Dear bogleheads,
Since this topic came up within discussions of another thread and I don’t want to change the focus of it, I would like to come up with a specific rather German market related question, specifically to the so called “Vorabpauschale” (which is basically an upfront payment of taxes on the value increase of an (accumulating) ETF). But at this point it is not necessary to understand the German tax system and therefore the question is not specific to German taxation.
For simplicity the only part necessary to understand is, that you have to pay a fraction of the taxes, you would have to pay anyway on the capital gains of the ETF when selling it one day, in advance. Lets call this tax “in-advance-tax”.
Very simplified example:
ETF increases from 100 to 110 USD within one year but does not get sold – usually no taxes would occur – but with the “in-advance-tax” you must pay a fraction of the taxes, that would have occurred when sold, in advance. When the ETF actually gets sold one day, the upfront paid taxes will be considered.
Assuming there is no liquidity given to pay the “in-advance-tax” tax every year out of pocket, my question is the following:
Would you rather:
1.Get the accumulating version of an ETF and (due to the missing liquidity) sell a few shares every year to pay the “in-advance-tax”
or
2.Get the distributing version of the same ETF and use the dividends to pay the “in-advance-tax” and (potentially) reinvest the delta (of the total paid out dividends and the amount necessary for the “in-advance-tax”) -> for the reinvesting process we can assume to have very low to zero transaction costs
My initial plan was to invest in an accumulating ETF and basically forget about it. But with the so called “Vorabpauschale” (“in-advance-tax”) my perspective changed a little because due to large sums I want to invest, I can’t afford paying the “in-advance-tax” out of pocket every year. Since I am very new into investing in general, I would like to get the perspective of more settled investors on this to get a better feeling of which additional factors I need to consider in making the decision between accumulating vs. distributing ETF.
Even if this is not important for the question, but taxes on dividends and growth-related earnings are basically the same in Germany, so this shouldn’t make too much of a difference.
I really hope we can create a little more clarity on this topic, because I am pretty sure that others face similar issues!
Thank you so much already in advance for your support!
Best,
Tyler
Since this topic came up within discussions of another thread and I don’t want to change the focus of it, I would like to come up with a specific rather German market related question, specifically to the so called “Vorabpauschale” (which is basically an upfront payment of taxes on the value increase of an (accumulating) ETF). But at this point it is not necessary to understand the German tax system and therefore the question is not specific to German taxation.
For simplicity the only part necessary to understand is, that you have to pay a fraction of the taxes, you would have to pay anyway on the capital gains of the ETF when selling it one day, in advance. Lets call this tax “in-advance-tax”.
Very simplified example:
ETF increases from 100 to 110 USD within one year but does not get sold – usually no taxes would occur – but with the “in-advance-tax” you must pay a fraction of the taxes, that would have occurred when sold, in advance. When the ETF actually gets sold one day, the upfront paid taxes will be considered.
Assuming there is no liquidity given to pay the “in-advance-tax” tax every year out of pocket, my question is the following:
Would you rather:
1.Get the accumulating version of an ETF and (due to the missing liquidity) sell a few shares every year to pay the “in-advance-tax”
or
2.Get the distributing version of the same ETF and use the dividends to pay the “in-advance-tax” and (potentially) reinvest the delta (of the total paid out dividends and the amount necessary for the “in-advance-tax”) -> for the reinvesting process we can assume to have very low to zero transaction costs
My initial plan was to invest in an accumulating ETF and basically forget about it. But with the so called “Vorabpauschale” (“in-advance-tax”) my perspective changed a little because due to large sums I want to invest, I can’t afford paying the “in-advance-tax” out of pocket every year. Since I am very new into investing in general, I would like to get the perspective of more settled investors on this to get a better feeling of which additional factors I need to consider in making the decision between accumulating vs. distributing ETF.
Even if this is not important for the question, but taxes on dividends and growth-related earnings are basically the same in Germany, so this shouldn’t make too much of a difference.
I really hope we can create a little more clarity on this topic, because I am pretty sure that others face similar issues!
Thank you so much already in advance for your support!
Best,
Tyler
Statistics: Posted by TylerDurdenThe2nd — Mon Jul 08, 2024 5:28 pm — Replies 0 — Views 151