Tax-free savings a winner
Tax-free savings accounts (TFSAs) were introduced in 2015 – and while most people have heard of them, many people have still not started their investment in a TFSA. That’s a great pity – because this vehicle offers some spectacular benefits.
Tax-free growth, coupled with loads of flexibility
One of the great things about TFSAs is that they leave a lot to the investor’s discretion. The regulator is not at all prescriptive about how long you have to invest for, or when you can access your money.
While legislation does put limits on the kind of funds that providers can offer in a TFSA, these regulations are mostly directed at managing the overall cost of investing.
Legislation is not prescriptive either with respect to your asset allocation or the mix of funds in your portfolio. This is great news for investors, because when it comes to growing your capital in the long run, you really want to allocate as much as possible to equities.
Equities, or shares, is the asset class that has historically outpaced inflation the most over the long term, making them a necessity in any long-term portfolio.
Of course, equities also tend to be volatile in the short term (so be prepared for some ups and downs along the way).
The benefits of tax-free growth in the long run
While the accessibility of TFSAs makes them a great convenience to have on hand, the benefits they offer really begin to stack up in the long run. Unlike a retirement annuity (RA), for example, you cannot claim a tax deduction on your contribution. But all the growth in your portfolio, including interest, dividends and capital gains, – is tax free.
Usually, you’d pay away a portion of the growth on your investment as tax in various forms over time.
In a TFSA, instead, this money is left to grow tax free – and earn more interest and dividends that continue to grow tax free!
The compounding effect over time can be very powerful, but you need to be patient, invest for as long as possible, and resist the temptation to make unnecessary withdrawals.
Use TFSAs to add to your retirement toolkit
TFSAs also make a great addition to your retirement savings toolkit. While many people think investing in a TFSA or an RA is a mutually exclusive decision, they actually work very well together as part of an overall balanced portfolio.
The TFSA provides additional flexibility, while the RA ensures you grow a designated pool of money that cannot ordinarily be accessed before retirement.
Know the limits
Contributions are limited to R33,000 per tax year, or R500,000 over your lifetime. If you haven’t started a TFSA yet, the end of the tax year (February 28) drawing closer provides an additional incentive for you to get in touch with your financial adviser.
But whatever you do, remember that the benefits of TFSAs stack up in the long run. So don’t delay too long!
Disclaimer: The information in this document is provided as general information. It does not constitute financial, tax, legal or investment advice and the PSG Konsult Group of Companies does not guarantee its suitability or potential value. Since individual needs and risk profiles differ, we suggest you consult your qualified financial adviser if needed. PSG Wealth Financial Planning (Pty) Ltd is an authorised financial services provider. FSP 728.