WTF Is... A Tax-Free Sav­ings Ac­count?

Bag a SARS-free piggy bank, legally

Women's Health (South Africa) - - CONTENTS - By Wanita Ni­col

You’ve prob­a­bly seen ads for tax-free sav­ings ac­counts (TFSAs). And, if you’re a healthy scep­tic, chances are you’ve been think­ing it’s a trap. Well, good news: it isn’t. What it is, is a fi­nan­cial tool that the gov­ern­ment in­tro­duced three years ago to en­cour­age South Africans to save. HOW IT WORKS

Usu­ally, when you put your money in a sav­ings or in­vest­ment ac­count, the growth on these in­vest­ments may be taxed by the gov­ern­ment. And that’s in ad­di­tion to all the fees you pay to the fi­nan­cial in­sti­tu­tion for the priv­i­lege of hav­ing them in­vest your money. The main ben­e­fit of a TFSA is that you don’t pay tax on any in­ter­est or div­i­dends earned on your money, re­gard­less of how long you in­vest for – and you also don’t have to pay tax when you with­draw your money, ex­plains Sylvia Walker, fi­nan­cial plan­ner, speaker and au­thor of Smart­woman. What’s more, you can in­vest as lit­tle as R50 a month (the price of two cof­fees), so you can start sav­ing even if you don’t have lots of spare cash avail­able, she adds. An­other ben­e­fit is that you can ac­cess your money eas­ily – there won’t be long no­tice pe­ri­ods or penal­ties for mak­ing a with­drawal. And you can choose whether you want a low-risk in­vest­ment op­tion or a high-risk, high-re­turn in­vest­ment. Pretty easy, right?

IS A TFSA FOR YOU?

Be­cause they’re fairly sim­ple, tax-free sav­ings ac­counts can be a good op­tion for first-time in­vestors want­ing to en­ter the sav­ings mar­ket, says Daryll Welsh, head of prod­uct at In­vestec In­vest­ment Man­age­ment Ser­vices. If you al­ready have other in­vest­ments, it’s worth con­sid­er­ing that for any short-term in­vest­ment the first R23 800 re­turns you earn are ex­empt from tax any­way, says Walker. And if you’re older than 65, that goes up to R34 500. But if the re­turns on your cur­rent in­vest­ments ex­ceed those thresh­olds, then a tax-free sav­ings ac­count could be a good op­tion. “While there is lit­tle tax ben­e­fit to be had in the short to medium term for these ac­counts (given cur­rent cap­i­tal gains tax and in­come tax ex­emp­tions), the longert­erm tax ben­e­fit at the time of with­drawal – par­tic­u­larly from a cap­i­tal gains tax ben­e­fit – can be sig­nif­i­cant,” agrees Welsh. As for long-term in­vest­ments, it de­pends on what you’re sav­ing for. If it’s for re­tire­ment, a TFSA is gen­er­ally not the best tool for the job, says Walker, who rec­om­mends tak­ing out a re­tire­ment an­nu­ity for that pur­pose. “But it’s a good way to save for longert­erm goals that are not linked to re­tire­ment,” she says. A prime ex­am­ple – your kids. Welsh says it’s been en­cour­ag­ing to see that a num­ber of ac­counts have been opened by par­ents for the ben­e­fit of their chil­dren. And that by start­ing to in­vest at such a young age, these ac­counts al­low the process of com­pound­ing to work in their favour. “Imag­ine start­ing your work­ing ca­reer with an ac­cu­mu­lated lump-sum sav­ing that takes away the pres­sure to put away more than you may be able to save when start­ing out in the ‘real world’”. The trick to get­ting the most out of your TFSA is to stay in­vest­ing, says Walker. “Don’t be tempted to cash in when money is tight. Re­mem­ber the end goal – why you took it out in the first place. It’s the dis­ci­pline of sav­ing and not the ve­hi­cle that is im­por­tant.”

SIGN ME UP

You can get a TFSA from your bank, an as­set man­age­ment com­pany or long-term in­surance com­pany – in many cases, you can sim­ply sign up on­line. But de­pend­ing on which com­pany you go with, dif­fer­ent fees will ap­ply and you can ex­pect to earn dif­fer­ent amounts of in­ter­est on your money.

THE BANK.

