ince the launch of the tax-free savings account (TFSA) offering, there has been a strong campaign by investment houses for parents to open a TFSA in their child’s name to save for school or university fees. A press release from Investec Cash Investments stated that “if a parent started contributing R30 000 a year into a tax-free savings account with a 7% fixed interest rate, before their child turns 17, they would have met the current lifetime contribution limit of R500 000. If they left this in the tax-free savings account until their child turns 18, thanks to compound interest (at a constant rate of 7% a year), their accumulated savings would have grown to more than R1 million.”
This is powerful messaging, but we need to take a step back and understand the implications of cashing in the money at this point to pay for a child’s education at the age of 18.
The child would have reached their lifetime limit of R500 000 – while Treasury is likely to have increased that limit by the time the child is 17, it would still be a significant portion of the full allowance that your child would ever be able to use for their own future savings.
This means you would be limiting their options in terms of their own future goals because they would not be able to make further use of the TFSA offering.
On the other hand, an 18-year-old would not qualify for either capital gains tax or interest income tax. Capital gains tax and tax on interest is determined by your current marginal tax rate; as, presumably, the child would not be earning an income and would, therefore, have a zero marginal income tax rate, he/she would not pay capital gains tax or interest income on any investment outside of a tax-free savings account.
One could argue, therefore, that the use of a TFSA for an investment you intend to cash in before your child starts earning an income would be wasting a valuable vehicle that they would need once they become taxpayers.