Junior accounts allow you to save for your offspring in the long term

Status: 24.05.2024 12:03

Those who save for their children can earn a substantial sum in the long term. A separate account or depository for young savers helps with this. This also offers tax advantages.

Money for the first car or a big trip after graduating from high school: If you start saving small amounts for your children early on, you can build up the capital stock for it at the desired time thanks to interest and compound interest.

Small children grow up to be big people – and small savings become a large sum when it is needed years later. The time factor plays a crucial role when saving for the next generation. The money that flows into a savings plan every month, for example, can then “work” accordingly.

Long-term savings on most profitable

If you invest 100 euros a month in a fund savings plan from the birth of your child, you will have a sum of 31,441 euros available when your child comes of age, assuming a return of around four percent per year on the stock market. Only a good two thirds of this is your own money. Almost 10,000 euros is due to the increase in value of the portfolio.

Going on the stock market depends primarily on the planned period in which the amounts from savings installments are to flow or an existing amount of money is to be invested, explains Ralph Wefer, financial expert at the consumer portal Verivox: “If a young person is given a large sum of money at the age of 14 for their confirmation and then wants to use the money to buy a car or get a driver’s license when they turn 18, for example, then a fixed-term deposit is the best option. The period is simply too short for investing money on the stock market. The risk of price losses would be too great.”

“Surviving the crisis by waiting”

The experts assess the situation differently if you want to save or invest over a period of ten years or more. Historically, the stock market offers significantly higher increases in value than money in current or fixed-term accounts. And the risk of higher fluctuations on the stock market becomes significantly smaller in the long term. For example, a savings or investment period of 18 years means that these risks appear manageable, says Jannes Lorenzen, head of the fund information platform JustETF: “Purely statistically, for example, you would never have made a loss in the German-speaking stock market if you had held for at least 13 years. So you could have survived any crisis simply by waiting.”

However, Lorenzen also recommends looking far beyond the German stock market when saving for the next generation in funds. His recommendation is to invest internationally and to use low-cost index funds, ETFs: “Above all, this should be done in a broadly diversified manner. ETFs are best suited for this because they are also very cost-effective. Unlike actively managed funds, where the costs eat up a large part of the return.”

Broadly diversified, this can mean investing in international stock indices such as the MSCI World or adding US indices, European and Asian stock markets to the portfolio via several products.

Opening a junior account

A number of banks offer daily money and fixed-term deposit accounts for children. Direct banks and discount brokers also offer “junior deposits” that can be used to save in funds. In both cases, the parents or the parent raising the child must also prove their identity using an identification procedure. In addition, the tax identification numbers of the child and parents are required to open the account.

When choosing a children’s portfolio or account, care should be taken to ensure that there are no deposit fees. In addition, the costs for regular savings installments should also be as low as possible. Anyone who has to pay a fee of €1.50 to the depository bank for every €100 of fund savings will have to cope with a significant loss of return in the long term. Last but not least, the products, i.e. funds and ETFs, should be tradable in the place where the small fortune for the offspring is to be created.

Lump sum and Basic allowance

The parents act as trustees of the account or portfolio until the child comes of age and can also limit the number or amount of withdrawals by the child. However, the funds or fund shares belong to the child. And that means that their own tax allowances also play a role, which can ultimately increase the real return on the account: “Capital gains of up to 1,000 euros generally remain tax-free due to the saver’s allowance, as long as an exemption order is available at the bank,” explains Verivox expert Wefer, “but even with higher returns, taxation can be avoided as long as the child’s income in the respective year does not exceed the basic allowance, which is currently 11,604 euros.”

In order to avoid taxation of the income on the children’s account or deposit, a “non-assessment certificate” (NV certificate) can be applied for from the tax office. This is presented to the depository bank, which then does not make any tax deductions. This would otherwise be done automatically if the exemption amount is exceeded. A NV certificate is issued for a period of one to three years and must then be applied for again.

If the Capital gains: no Family insurance

The child’s capital gains on fixed-term deposit accounts or securities accounts are also considered income. Even if the basic allowance of 11,604 euros per year is not reached, another income limit must be observed. If the child “regularly” has more than 505 euros per month in income, free health insurance in the family insurance of the parents or one parent is no longer possible. The child then needs its own health insurance.

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