If you’re the type of per­son who’ll take a smaller, guar­an­teed re­turn over the chance of a higher re­turn, a bank may be a good op­tion. “Banks give you a pre­de­ter­mined in­ter­est rate, so you know what your re­turn will be,” ex­plains Walker. But that guar­an­teed in­ter­est rate may be far lower than what an as­set man­ager could get you with a lit­tle more risk. An­other rea­son to go with a bank? If you only want to save the bare min­i­mum monthly amount (say, R50). “Most long-term in­surance com­pa­nies and unit trust com­pa­nies would start at

R200 per month or so for a TFSA,” says Walker. Still shop around though – dif­fer­ent banks of­fer dif­fer­ent rates, charge dif­fer­ent fees and have dif­fer­ent min­i­mum in­vest­ment amounts.

AS­SET MAN­AGERS.

They’ll pos­si­bly get you the high­est re­turns with the least fees be­cause you’re deal­ing di­rectly with the guys who ac­tu­ally in­vest your money. “As­set man­agers and longterm in­surance com­pa­nies of­fer growth based on the per­for­mance of the fund in which you in­vest,” says Walker. The key here is to have time on your side – so if the value of your in­vest­ment does drop, you can leave it in­vested un­til the mar­ket swings back up in your favour. Dif­fer­ent com­pa­nies will in­vest your money in dif­fer­ent funds, so ask about which funds they’re in­vest­ing in, why those ones and how those funds are per­form­ing. If you don’t feel con­fi­dent eval­u­at­ing those num­bers your­self, con­sult an in­de­pen­dent bro­ker or fi­nan­cial ad­vi­sor – one who is not af­fil­i­ated to any com­pany that of­fers a TFSA. She’ll be able to ad­vise you on which of­fer­ing is best for you, based on your time­line, in­vest­ment goals and ap­petite for risk, says Walker.

LO N G -T ER M IN­SURANCE COMPANIE S .

Like with an as­set man­age­ment com­pany, your re­turn will be based on the per­for­mance of the fund your money is in­vested in. Un­like an as­set man­ager, a long-term in­surer could also of­fer you in­vest­ment ad­vice through one of their fi­nan­cial ad­vi­sors. And if you al­ready have, say, a re­tire­ment an­nu­ity or pen­sion plan with the com­pany in ques­tion, it may be tempt­ing just to add on a TFSA. But be­fore you do, be sure to in­ves­ti­gate all the fees, in­clud­ing those for de­posit­ing, with­draw­ing and switch­ing in­vest­ment funds and ask about any oth­ers that might ap­ply.

TS AND CS AP­PLY

Okay, so what’s the catch? For starters, you can only in­vest R33 000 a year into your TFSA and there’s a life­time cap of R500 000, says Walker. Your TFSA con­tri­bu­tions form part of your an­nual tax re­turn, so SARS will know how much you’ve been stash­ing in there. And if you had R33 000, with­drew R10 000 and then put R10 000 back in later in the year? You’ll be li­able for tax on the R10k you put back in – be­cause the limit is on money de­posited, not how much money is sit­ting in the ac­count. The other thing to re­mem­ber is that TFSAs may be tax free, but fees will still ap­ply. And, de­pend­ing on which com­pany you go with, there could be lay­ers and lay­ers of them – in­clud­ing ad­min fees, ad­vice fees, in­vestor fees and with­drawal fees. These will each be ex­pressed as a mi­nus­cule per­cent­age of your in­vest­ment, but they add up. What’s more, these fees are of­ten so well hid­den in the fine print that you won’t even realise you’re pay­ing them. Lastly, “the plan is not pro­tected from cred­i­tors,” cau­tions Walker. “With a re­tire­ment an­nu­ity, even if your busi­ness goes un­der or you lose ev­ery­thing fi­nan­cially, your re­tire­ment sav­ings are pro­tected.” This isn’t the case with a TFSA – an­other rea­son why it’s not the best choice for re­tire­ment sav­ings.

SO, SHOULD YOU GET A TFSA?

A tax-free sav­ings ac­count is a use­ful tool to have for long-term sav­ings goals other than re­tire­ment. It’ll earn more in­ter­est than your cheque ac­count, but un­like with, say, a fixed-term ac­count, you’ll have easy ac­cess to your money if you need it. And as long as you stick be­low the thresh­old, you won’t pay any tax. If you’re not in­vest­ment savvy, the best way to en­sure that you’re get­ting a good deal is to con­sult an in­de­pen­dent fi­nan­cial ad­vi­sor.

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