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CityPress - - Business -

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.

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