Investment & save for children with etfs, etf savings plan, justetf

financial investment & Save for kids with ETFs

Piggy bank is yesterday: In times of low interest rates, savings accounts hardly offer any added value. With a Junior Depot or an ETF savings plan, you can still invest money for children at a profit. What you should pay attention to.

The children’s birthday is just around the corner. The grandma pulls out the wallet and gives the grandchild 50 euros: "That puts the mom back in your savings book and at some point you will buy something nice from it!" Neatly meant, but in times of low interest rates, the money in the savings book increases just as little in the stocking, which is hidden in the drawer.

So how does it make sense to invest money for children so that they can later finance an exchange year, a driver’s license or a degree? – ETFs are the new piggy bank: not so cute, but with the prospect of higher returns.

Long-term investment for children

ETFs are ideal for long-term investment as they offer a number of advantages over traditional funds and individual stocks.

The advantages of ETFs at a glance

  • ETFs as a simple investment: no daily checks necessary
  • ETFs are easy to understand: no detailed market knowledge is required
  • ETFs spread the risk: invest in the entire market instead of in individual companies
  • ETFs are inexpensive: very low product costs
  • ETFs are flexible: buy and sell shares at any time
  • ETFs are legal special funds: money is protected in the fund
  • ETF savings plans are easy to set up

You do not have to constantly monitor a deposit for children or an ETF savings plan, as these are long-term investments, the assets of which you usually only access when the child is of legal age. With ETFs, you can easily grow your child’s wealth without having to deal with it on a daily basis. With ETF savings plans in particular, you can regularly save money, starting at a savings rate of 25 euros per month or quarterly. Best of all: the earlier you start, the more you benefit from the compound interest effect.

ETFs are simple because they track indices. You do not need detailed knowledge, such as the exact business model of a company.

ETFs spread the risk by investing in entire markets instead of just individual positions. A total loss is highly unlikely and you avoid single title risks. For example, ETFs on the MSCI World spread the risk on over 1,600 stocks worldwide.

ETFs are among the cheapest investment vehicles on the market. Compared to traditional funds, the running costs of ETFs are very low at a fraction of a percent. Many online brokers also offer long-term promotions for ETF purchases that completely eliminate trading fees for ETFs.

With ETFs you stay flexible because you can sell your shares at any time or buy new ones. You are not bound by minimum holding periods and other restrictions.

ETFs are legal special assets, so if the ETF provider becomes insolvent, they are not part of the bankruptcy estate. Your money is protected in the fund. You only bear the risk of capital losses due to price fluctuations (volatility).

ETF savings plans are easy to set up in online banking with just a few clicks. Here is the step-by-step guide for setting up an ETF savings plan.

However, there are a few things to keep in mind when saving with ETFs for children. Whether you should choose an ETF savings plan in your own account or a junior account also depends on some legal and tax factors, which we will explain in more detail below.

Rights and obligations when investing in children

As for everything, there are legal regulations for savings accounts and deposits for children, which you should observe: You can open a junior deposit from the birth of your child. All you need is the birth certificate and the child’s ID card from 16 years of age. Some providers also require a copy of the parents’ marriage certificate. If you have sole custody or unmarried parents, you may need to provide a copy of the custody decision.

Even if the child owns the Junior Depot or the ETF savings plan, as a parent you have control over the depot up to the age of 18 of your child. This goes hand in hand with responsibility and the requirement to invest the child’s money as “safely as possible”. The account must always have credit. The deposit must therefore not be invested in speculative stock transactions.

A noteworthy point: Children whose assets are too high can be refused education support (BAföG). The allowance is currently 7,500 euros.

But the most important thing: once parents have invested money for their child in a junior depot, they are no longer allowed to use it for their own purposes. They are therefore only allowed to withdraw money for the child and not for their own needs. The transfer of the property to the child must be effective under civil law, otherwise the authorities assume a sham transaction that serves to evade taxes on investment income.

A depot for children also gives tax advantages that you shouldn’t miss.

Tax advantages when saving for children

Whether you only have an account or a deposit, you may have gotten to know the so-called "saver’s lump sum" without knowing it. With a capital gain of up to 801 euros per year, you do not have to pay any taxes on it. These capital gains include, for example, interest, dividends and price gains from sales.

This saver lump sum is available to every natural person in Germany. Each child can also earn up to 801 euros in capital gains before taxes are due. It therefore makes sense to close a junior custody account in the child’s name as early as possible, since all transactions made in it benefit from the child’s saver lump sum. This enables tax-free wealth growth for your child.

Taxes paid too much can be recovered from the tax office the following year. If it is foreseeable that the tax burden will not exceed the basic allowance of 9,000 euros (as of January 2018), you can apply for a so-called "non-assessment certificate" (NV certificate) in advance from the tax office. You will then also be exempt from tax on capital gains of the Junior Depot in addition to the annual savings amount of EUR 801. After you submit the NV certificate to the online broker, taxes on dividends and capital gains are not even deducted. Since children usually do not have a earned income, the application for a NV certificate is usually easy.

A deposit for children grants you and your offspring some significant tax advantages. If you use the tax-free allowances skilfully, you can easily increase your child’s assets on your own account tax-free. If, on the other hand, you deposit the money in your deposit and give it to the child later, you will also have to pay tax on it yourself.

The differences in depots for children are big

You need a securities account to save with ETFs. The conditions of banks and online brokers for a junior custody account vary considerably.

In most cases, the same conditions apply to depots for children as for adults. Order fees, interest and so on are mostly identical. At some banks there are also special junior depots on offer that come with their own terms.

The plus for Junior Depots: reduced order fees and no account management fees. The minus: Some online brokers further restrict the selection of financial instruments at deposits for children. Some even go so far as to prevent regular trading in stocks and ETFs. In such cases, only ETF savings plans are possible.

Junior depots as a sensible investment for children

We have summarized for you exactly how to proceed in order to invest money sensibly for children in a checklist. A junior depot or an ETF savings plan can be set up quickly. Grandma or godfather can simply set up a standing order and regularly transfer money to the clearing account of the Junior Depot. There it is invested through an ETF savings plan.

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Christina Cherry
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