Fees vs. Tax – What to Prefer When Investing for My Future

When you’re looking for perfect, sooner or later you’ll realize that there’s always something. Sadly, this also applies to investing. Either you will have to pay taxes to the German state or you have to pay a closing-fee. So no: the all-in-one device for every purpose doesn’t exist. But if we know what’s happening, we can make our investment strategy as all-in-one-y as possible.
 

It’s either taxes …

When it comes to long-term investing, there are basically two choices: You can either trade with the help of an online broker, a bank or one of those many apps, or you hold your portfolio via an insurance company. If you go with the first option, you are investing like most people do: You probably chose a (online) bank to act as a broker and to store your shares in your portfolio. This intermediate is necessary, because you can’t just walk to the stock market and yell to everyone and nobody in particular how many shares you want to buy or sell. You always need an institution to do the trading in the end.

(That being said, you could also invest in a particular company or sports club directly, but those kinds of investments happen in the top floors of the world’s business towers (or on the golf court) and need at least six figures.)

golf ball and golf club on grass

If the big league isn’t for you, you need an intermediate to store your portfolio | Photo by Robert Ruggiero on unsplash.com

So I guess we’re back at the bank again. Once you’ve activated your portfolio, you can tell the bank how many shares of which companies, funds and ETFs you want to buy or sell and the bank does as told. If you do this every day, you’re a day-trader. These guys and gals are trying to make a profit by buying shares at the lowest price of the day and selling them at the highest. If you refrain from making your shares your top priority, you might feel the urge to buy and sell maybe once a few months. Or you will even end up buying them at some point and then pretty much forget about them. And by that you’re a long-term investor.

So long-term investing is pretty boring, actually. And that’s what makes it perfect for everybody who doesn’t really care about all those money topics, but doesn’t want to be poor in old age, either. It’s the classic buy and hold strategy and if you didn’t just invest in one single fund or company, but spread your investments, it always works. Like, always always.

And now to the downside.

Germany isn’t exactly known as a tax haven. So yes, the German state wants a share of your shares, so to speak. Better said: They want a share of your profit. This share isn’t exactly small, but a hefty 25 % on your winnings every year (not included church tax and Solidaritätszuschlag), if those winnings were higher than 800 €. So every Euro on top is only 75 Cents for you. And it doesn’t even matter if you actually sold your shares to generate this profit. The normal volatility is enough for the tax to strike.

So yes, you can invest long-term for your old age via an online bank or similar and you will definitely make way more money this way than by putting it aside on a normal bank account, but your winnings will always be the winnings of the German state as well.

 

… or a closing fee

If you don’t call paying taxes one of your most beloved hobbies, especially not when it comes to preparing for your days as grandma or grandpa, there is another way you should have a look at.

Nobody forces you to go to your bank and ask them to take care of your portfolio. You can also ask an insurance company to do that. This option is widely unknown to the public, because insurance companies traditionally didn’t use to participate in something as unpredictable as the economy market. They preferred the old-fashioned style: Invest super safe and give the customer a guaranteed return of investment, say 4 % per year. But during the last decade, those 4 % have melted continuously under the burning sun of decreasing fixed interest rates, until there was almost nothing left. So the insurance companies had to find new ways to stay attractive to long-term investors – and they did. They found the economy market and came up with a bunch of very up-to-date investment models. One (out ofmany) is the all-in-funds model: The customer invests in funds and ETFs of their own choosing by contributing a specific amount every month for the next years or decades to come.

So far, so similar. BUT: Since the portfolio is held by an insurance company, not a bank, the customer automatically participates in the down-to-earth name of insurance companies as such. And that’s actually a very big difference regarding how the German state taxes your winnings, because now they treat your portfolio as old-age insurance, not just an investment. When you hold your portfolio at a bank, the German state assumes that you want to be rich someday. Because this is the only plausible reason why you would invest in the stock market via a bank, right? No? Anyways, that’s what they think. So the calculation goes like this:

Person has a portfolio at a bank = person has money to just play around with = person wants to be rich = person can be taxed

If you hold the same portfolio via an insurance company on the other hand, the calculation changes:

Person has a portfolio at an insurance company = person is obviously taking care of their old age = person will need the money when old = person should not be taxed

This change in taxation is simply due to the fact that you’re now officially holding an old-age insurance portfolio instead of a rich-person investment. But it doesn’t work with every investment. For the tax exemption to work, you have to hold the contract for longer than 12 years and receive the money as a monthly pension. So simply put: It really has to be an investment for your old-age or at least look a lot like it.

So we did find the perfect all-in-one device after all, didn’t we? Not completely. There has to be a downside somewhere and there is: If you hold your investment via an insurance company, you ditch the tax, but you have to pay a closing-fee instead. How high this fee is is based on how much you will contribute yourself, so your contribution per month times the total number of months that you plan to have the investment.

woman with pink nails checking stock information on phone

If you want to invest with the highest possible outcome, you have to know what’s happening | Photo by William Iven on unsplash.com

The Number One Question: Which Option Is More Profitable?

Once we’ve reached this point, every client asks me the same question: Which option is the better option for me? And I always give them the same answer: That depends. For one, it depends on how much you want to contribute, because this has an effect on both the closing fee and your expected winnings and by that the height of the tax. But more than anything else it depends on the duration of the investment.

If you go for the insurance option, thus the closing fee, you won’t have to pay the fee like you normally pay bills, but it will be split in five parts and every year during the next five years one part will be taken out of your account. This means that you won’t really realize that you’re paying a fee, but it also means that during those five years you’re investing less than you pay in. This leads to a lower return of investment especially in the early years.

If you go for the bank option instead, you can start investing right away, no parking brake attached. But the longer you stay invested, the more profit you will make and the more tax you will have to pay.

So if you want to figure out which option is the better option for you, here’s a rule of thumb: If you want to invest short-term to middle-term (anything between 0 and up to 12 years), you should give the classic investment way via a bank a try. But if you’re looking to invest long-term (12 years and more), usually the insurance option is more profitable.

That being said, the only way to know for sure is to run the numbers. So let’s have a talk and find your very own investment solution!

Looking forward to that!

Best,
Verena

Old woman smiling happily

For a carefree retirement you need to know which investment optin is best for you. We’ll help you with that. | Photo by Christian Newman on unsplash.com

Main photo by Tyler Nix on Unsplash

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