Most parents will probably save money for their children in one form or another.
Those with an affinity for the stock market swear by ETF savings plans, which is a good thing. But often it happens in the parents’ own names, and later a donation is made. You can do that, but depending on the amount of assets you want to invest for the kids, the best choice is to have your own custodians for the kids. I will explain why in this post.
Use tax credits
Each citizen not only has their own savings allowance (801 EUR pa) but also the property tax deduction (2022: 10347 EUR) at their disposal. Up to this amount, you can post tax-free income – including children! The income also does not affect child benefit, which is independent of the child’s income situation until the child comes of age. Many parents don’t even know it.
This means in plain language: A child can “earn” the sum of 11148 EUR tax-free in 2022! Since a child will generally not have any other income (except, for example, property rights), we are talking about EUR 11,148 in capital gains, which would be tax-free.
ATTENTION health insurance!
Most children are co-insured with their mother/father in the family insurance. There is a catch here. Exceed the child’s earnings EUR 6441 per year (from 2022), then it would be thrown out of the family insurance and would have to have its own health insurance. Children of privately insured people do not have this problem, as the child then has their own insurance anyway.
For most parents, the limit of EUR 6441 per year in investment income should therefore be decisive – certainly not many will reach this mark anyway.
How to proceed now?
Step 1: Open a guardianship for a child (e.g “Junior Depot” in Consorsbank). If the deposit is with the same broker that you already use yourself, it may be possible to negotiate the terms (also use your own fee model for the child).
Step 2: Transfer money. Remember: the money now belongs to your child! You cannot treat this repository as your own secondary repository. For a ten-year period, you can give EUR 400,000 tax-free per child.
Step 3: Submit an exemption application to the bank. You can usually find the forms on the website.
Step 4 (optional): If your child is expected to have more than EUR 801 but less than EUR 11148 in investment income and you want to save yourself the trouble of filing a tax return for the child, you can apply for a non-employment certificate (NVA) from the tax office. The bank then pays no tax up to the limit specified in the NVA. The NVA is normally valid for three years. You probably have to prove to the tax office that the capital gain is higher than the savings deduction.
Step 5: To invest money. Buy ETFs and stocks that you believe in for the long term – also through savings plans. It is best to send gifts from relatives directly to the depository.
Step 6: Partially active management of the depository. Take advantage of quotas by selling high profit positions. Then reinvest the money. If the assets are very small and the income correspondingly low, it may also make sense not to sell anything for years. But always remember the winnings earned!
A few more remarks
- It can be difficult for one or the other to part with large sums, despite all the love for the child. The money then belongs to the child! Look at it this way: You have to finance your education/studies anyway, and the wealth also ends up with your children after you die. That way, at least the state gets less.
- A risk that is sometimes mentioned: the child could empty the deposit at the age of 18 and squander the money, thus undermining the real purpose of saving. That is true – but you have a decisive hand in your upbringing if that is the case.
- When the child has reached a certain age, you can let him in on 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.
- Note to readers from Austria: In the Alpine Republic you cannot open depositories for minors, a safe is mandatory for the smallest!
- This is all my personal view and of course not tax advice. If you want to know everything for sure and precisely, go to a tax advisor,