Financial foundations
The cash you withdraw from an ETF is not automatically taxable profit. The result depends on the units you sell, their purchase cost, any Vorabpauschale already assessed and the fund's tax classification. You need those details before estimating what will reach your account.
Sale and gain
When you need cash from an ETF, you normally sell units. The sale proceeds include the money you first invested and, if the price has risen, a gain. German tax generally applies to the gain on the units sold. It does not treat the whole cash amount as profit.
In simplified terms, the gain starts with the sale proceeds, less the purchase cost and costs directly related to the sale. For fund units, assessed Vorabpauschalen also affect the calculation. Your broker uses the actual units in the account. For fungible securities held in collective custody, the rule is generally first in, first out. If you bought units over many years, the tax gain can differ from a calculation based on your average purchase price.
Distributions and sales are separate events. Distributions can create taxable investment income while you are still accumulating. This article looks at the additional sale of ETF units to fund spending.
German tax rules
For investment income from fund units held as private assets, the general flat tax rate is 25 percent. A solidarity surcharge is added to that tax. Church tax may also apply. Germany's saver allowance, the Sparer-Pauschbetrag, reduces taxable investment income if it is still available: €1,000 for one person and €2,000 for spouses assessed jointly. A Freistellungsauftrag lets a bank apply an available allowance when withholding tax.
Individuals receive a 30 percent partial exemption on income from an eligible equity fund under German tax rules. An ETF is not automatically an equity fund for tax purposes just because it trades on an exchange. Its tax classification and the required equity quota matter. Other fund categories have different partial exemptions.
An accumulating fund can also generate a Vorabpauschale in some years. It is treated as received on the first working day of the following year. Vorabpauschalen already assessed during the holding period reduce the gain used when units are later sold. This prevents the same increase in value from being fully counted a second time.
If your personal income tax rate is lower, a Günstigerprüfung through your tax return may reduce the final tax. Church tax, losses, other investment income and foreign tax can also change the result.
Worked example
Assume you sell units in an ETF classified as an equity fund under German tax rules for €12,000. Their purchase cost was €8,000, so the gain before exemptions and allowances is €4,000. For this example, there are no sale costs and no earlier Vorabpauschalen to deduct.
After the 30 percent partial exemption, €2,800 remains for tax purposes. The full €1,000 saver allowance is unused and applies only to this sale in the example. That leaves €1,800 to tax.
The tax here applies to the calculated gain, not to €12,000 of proceeds. The result changes if the units sold have different purchase costs, the allowance has already been used or the fund does not qualify for a 30 percent partial exemption.
Withdrawal rules
The tax calculation does not tell you how much to sell each year. Three common rules produce different cash flows:
No rule makes returns predictable. Each one distributes market swings differently between your portfolio and your spending. Your model should show the net amount you need and the pre-tax sale proceeds required to fund it.
Sequence risk
Return order matters once you withdraw money regularly. Start with €100,000 and take €10,000 at the end of each year. In both cases, the two annual returns are minus 20 percent and plus 25 percent. Without withdrawals, either order would leave the portfolio back at €100,000.
After a loss, you have to sell more units to withdraw the same amount. A long-term average does not show this pressure at the start of retirement. That is why an income plan should include several return sequences, not only one average return.
The model
A useful withdrawal model should track at least four things separately:
If you apply one tax rate to the gross sale, you treat your own invested capital as profit. If you use only one average return, you hide sequence risk. Either shortcut can make a plan look more generous than it is.
A first model does not have to recreate every tax statement. Mark its assumptions, compare several cases and update purchase costs and assessed Vorabpauschalen from your broker records. For large sums or a personal tax question, ask a tax adviser.
Next step
Start with the amount you need to spend each year after tax. Work out the sale proceeds required, then estimate the taxable gain on the actual units you would sell. Only then apply the partial exemption, any unused allowance and the other tax factors.
Run the model with fixed euro payments and flexible withdrawals. Move the weak market years to the beginning and then to the end of the period. You will see how much the portfolio has to absorb when returns fall at the worst time.
For the rest of the plan, read about the 4% rule, Monte Carlo retirement risk and how much money financial independence may require. They answer different planning questions. Your tax estimate still has to come from your own holding data.
The rule describes one possible annual withdrawal. Read what it measures and where its limits are.
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