Tax-free account could be vital to secure child’s financial future
MANY parents try to give their children as big a financial leg up as possible when they start adulthood.
That might mean paying for university, buying their child’s first car or helping with a deposit on a home. Unless a parent is in a fortunate position, they’ll need to save and invest to have any hope of providing them with those things.
You could use education investment policies; however, many parents have opened their child’s education policy when they reach 18, only to find that it’s barely enough to cover their first year of studies.
As such, parents should take advantage of the range of savings and investment tools available to them. One of the most powerful is the tax-free savings account (TFSA).
Maximising savings
TFSAs were introduced to South Africa in 2015. The idea behind the accounts is to try to encourage a culture of saving among South Africans.
With TFSAs, contributions are not tax-deductible. Any interest, dividends or capital gains earned within the account are tax-free. TFSA contributions are subject to annual limits set by the South African Revenue Service (Sars). The limits are around R36 000 annually and R500 000 over your lifetime. The growth and income you receive on your investment are tax-free. The value of the fund can, however, grow indefinitely.
Timing matters
There are, however, a few factors you should consider before opening a TFSA for your child. Key among those considerations is timing.
Remember, children generally have few tax liabilities. If you had another better-performing investment vehicle in their name, they generally wouldn’t be liable for the capital gains and income tax anyway. On the other hand, if you open a TFSA when they’re one or two and start withdrawing when they’re 18 or 19, they could easily end up exhausting their child’s lifetime tax-free allowance.
A better option may be to start using a TFSA later, so that your child accrues most of the tax benefits early on in their career when they’re earning the least. If they reach the threshold of the tax-free allowance by the time they’re in their late twenties, they might be in a better position to use it for something meaningful, like a deposit on a home.
One tool among many
TFSAs are just one among the many tools available to them when it comes to investing in their children’s future. It is important to diversify investments for your child’s future. A TFSA can be a powerful tool but it’s most effective when used at the right time.