There are many ways to maximise having a tax-free savings account (TFSA) and later use the returns towards other long-term investments such as your retirement savings or annuity.
You can use this investment strategy wisely and reach your financial planning goal at a faster pace.
“Many people ignore the benefit of having a TFSA and only consider it for their short-term saving and investment goals like emergencies, deposit for a new car or house. While this is good, we challenge investors to think broadly and strategically diversify the use of their investments focusing on the long-term benefits,” said Samukelo Zwane, the head of product development at FNB Wealth and Investments.
The benefits of TFSAs are not designed for regular withdrawals over the short term as you can’t top up your TFSA again after a withdrawal.
A once-off or regular withdrawal from your TFSA will result in premature use of your tax benefits while wasting a part of your lifetime contribution and losing out on potential investment returns over the long term.
The value of a TFSA is maximised through the tax-free compounding returns over the long term.
Zwane highlights that “tax-free growth can be significant for those who have 20 or 30 years until retirement. If you start investing early into a tax-free savings account when you are in your twenties, you will have contributed the maximum total amount in 15 years. But that invested capital will continue to grow at a rate of return of the underlying investments for as long as you leave it untouched, which means that at retirement you could literally have a couple of million rands worth of additional tax-free capital.”
The reality is that more than 90% of South Africans have not saved sufficiently for retirement. Therefore, a TFSA is a great vehicle to supplement your traditional retirement savings such as a retirement annuity, pension fund or preservation fund.
Different asset classes are allowed as a possible investment in a TFSA. These include unit trusts, bank deposits, exchange-traded funds, and so on.
Another factor to consider with a TFSA is that it can be included as part of the rest of your assets in your will and estate planning. The proceeds of your TFSA can be bequeathed to your beneficiaries.
Retirement savings like a pension fund, provident fund and retirement annuity are typically long-term products, therefore it is important to ensure that when investing your TFSA for retirement purposes, you invest in asset classes whose returns beat inflation over the long term.
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