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Tax-Free Savings Accounts – all you need to know!

Much has been written about Tax-Free Savings Accounts (TFSA) since they launched but in light of the tax year coming to an end, it is always good to remind ourselves of the benefits of investing in one.

I must say, I have always frowned upon the name Tax-Free Savings Account as I feel that for many people it can be misleading and one might end up thinking of it as just another bank account where you save, not associating it with an investment where you should be thinking long term.


What is a Tax-Free Savings account?

 TFSA were launched in 2015 as an initiative by the government to encourage more South Africans to save. When you invest in a Tax-Free Savings Account, any interest, capital gains or dividends from your investment is tax-free, essentially making it a tax haven, albeit a small one.


How does it work?

You can contribute a maximum of R2,750 or R33,000 in one tax year. Anything above this limit, you will be taxed at 40%, making it not worth your while to contribute more to this investment.

While the above numbers may not seem significant, the fact that your investment is free of tax coupled with compound interest, over the long term, investing in a TFSA may prove to be worthwhile.

TFSA also have a lifetime limit of R 500,000 this means that you can only contribute up to R 500,000 in your lifetime into a TFSA and this amount can be reached in just over 15 years if you contribute the prescribed maximum limit every year.

So what does this tell you about investing in a tax-free savings account?

You will only realise and enjoy the real value of a tax-free savings investment, once the value of the investment is sufficient to exceed the annual interest exemption which is R23,000 for individuals younger than 65 (or R 34,500 for anyone above 65) and capital gains exclusion of R40,000. It is therefore best to only invest in a TFSA with a long-term view.

What can you use a TFSA for?


  • To save for a long-term goal i.e.:

To fund your kids tertiary education,

To save for a deposit for an investment property that will supplement your retirement income, or

How about adding some fun into financial planning and save for a trip of a lifetime around the world? etc.

  • If you have maxed out the R350,000 limit in retirement funding, you can top-up your retirement saving with a Tax-Free Savings Account, although you will not get the tax break as you would in a retirement fund vehicle.
  • If you are a freelancer or uncertain about your employment and cannot commit to a fixed amount into a Retirement Annuity. A TFSA allows you the flexibility to withdraw should you really need to.
  • If you want to save for retirement but there is a possibility that you will emigrate, TFSA might be a good option. While you can access your retirement funds upon emigration, it can be a lengthily exercise.
  • For estate planning purposes: if your TFSA is in an endowment vehicle, you can choose a beneficiary. Should you become deceased, the funds get paid directly to your beneficiary, avoiding executor fees but not estate duty.


Where to invest in TFSA?

For those who cannot afford the maximum contribution of R2,750, many banks, asset managers and insurers offer TFSA at a minimum recurring amount from R250 only making it an accessible investment for most.

One can invest in TFSA via Exchange Traded Funds, Unit Trusts, and Endowment policies and some fixed deposits, thereby giving you the investor access to different asset classes, i.e. equity, bonds, cash and property.

Almost all investment houses offer a range of TFSA funds, so you do not have to stick to the banks’ offering of a savings account. In fact, considering that a TFSA should be a long-term investment, a cash-based savings account is not necessarily the best vehicle.


Costs involved in investing in a TFSA

There are some costs involved when investing in a TFSA, these can be:

  • Financial adviser service fee
  • Platform service fee (in the case of a linked service provider)
  • Service fee of the fund selected

Providers are currently not allowed to charge performance fees on TFSA.

If one of your new year’s resolutions is to start investing for the long-term, I hope you do consider a Tax-Free Savings Account as part of your portfolio.


This article first appeared in City Press.


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