Building wealth from the first day of life
A portfolio opened in a child's name is less a question of money than a question of patience. Paying in early and regularly to a broadly diversified equity ETF gives the long horizon room to do its work, and at the same time draws on the annual tax-free allowances that belong to a child anyway.
An ETF savings plan for a child brings together two things that rarely meet: a very long time horizon and a separate taxable person with allowances of their own. Both can be put to use, provided you know the rules and do not mistake them for promises. This article sets out the building blocks, describes how the tax pieces fit together, and names the limits plainly.
With a child's portfolio the most important variable is not the return, but the time you have available.
For a child's portfolio with a horizon of many years, a broadly diversified, market-capitalisation-weighted global equity ETF (of the MSCI World or FTSE All-World type, say) is a common, conventional building block for the long run. That is a widespread choice, not a recommendation: which fund suits a given family depends on risk appetite, holding period and personal circumstances.
The logic behind it is diversification rather than selection. A globally broad equity fund bundles thousands of individual holdings across countries and sectors, so that the fate of any single company barely registers. Over long periods this breadth has historically proven a robust building block. Past performance is no guarantee of the future, however: returns are assumptions, not commitments, and the capital invested remains exposed to risk as a matter of principle. A long horizon lowers the probability of losses, it does not remove them.
For tax purposes the legislator treats broad equity ETFs uniformly: a fund with more than 50 percent in equities counts as an equity fund within the meaning of the Investmentsteuergesetz (Germany Investment Tax Act) and receives a Teilfreistellung (partial tax exemption) of 30 percent (§ 20 InvStG). These 30 percent remain tax-free, and they do so on distributions, on capital gains and on the Vorabpauschale (Germany advance lump-sum tax on accumulating funds) alike. The remaining income is subject to the Abgeltungsteuer (Germany flat-rate withholding tax on capital income) of 26.375 percent.
One early fork concerns the use of income: accumulating or distributing. Both variants receive the same Teilfreistellung of 30 percent and the same allowances. The difference lies not in the tax burden per euro of income, but in when and how the child's annual allowances are filled. We return to this in more detail below.
Kernaussagen
The real lever of a child's portfolio is not the size of the individual contribution, but the number of years over which it can take effect. A savings plan that begins at birth has eighteen years until the child comes of age, and over such spans the relationship between contributions and accumulated income shifts considerably.
Compound growth describes how income can itself go on to earn income. Over a long period the weight thereby moves increasingly from the amounts paid in toward the accumulated gain. How strongly this effect plays out depends entirely on the actual performance, which no one can predict. Every projection is therefore expressly illustrative and not a forecast: it shows the mechanism, not the outcome.
A steady monthly contribution also brings a practical side effect: it spreads the entry points across many years. Sometimes the purchase happens at higher prices, sometimes at lower ones, so that the average entry price smooths out over time. This is no protection against losses, but a discipline that spares you the attempt to pick the right moment.
Here lies the analytical heart of a child's portfolio. The difference between accumulating and distributing ETFs is more subtle in tax terms than it is often made out to be, and for a child the usual logic is in part reversed.
| Feature | Distributing | Accumulating |
|---|---|---|
| Income | Is paid out | Is reinvested within the fund |
| Child's allowance | Filled passively each year | Largely left unused without action |
| Annual taxation | On the distribution | Only on the small Vorabpauschale |
| Teilfreistellung | 30 % | 30 % |
| Effort | Reinvest manually | Sell and reinvest to lift the allowance |
The decisive point is that a child's tax-free allowances work on a use-it-or-lose-it basis. They apply per calendar year and cannot be carried forward. Whoever fails to use them up in a given year forfeits them for that year.
A distributing fund fills this annual room passively: every distribution is realised income that falls within the child's allowance volume. As long as the distributions stay below the allowances, they flow tax-free, and you then reinvest them manually. The advantage is simplicity with no active intervention.
An accumulating fund, by contrast, retains the income and reinvests it automatically. For tax purposes only the comparatively small Vorabpauschale arises each year (§ 18 InvStG). For 2026 the Basiszins (Germany base rate used to compute the advance lump sum) is 3.20 percent, from which a base yield of 70 percent × 3.20 percent = 2.24 percent of the value at the start of the year results, capped at the actual increase in value over the year and zero if the fund has fallen. The bulk of the annual allowance thus stays unused, unless you intervene actively.
Base yield of the Vorabpauschale 2026 (illustrative)
70 % × 3.20 % = 2.24 % of the value at the start of the year, capped at the actual increase in value over the year
Anyone who still wants to lift the allowance with an accumulating fund can sell units deliberately toward the end of the year and buy them back immediately. This realises a gain within the allowance and resets the entry price upward, so that later tax on this portion falls away. It is a recognised technique, but one tied to effort and to costs from spread and fees. It is a liquidity and tax instrument, not a return enhancer.
