Tax-free sav­ings ac­counts

Fairlady - - CONTENTS - By Shireen Fisher

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

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