Should I use tax-free savings for my child’s education?
Ihave two young boys, one aged six years in Grade 1 and an eight-year-old in Grade 2. I intend to invest money towards their tertiary education by investing R350 per month for each of them this year and then to increase the amount to R500 each next year. What would be an appropriate investment product?
City Press replies:
A tax-free savings account (TFSA) that invests in a fund that can outperform inflation would be your best solution as you do not have to pay tax on the growth and it is fully flexible in terms of access.
You can open a TFSA in your name as you can invest up to R2 750 per month. You can have more than one account as long as combined they do not exceed a contribution of R33 000 per year.
You could also open the accounts in your children’s names. However, be aware that when you withdraw those funds when they are 18 you will have used up a portion of their own lifetime limits and they would not be able to benefit as much from their own TFSAs in the future.
If you invest in a bank savings account, your returns will be in line with the current interest rates which will not keep up with inflation and will not be sufficient to provide for your children’s education.
As you have at least 10 years before you need the money, you can afford to invest in funds that have exposure to equities such as unit trusts and exchange-traded funds. Make sure you understand the costs as some TFSA products are more expensive than others and this will affect the final return.
The tax-free element is very important. If, for example, you invest R500 per month for your sixyear-old and that grows on average by 10% a year, by the time he is 18 it would be worth R139 000, but you only invested R72 000. That gives you a net capital gain of R67 000. The current exemption for capital gains is R40 000, so you will pay capital gains tax on the balance of R27 000.
There is also dividend tax of 20% which would be paid in a normal investment outside of a TFSA.