Why a TFSA is the gift that keeps on giving

Scratching your head over festive season gifts for your offspring (or your better half)? We spoke to Jaco van Tonder, Advisor Services Director, for the four reasons why you should look no further than a Tax-free savings account. Rather than spoil your little angels with short-term plastic gifts and toys now, why not look to their future and put that money into a TFSA, where it could compound over time? One day, you could afford them a gift far, far more valuable. Like a car, a graduation robe or even a deposit on a home.

1. It’s in the name – no tax is payable!

   TFSAs were introduced in 2015 to encourage South Africans to save more. A TFSA’s appeal lies in the fact that the growth and income received on the investment is entirely tax free, which means you are not liable for any capital gains tax (CGT) or income tax on the dividends and interest received on your investment. This means that more of your money is available to benefit from the power of compounding.

2. They’ll thank you later

   Once you’ve taken the plunge, remember that a TFSA should be used as a long-term investment vehicle. Why long term? You would typically only start seeing the returns of your TFSA matching or even exceeding your contributions after about 10 years. After 20 years the value of the tax saving becomes substantial relative to the size of the original contribution and could represent over 20% of the total fund value.

   The other important point to note here, is that there are limits to how much you can contribute. Currently, the maximum amount you can contribute to a TFSA is R36 000 per year (or R3000 per month via debit order) and the maximum lifetime contribution is R500 000. So, the sooner you start the investment, the longer it has to grow.

3. Complete flexibility with the underlying investments

   There are a multitude of service providers and options to choose from, and unlike pension funds and retirement annuities, you’re not restricted in terms of the asset classes in which the money can be invested.

   However, given the long-term nature of TFSAs which we highlighted above, you should consider structuring the underlying portfolio for more growth, i.e. aim to have a higher allocation to equities and offshore exposure rather than to cash, which provides a much lower return over the long term.

   With practically every financial services company offering TFSAs, it can be confusing. There are several benefits to picking an investment platform (like the Ninety One Investment Platform). In addition to the fact that investment platforms offer an extensive choice of local and international funds covering all risk profiles, asset classes and sectors, you also have the flexibility to switch between them.

4. You can withdraw money at any time (but try not to!)

   If you’re in a pinch, you can withdraw money from your TFSA at any time without penalties. However, once you’ve reached your lifetime maximum allowance, you can’t top up again after a withdrawal. And remember, if you dip into your TFSA over the short term, you are not only not getting the tax benefit that accumulates with time, but you’re also losing out on the potential long-term returns.

   In conclusion, whether you want to boost your or your spouse’s retirement pot or provide your kids with a wonderful start in adult life, look no further than a TFSA.

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