Demystifying Tax-Free Savings Accounts: Your Top Questions Answered

A Tax-Free Savings Account will forever be an investment vehicle I love and recommend. I've always said I don't like the name 'account' because automatically, one would imagine that this is a normal savings account; which is not. A tax-free savings account should be looked at as a long-term investment, not a short-term savings account!

So what is a Tax-Free Savings Account (TFSA)? And why do I looove it so much?

Introduced in 2015 (the year my wonderful son was born) the TFSA was created to promote a culture of saving. However, many individuals continue to lack an understanding of the significant potential it holds as a tool for building wealth. Misconceptions persist among a large number of people regarding the proper use of TFSA.

The beauty of a TFSA is that it enables individuals to save money and earn investment returns without incurring taxes on interest, capital gains, or dividends.

TFSA Limits

• You can contribute up to R36,000 per tax year (1March- 28 February) which equals to R3,000 per month. Now, depending on your financial situation; if you are able to contribute R3,000 please do so, if on the other hand, you are can only afford R1,000 or R500 or less, you can and should do so as well.

• The lifetime limit is R500,000- meaning that your total contributions into a TFSA can only be upto R500,000. You will reach this lifetime limit in just 14 years (R500,000/R36,000 =13.89).

• Any annual contribution that exceeds R36,000 will be taxed at 40%, so make sure you don't exceed this limit!

FAQ's

1. Can I have more than one TFSA

   
   

Yes you can have more than one TFSA - but the rules remaim the same, your individual limit every year is R36,000. Meaning that if you were to have 3 TFSA's for example - one would have R10,000, the second one would have R10,000 and the third one would have R16,000 -- all in all, no matter how many TFSA's you have, they will collectively have to be R36,000 in total or less (depending on how much you have contributed)

2. If the limit is R500K, is the investment growth limited?

Absolutely not, the growth is not limited. Look at the example below, you can clearly see that the longer you leave the funds invested, the more growth you will have - this growth in NOT limited.

3. Can I withdraw from my TFSA/Does withdrawing from my TFSA reduce the lifetime limit?

Yes you can withdraw from your TFSA but remember the aim is to invest in your TFSA for at least 14 years! It should not be used as a short-term savings account!

Yes, withdrawing from your TFSA does reduce your lifetime limit. For example, lets say in this tax year, you have contributed R20,000 so far but perhaps you need the funds for some sort of emergency 🚨 , you cannot turn around and say you will replace those funds later, your limit still remains R36,00 - meaning you can only contribute R16,000 into your TFSA now since you withdrew your contribution of R20,000!

4. Where should I invest

You should open a TFSA with an asset management company. I like www.satrix.co.za, www.sygnia.co.za, www.easyequities.co.za to name a few, NOT with your bank!!!

5. Can I switch from one service provider to the next?

Yes, but transfers should only be carried out between service providers. You will not be able to switch to another financial institution by withdrawing your funds from your TFSA and putting them into a TFSA with a different provider – that would be seen as a withdrawal. So make sure you give an instruction to your service provider when moving to your new preferred asset management company.

6. Can I open a TFSA for my child

Yes, you absolutely can. I have my two boys, age 9 and 6, and both of them have a TFSA in their own names. I don’t always max it out but I will never withdraw from it. The goal for these TFSA is to gift them with financial freedom when they are much older.

Women & Money Brunch

19 October 2024, 10:30–16:30|Randpark Club

Register Now