Most parents will probably save money for their children in one way or another.
Those with a connection to the stock market swear by ETF savings plans, which is a good thing. But most often this is done in the name of the parents, and then the donation is made later. You can do this, but depending on the size of the assets you wish to invest for the children, your own custodian accounts are the best option. I will explain why in this post.
Use tax credits
Each citizen has not only his own savings allowance (801 EUR pa), but also the basic tax exemption (2022: 10347 EUR) at his disposal. Up to this amount you can add tax-free income – even children! Income also does not affect the child’s entitlement, which does not depend on the child’s income status until the child reaches the age of majority. Many parents do not know this.
This means in plain language: a child can “earn” €11,148 tax-free in 2022! Since the child will generally not receive any other income (except, for example, real estate ownership), we are talking about 11,148 euros in capital gains, which will be tax deductible.
Health Insurance Attention!
Most children are insured with the mother/father in the family insurance. Here lurks fishing. Child earnings exceeded 6,441 euros per year (as of 2022)Then he will be excluded from family insurance and will need his own health insurance. Children of privately insured people do not have this problem, because the child does not have his own insurance.
Thus, for most parents, the investment income limit of 6,441 euros per year should be decisive – and certainly not many of them will reach that mark anyway.
How do you complete now?
Step 1: Open a custody account for the child (eg “Junior-Depot” at Consorsbank). If the deposit is with the same broker you already use, it may be possible to negotiate terms (use your child fee form too)
Step 2: money transfer. Remember: the money now belongs to your child! You cannot treat this repository as your own secondary repository. In a ten-year period, you can give €400,000 tax-free to each child.
Step 3: Submit an exemption request to the bank. You can usually find the forms on the home page.
Step 4 (Optional)If your child is expected to receive more than €801 but less than €11,148 in investment income and you want to save yourself the trouble of filing a child tax return, you can apply for a Certificate of Non-Valuation (NVA) from the tax office. Then the bank does not pay any taxes up to the limit set in the NVA. An NVA is usually valid for three years. You may have to prove to the tax office that the capital gains are higher than the savings allowance.
Fifth step: invest. Buy ETFs and stocks that you believe in for the long term – also through savings plans. It is better to ship gifts from relatives directly to the warehouse.
Sixth step: Partially active management of the warehouse. Exploiting provisions by selling high profit positions. Then reinvest the money. If the assets are very small and the income is correspondingly low, it may also make sense not to sell anything for years. But always keep in mind the cumulative winnings!
A few more notes
- It can be difficult for one or the other to part with large sums of money despite all the love for the child. So, the money goes back to the baby! Look at it this way: you have to fund your training/studies anyway, and the assets will also end up with your children after you die. In this way, the state at least gets less.
- A danger that is sometimes mentioned: a child can empty the warehouse at the age of 18 and waste money, undermining the actual goal. It’s true – but you have a crucial hand in your upbringing if that’s the case.
- When the child reaches a certain age, you can let him into the secrets of the stock exchange and the child can even manage his own portfolio in the Family Council. This is how you strengthen the financial competence of young people.
- This is my personal view and of course not tax advice. If you want to know everything for sure and accurately, go to a tax advisor,