It is over 10 months into the tax year, and a critical way taxpayers can benefit from tax laws is to contribute to a tax-free savings account (TFSA).
The South African government introduced TFSAs in 2015, and each taxpayer can make a maximum annual TFSA contribution of R36 000. The lifetime contribution limit is R500 000. All capital growth and income, including dividends and interest, received from money invested up to the annual limit in a TFSA is tax free.
Sunday World spoke to 10X Investments product development specialist Kelin Pottier about how readers can maximise their TFSA benefits.
Start investing as soon as possible
It takes up to 14 years for an investor to reach their lifetime TFSA limit, so start investing as soon as possible.
Invest long term
It pays to invest your money in a TFSA over the long term because these savings compound. For example, money invested in a TFSA achieves a tax saving that adds an extra 1% to an investor’s annual return.
After 20 years, the tax savings can make up almost a quarter of a TFSA’s total value.
Pottier said that the scenario had three assumptions:
- First, the investor’s TFSA portfolio is growing at consumer price inflation plus 6.5%.
- Second, the investor is on the highest marginal tax rate of 45%.
- Third, there is an equal split of returns between income, dividends, and capital gains.
Invest in high-growth investments
Investors should ensure their TFSA portfolio has high exposure to growth assets such as shares and property.
“High-growth investments equal high tax benefits, but low-growth assets mean low tax benefits,” Pottier said.
Avoid the temptation to make withdrawals
Investors should avoid the temptation to withdraw their TFSA money. If an investor withdraws TFSA money, the investor cannot replace that withdrawal with another contribution.
Don’t exceed your contribution limits
Avoid contributing over R36 000 to a TFSA or a combination of TFSAs in a single tax year. A tax penalty of 40% is applicable on any excess contributions an investor makes to a TFSA.
Top up your TFSA
If you can only afford to invest R3 000 each month, which will see you invest R36 000 yearly, top up when you get a bonus or have extra money left over at the end of the month.
Don’t think of your TFSA as your savings account or emergency fund
Pottier said investors should avoid making withdrawals as they only have a fixed contribution limit.
“Every time you pull money out, you have less money to invest in your TFSA.
“Because it is a long-term investment, please do not treat it as your savings account. Your TFSA is not there to dip in whenever you want to go on a holiday trip or pay for an unforeseen expense.”
Pottier said when the government launched TFSAs, the banks were the first to launch them. Thats why ordinary
people often associate TFSAs with transactional bank accounts, which can result in users of TFSAs utilising them like their bank accounts.
Invest on behalf of your children or grandchildren
Pottier said many parents and grandparents wanted to invest in a TFSA for their children and grandchildren, respectively.
“The debate is that you are taking away on the one hand, a tool in the financial toolbox of the minor once they reach the age of majority, and they will not be able to contribute further to a TFSA.
“On the other hand, they would have had compound growth for up to 14 years.
“Assuming that the child does not touch their TFSA, then the returns from the account will compound and that far outweighs only starting to contribute from the age of 18.”
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