8000 euros in your accountwhich is below the already asset limit of 10,000 euros is. In addition, you have no other realizable assets, such as a property. As you also do not have a child with an income of more than 100,000 euros per year, you can "Help with care" from the social welfare office. This will cover the remaining 800 Euro per month.

How can you protect your assets?

To protect yourself from care costs, it is advisable to early transfer of assets is one of the most common strategies. However, please note that gifts can still be reclaimed up to ten years after the transfer can still be reclaimed if care costs are incurred.

This means that you can transfer all of your money to your children above the minimum asset limit and if you only enter a care home ten years later, the care insurance fund will cover the costs. However, your assets are then in the hands of your children, who are free to make their own decisions. Another method is to foundation of a Treuhandverwaltung or Stiftung. This option is particularly suitable if you have large assets, such as works of art, investments or real estate. property. You transfer your assets to a foundation and they are managed permanently by the foundation so that they can no longer be used for private purposes, not even by the authorities.

With a trust, you transfer your assets to a trustee who manages them on your behalf. manages it on your behalf. Legally, the money remains with you, but a trust agreement protects it from unwanted access, for example a claim for care costs.

www.msn.com/de-de/finanzen/top-stories/finanzen-sichern-so-schützt-du-dein-geld-vor-pflegeheim-kosten/ar-AA1wXhhK?ocid=msedgntp&pc=LCTS&cvid=b3a872883bbd4d009e2347394924fda2&ei=38#

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