EXAMPLES: MORE INCOME, LESS TAX

HERE are two examples of how a TFSA can provide tax relief and add value to people in retirement.

EXAMPLE 1

Sarah, who is 25, aims to contribute the maximum of R33 000 per tax year to a TFSA and stay invested until she reaches 65, when she will draw a monthly income from it. Based on the assumptions in the article, the inflation-adjusted value of her TFSA at 65 will be about R2 259 000. This could equate to a sustainable tax-free income of almost R10 000 a month, assuming an annual withdrawal rate of 5%. If Sarah needs a gross monthly income of R25 000 in retirement, she will have to draw only R15 000 from the annuity she bought with the proceeds from her company pension fund or RA. Sarah will also reduce her tax liability, because she will be taxed on R15 000 a month and not R25 000.

EXAMPLE 2

The parents of five-year-old Max want to help him provide for his financial future and open a TFSA in his name. Assuming that Max’s parents contribute the maximum amount each tax year until the lifetime limit is reached, and no withdrawals are made, when Max turns 65 his TFSA could have a value of about R4 112 000 in today’s terms. This equates to a sustainable tax-free income of close to R17 000 a month, assuming an annual withdrawal rate of 5%. If Max requires a monthly income of R25 000 in retirement, he will be able to withdraw only R8 000 from his other retirement savings, and it will be on only this amount that he will be liable for tax.