Is cash ap­pro­pri­ate for tax-free sav­ings?

CityPress - - Busi­ness -

Hlakanyane asks:

I am a 52-year-old man and I cur­rently con­trib­ute R2 500 a month into a tax-free sav­ings ac­count. This is in­vested in cash and stand­ing at R10 000 so far. Is it bet­ter to leave it in the bank, or go di­rect through the JSE? What are the pros and cons for each?

City Press replies:

Tax-free sav­ings ac­counts (TFSAs) are best for longterm in­vest­ments be­cause one of the big­gest tax sav­ings is on cap­i­tal gains tax, which builds up over time.

Un­der cur­rent tax leg­is­la­tion, even if you are in­vested out­side of a TFSA, you are able to earn R23 800 in in­ter­est each year be­fore you pay tax, so you can in­vest about R400 000 in a bank ac­count be­fore you pay tax. So, for cash sav­ings, a TFSA is not a real ben­e­fit.

Another rea­son TFSAs should be con­sid­ered for longer-term sav­ings is that if you with­draw funds, you are not able to re­place them, and this af­fects your over­all life­time limit of R500 000.

As­sum­ing you are us­ing the TFSA for a longer-term in­vest­ment (more than five years), you need to be in­vested in a prod­uct that keeps up with in­fla­tion and grows your money, such as eq­ui­ties (shares listed on the JSE). This could be ac­cessed via unit trusts and ex­change-traded funds.

Most unit trust com­pa­nies as well as providers of ex­change-traded funds, which in­clude Sa­trix and var­i­ous stock bro­kers, of­fer TFSA op­tions. Un­der­stand the costs and make sure they match your time hori­zon and risk pro­file.

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