Equity savings account or book-entry account?

While the equity savings account is a simple tool for those who want to save in equities, a book-entry account makes sense in some cases. So what are the things you need to know when weighing between these two options?

At the beginning of 2020, Finnish equity savers were given a brand new alternative to the traditional book-entry account with the introduction of the equity savings account. An equity savings account consists of a cash account and a custody account for book-entry securities in the same package. You can transfer money to it and use it to trade in Finnish and foreign listed equities. *

The key difference between an equity savings account and a book-entry account is in their taxation. First of all, when you trade in the shares held in your equity savings account, you will not automatically incur tax consequences for the year when you make the trades – instead they will be taxed in the future when you withdraw money from the account. With a book-entry account, your capital gains or losses are included in your taxation for the year the trades take place. 

Similarly, no taxes are withheld from dividends paid by Finnish companies to an equity savings account. On a book-entry account, a withholding tax is levied on 85% of dividends paid by Finnish companies.

Thanks to the system of deferred taxes, you can reinvest capital gains and dividends in full on an equity savings account. 

Equity savings accounts are a good alternative for long-term and active equity investors 

Tanja Eronen, Head of Nordea Funds Ltd, believes that an equity savings account is a good option for savers who appreciate a straightforward solution. 

“It’s easy to check at any time how much of your savings is capital you invested and how much is return on investment. When you withdraw money from the account, you can quickly calculate how much taxes you have to pay,” Eronen says. 

Due to the deferral of taxation, Eronen considers the equity savings account to be a wise choice for those who plan on investing for several years, decades even, and those who like to actively trade their equity investments and reinvest their dividends. 

“Over the long term, you get to benefit from the effect of compounding your returns. The longer your investment horizon, the more profitable the equity savings account becomes. For this reason, an equity savings account is particularly well suited to young investors and for saving for your child or grandchild,” she adds. 

An equity savings account is also the best option for students because dividends and sales on the account do not affect their student financial aid. However, Eronen points out that Kela will take dividends paid to an equity savings account into consideration in the general housing subsidy, which nowadays covers students as well. 

A book-entry account for those seeking wider diversification and buy-and-hold investors 

Tanja Eronen recommends a book-entry account for those who prefer to withdraw their dividends to spend on living expenses, for example. 

Similarly, a book-entry account is a better alternative for investors who follow a buy-and-hold strategy. 

“When you sell stocks held on a book-entry account, it’s possible to apply the presumed acquisition cost, which in some cases could lead to you paying less taxes on your returns. The presumed acquisition cost can’t be applied on the equity savings account.” 

Eronen also recommends a book-entry account for those you wish to diversify their investments into foreign equities or into exchange-traded funds (ETFs). You can acquire other securities besides equities on a book-entry account, whereas this isn’t possible with an equity savings account. 

In addition, deductions for losses work differently on the book-entry account and the equity savings account. With a book-entry account, you can sell an investment at a loss and deduct this loss from other capital income over the next five years. With an equity savings account, you can only deduct your losses by closing the account, which means you would have to sell all the equities held there.

Read about these two alternatives and choose the most suitable way for you to invest.

* Finnish securities are held in a book-entry account maintained by Euroclear Finland. Foreign equities are held in custody by Nordea.