By Hedley Lamarque, Certified Financial Planner®, BDO Wealth Advisers
A tax free savings account (“TFSA”) is a very important and under-used investment vehicle, especially as the growth in the investment attracts no tax, especially the dreaded Capital Gains Tax, which at a marginal tax rate of 45% is now an effective 18% CGT rate for individuals or 36% applicable to discretionary trusts.
The name tax free savings account is very misleading as it can be a traditional savings account, fixed deposit, a unit trust investment, a JSE-listed exchange traded fund or a combination of all of all of these, and not just a SAVINGS account. You can therefore mix your investment in a TFSA to how you see fit e.g. have a mix of different savings and investment products. The only proviso is that your total contributions do not exceed the annual limit (revised now up to R33000) and the lifetime contribution limit (R500000).
There were, however, limitations placed by National Treasury on the governance of a TFSA such as; performance fees cannot be charged; it must be transparent and the fees must be reasonable.
But, there is absolutely no limit to how much your investment can grow, and the beauty is that it is all tax free. Interest, dividends and all capital gains on growth assets are all tax free!
You can either use it to start saving once a child is born to use for their education (it will take you just over 16 years to achieve the lifetime limit of R500,000) or you can use it to supplement your retirement income. The nice thing when you retire is that the amount you withdraw out of the TFSA will not increase your taxable income.
In a TFSA, your money is not tied up and as such you can withdraw at any time. The regulations state that the money must be made available to you within seven days; except of course if you have invested in a fixed deposit. It is important to remember that if you do withdraw you cannot roll-over that amount as a contribution for the following year. For example, if you withdraw R20000 this year, you cannot then invest R53000 next year i.e. your maximum annual contribution limit still applies.
The benefits mentioned above must be taken in context, as you are using after tax money to invest in a TFSA. It is important that you should always try utilise as much of the retirement saving deduction allowed first i.e. 27.5% of remuneration or taxable income, as a Retirement Annuity is still the most efficient investment vehicle out there, becuase SARS is in effect assisting with your investment growth and you get a tax break on the contributions. The only challenge is that your money is tied up until you are 55 in a Retirement Annuity
It is advisable that the TFSA be used once you have utilised the retirement annuity benefit to its fullest, or where you want to invest surplus cash into, for example, it is a better choice to do the investment in a TFSA with underlying unit trusts as your investment, rather than investing directly into unit trusts, as you will then bypass paying Capital Gains when you cash in your investment. Ultimately, the intention of Treasury is to do away with the interest income exemptions. So best you consider taking advantage of the tax free saving haven.
If in doubt, speak to your financial adviser.
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