On balance, the choice between the two variants is, for a child, not a question of the tax rate but of effort. Both receive the same Teilfreistellung and the same allowances. Distributing funds fill the allowances by themselves; accumulating ones call for an active step in order to use them.
A child has tax-free allowances of their own: the Grundfreibetrag (Germany basic income-tax allowance, around EUR 12,348 in 2026), the Sparer-Pauschbetrag (Germany saver's lump-sum allowance) of EUR 1,000 and the Sonderausgaben-Pauschbetrag (Germany standard special-expenses allowance) of EUR 36. If capital income is the child's only taxable income, that produces room of around EUR 13,384 (2026), up to which capital income can remain tax-free.
These roughly EUR 13,384 are a computed figure, not an automatic result. The sum holds only when capital income is the child's only taxable income, and it follows the same yearly rhythm as every allowance: use it or lose it.
In practice two different instruments interlock. The Freistellungsauftrag (Germany exemption order placed with the bank) frees EUR 1,000 of capital income, no more. If the child's capital income exceeds that but stays below the Grundfreibetrag room, the NV-Bescheinigung (Germany non-assessment certificate) comes into play. It is applied for at the Finanzamt (Germany tax office) (form NV 1 A, which also applies to minors; the legal guardians make the application) and presented to the bank. The bank then pays out gross, that is, without Abgeltungsteuer at source. The NV-Bescheinigung is valid for up to three years and is revocable.
| Instrument | Shields free | Applied for at | Applies to |
|---|---|---|---|
| Freistellungsauftrag | EUR 1,000 | the bank | capital income only |
| NV-Bescheinigung (NV 1 A) | up to the Grundfreibetrag room | the Finanzamt | all income |
This is where the distributing variant pays off: because it fills the allowance passively, the room can be used from year to year without having to sell and buy back actively. With an NV-Bescheinigung the income flows gross up to the limit, instead of being taxed first and reclaimed later through the assessment.
Tax-free room of around EUR 13,384 does not mean the same room for health insurance. The contribution-free Familienversicherung (Germany family coverage) in the gesetzliche Krankenkasse (Germany statutory health insurance) (§ 10 SGB V) ends when the child's total income exceeds about EUR 565 a month (around EUR 6,780 a year) in 2026, and the child's capital income counts here. If the portfolio income lies well above this monthly threshold, it can jeopardise the contribution-free Familienversicherung and trigger contributions of its own, even when the income remains free of income tax. The exact treatment of the Sparer-Pauschbetrag in this test is not conclusively settled: when in doubt, ask your responsible Krankenkasse. The Kindergeld (Germany child benefit) is not affected by this.
Endwert mit 18 Jahren
EUR 43.323,36Wertzuwachs
EUR 21.723,36The following projection is illustrative and not a forecast. It shows the interplay of savings rate, term and assumed performance, not a result to be expected. Every assumed return is an assumption, not a promise, and no part of the portfolio is secured against losses.
The value of such a model lies not in the figure at the end, but in making the mechanism visible: how the relationship between what was paid in and what was added shifts over the years. It is precisely this shift that is the reason the early start counts.
One point is easily overlooked with a child's portfolio, yet legally it is unambiguous: the portfolio belongs to the child from the outset. The parents act only as legal guardians and manage the assets on trust in the child's interest (§ 1629 BGB). They may not use them for their own purposes nor for general maintenance; the assets are earmarked for the child.
When the age of majority is reached (§ 2 BGB), the parents' rights of representation lapse automatically. The now-adult child can dispose of the portfolio alone: keep it, restructure it or wind it up entirely. Assets built up over eighteen years thus rest, on a single date, wholly in their hands, regardless of whether, from the parents' point of view, this is the right moment.
What follows from this is less a legal task than a behavioural one. Whoever builds a child's portfolio is at the same time building toward the moment when responsibility passes over. That argues for talking about the purpose early, bringing the child along and seeing the handover as a planned step, not a surprise. The legal clarity is there; preparing for it is a question of upbringing, not of tax law.
This article explains the tax and legal essentials of a child's portfolio. It is no substitute for individual advice. On the NV-Bescheinigung, on the treatment in the Familienversicherung, or on larger transfers, you should consult a tax adviser, and on questions around Schenkung (gift) and the passing on of assets possibly a notary as well.
Keep a child's portfolio in view over the years
Investboard shows the contributions, performance and income of a portfolio clearly across long spans of time, and helps you keep an eye on the annual allowances.
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