We are coming to the end of the third tax year in which tax-free savings (TFSAs) have been punted, after their introduction on 1 March 2015. If you are already making use of this vehicle, great. If not, and you are getting annoyed that you are always being told about it come February, perhaps listen up this time. They are worth it
You should all be saving, and you should all be saving at least R33 000 a year. All this vehicle is telling you to do is to ‘ringfence’ that R33 000 as a tax-free saving. That does not mean you have to go invest the money in a complex fund that makes no sense to you. You can invest in just about anything (kind of).
The most popular are cash accounts (which, as you should know by now, I’m not a fan of), but you can also invest in unit trusts, ETFs, life insurance policies, you name it. You merely need to approach the holder of these accounts and say, ‘Please, can I open a TFSA with you’ and they should be more than willing to talk you through the process. The easiest way is to go to your current banker or investment house and see what TFSAs they have and pick one.
The potential saving is very attractive. If you invest R33 000 a year for 10 years in an instrument that earns you a return of 10% per year (as an example), you would accumulate roughly R580 000. Your total contributions would only be R330 000 though (R33 000 x 10 years). That means you have made a capital gain of R250 000, but no tax will be payable because you’ve invested in a TFSA. In comparison, if this investment had not been in a TFSA and you withdrew that full amount, you would use up your full R40 000 annual CGT exemption and be taxed on the remaining R210 000. With an inclusion rate of 60% and a tax rate of 35% (let’s say), that would amount to tax payable of roughly R44 100.
Maybe that does not seem like a big enough saving for the effort, but given that it really is no effort at all, I am telling you that it is worth it. Every year I pick a different account in which to ‘ringfence’ my tax-free savings, so I am probably creating more effort for myself than I need to, but even with this approach, it has been seamless every time.
Furthermore, remember that the R33 000 limit is per person (with a total lifetime limit of R500 000). Therefore, you could open these accounts for your children. Want to save for their education? Why not do so tax free and have slightly more at the end of the day?
Please note that the author of this article is not a certified financial adviser in terms of the Financial Advisory and Intermediary Services Act 37 of 2002. ASA and the author cannot be held liable for any loss (including indirect and consequential loss) arising from your reliance on the opinions given in this article. Should you nevertheless elect to rely on this article, you do so at your own risk and agree to indemnify ASA and the author from any loss or damage that you may suffer as a result.
IN SHORT
With the 2017/18 tax year coming to an end, it is the perfect time to consider your future investment decisions and how best to do your tax planning. Tax free savings accounts (TFSAs) are National Treasury’s way of trying to incentivise you to save more. And there aren’t any tricks to it. It is incentivised savings that everyone can use and benefit from.
Personal Finance Advisor
Gizelle Willows PhD, CA(SA) is an Associate Professor at the University of Cape Town
