Should I use tax-free sav­ings for my child’s ed­u­ca­tion?

CityPress - - Tenders -

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.

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