RANDS AND SENSE
By Siya Soga
You know you’re an adult when you’re reading articles about how to save! But it’s so important, and the earlier you start, the harder your money will work for you, setting you up to reach your financial goals.
There are lots of buzzwords in this space and it can get quite confusing. ‘Tax-free Savings Account’ is one of those buzzwords – also known as a TFSA. Maybe you’ve heard people talking about TFSAs around the braai fire? Well, here’s what you need to know about them and why you should consider adding one to your savings portfolio.
What is a TFSA?
Put simply, it’s a savings fund that you can contribute to up to a certain limit, and any growth within the fund is not taxed. TFSAs were introduced in 2015 by the government to incentivise people to save, and they’re regulated by the Income Tax Act.
The contribution limits are as follows: You can contribute up to R36 000 per year, with a lifetime limit of R500 000. Be careful not to over-contribute! Anything you put into the fund over and above the limits is taxed at 40%. Similarly, any withdrawals you make from a TFSA can’t be topped up and therefore reduce the lifetime limit.
It sounds complicated, but it’s easier to understand if you think of a TFSA as a long-term investment. Because the growth within the fund is not subject to capital gains tax, interest or dividends tax, you want your contributions to grow as much as possible. That means leaving your money invested for as long as possible. Say you contribute to the maximum of R500 000, for example, and you leave that money invested for 10 years at 7% growth per annum. By the end of the 10 years, your investment will likely be worth more than R1 million and you can withdraw the full amount without paying any tax.
What should I use it for?
The long-term power of a TFSA makes it an excellent savings vehicle to boost your long term investment goals or to help you reach any other major financial goals. (Because of the limits, is not a substitute for a retirement fund!)
Any individual is allowed to contribute to a TFSA. This means you can open one in your child’s name, for example, to save towards his or her tertiary education.
Another positive is that you can open more than one TFSA and transfer your savings between providers to maximise returns. (Note, however, that the contribution limits apply to the total sum invested in all TFSAs.)
How do I open a TFSA?
Almost all licensed financial institutions like banks, long-term insurance providers and investment companies offer tax-free investment products. You can start saving from as little as R250 per month, depending on the institution you choose.
As always, it’s best to meet with a Certified Financial Planner professional to discuss the different products and which one will work best for you, depending on your financial goals. Maybe you want to save towards opening your own business or you want to send your children to an overseas university one day?
A CFP professional will help you structure the best plan to help you reach those goals, by incorporating a TFSA into your greater financial portfolio.
Siya Soga is an Assistant Financial Planner at BDO Wealth Advisers.
PERSONAL FINANCE