Tax-Advantaged Accounts

Tax-Advantaged Accounts

Two accounts hold the same global equity fund. One costs 0.2% a year, the other 1.8%. Put €10,000 in each at a 7% gross return and wait thirty years: the cheap one ends near €72,000, the expensive one near €46,000. No tax rule caused that gap. The fee did.

So the order is free money first, fees second, tax treatment third. Most people work the other way round, buy whichever product has the best-sounding tax story, and pay for the story for thirty years.

The only contribution with a guaranteed return

An employer match is not a tax break. It is a raise that only gets paid if you save.

Earn $60,000 and your plan matches 50% of what you put in, up to 6% of salary. You defer $3,600. Your employer adds $1,800. The account receives $5,400 and you paid $3,600 for it: a 50% return before the fund moves a cent.

Then let it compound. $3,600 a year at 7% becomes roughly $340,000 after thirty years. $5,400 becomes roughly $510,000. The employer's half accounts for about $170,000 of that.

Vesting is the first condition: many employers only make their contribution legally yours after three or six years, so leaving in year two can cost you the whole match. The fund menu is the second. A match inside a plan whose funds charge 1.2% a year is still worth taking, but only up to the match. Capture the full contribution, then send the next euro somewhere cheaper.

US wrappers, roughly in the order they pay off

Roth or Traditional? Do the arithmetic. A Traditional account lets you invest $8,974 pre-tax for an after-tax cost of $7,000 at a 22% marginal rate. A Roth account lets you invest $7,000 that has already been taxed. Thirty years at 7% leaves $53,286 either way: $8,974 grows to $68,315 and loses $15,029 to tax on the way out, while $7,000 grows to $53,286 tax-free.

The wrapper is neutral. Whether you come out ahead depends on whether your retirement tax rate is lower or higher than your rate today — a question about your income, not the account. A median earner heading for a modest retirement income should take the deduction now. Someone in a low bracket early on should use Roth while it is cheap.

The German side: the wrapper is thinner than the brochure

Germany has no 401(k) for an ordinary employee and no Roth IRA. It has a taxable Depot and two allowances.

The headline is 25% Abgeltungssteuer plus a Solidaritätszuschlag of 5.5% of that tax, so 26.375% on dividends, interest and realised gains. Two things cut into it.

• The Sparerpauschbetrag: 1,000 € of investment income a year tax-free, 2,000 € for a married couple. File a Freistellungsauftrag with your broker, or the bank withholds from the first euro. The most commonly missed free money in German investing.
• The Teilfreistellung: 30% of the gain on an equity fund is exempt. Applied to 26.375%, that puts the effective rate on fund gains at 18.4625%.

On 50,000 € of gains that is 9,231 € of tax instead of 13,188 €. Almost 4,000 € kept, with no contract and no commission.

The Vorabpauschale runs the other way: an accumulating fund is taxed each January on a small notional gain from the Basiszins, sold or not. The Sparerpauschbetrag usually absorbs it, and it is credited when you do sell.

The structure matters more. A Depot has no lockup, no surrender schedule, no annuity requirement and no product fee, and a broad world equity ETF costs in the region of 0.1% to 0.2% a year. That is why the boring German answer — a Depot, one global fund, a standing order — is hard to beat with a subsidised product. Hard, not impossible.