Tax-free savings accounts
1. The basics
THE GOOD: It’s tax-free! That means you’re not liable for any capital gains tax or income tax on the dividends and interest you get.
THE CAVEAT: There’s a limit to the joy. ‘Currently, the maximum amount you can contribute to a tax-free savings accounts (TFSAs) is R33000 per year (or R2750 per month via debit order) and the maximum lifetime contribution is R500000,’ says Jaco.
2. Is it like an emergency cash fund?
THE GOOD: You can withdraw money from your TFSA at any time without any penalties.
THE CAVEAT: Because you’re allowed a maximum contribution of R500000, if you withdraw, you can’t deposit more to top it up. It’s what you’ve deposited, not what’s in the account, that matters. PLUS, at the moment, a moneymarket account would be a better place to store ready cash. ‘You can get up to 8% interest, and you can keep close to R300000 in there before you start paying any tax on the interest,’ says Jaco.
3. It may be the longest relationship of your life
THE GOOD: ‘After 20 years, the value of the tax saving becomes substantial relative to the size of the original contribution,’ Jaco estimates.
THE CAVEAT: That tiny bit about the 20 years – you are in this for the long haul! ‘It is important not to withdraw money unnecessarily from your TFSA,’ says Jaco, ‘especially as you can’t top up once you’ve reached your maximum lifetime contribution.’
4. Should I start right now?
THE GOOD: Of course! See above – the longer you leave the money in the account, the better the returns will be.
THE CAVEAT: ‘Your first savings priority should still be your contribution to a registered retirement fund (either through your employer or via a retirement annuity). As a rule of thumb, that comes first,’ says Jaco.
5. Where is the money invested?
THE GOOD: ‘TFSAs aren’t restricted – as is the case with pension funds and retirement annuities – in terms of the asset classes in which the money can be invested,’ says Jaco. In plain English, that means there are more options on where your money can be invested.
THE CAVEAT: Having fewer restrictions means it’s riskier. While the returns are potentially bigger, they could also be smaller. ‘We believe the asset allocation should reflect the fact that it’s a long-term view, with more equities and offshore exposure rather than cash, which provides a much lower return over the long term,’ says Jaco.
6. Which fund do I choose?
THE GOOD: There are plenty available to choose from.
THE CAVEAT: You’re in it for the long haul, so choose a fund that reflects that. ‘Look at popular multi-asset funds like the Investec Opportunity Fund, or similar funds from other fund managers,’ suggests Jaco, ‘because they provide a good blend of domestic and offshore exposure across various asset classes. Or, given the continued political and economic uncertainty here and the fact that you can take a long-term view on your TFSA, you could consider an offshore equity fund, like the Investec Global Franchise Feeder Fund.’
7. How would it work?
‘If you start saving in a TFSA monthly as soon as your child is born, and you contribute the maximum amount, R2750 per month, you’d be able to contribute for just over 16 years before you reached your maximum allowance of R500000. Say your investment returns were 10% per annum after all costs, the value of your investment at the end of the period would be about R1.2 million! Taking into account inflation, the equivalent value in today’s money would be in the region of R478000.’
Jaco van Tonder, director of Advisory Services at Investec Asset Management