Is cash appropriate for tax-free savings?
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.