Seven things you need to know about tax free savings accounts

2018-05-17 06:02

By Juggie Govender of East Coast Financial Services (Pty) Ltd – FSP 44760

1. THE BASICS

Its tax free! That means you’re not liable for any capital gains tax or income tax on the dividends and interest you get. There is a limit to the joy.

The maximum amount you can contribute to a tax-free savings accounts is
R33 000 per year or R2 750 per month via debit order and the maximum lifetime contribution is R500 000(current tax legislation).

2. IS IT LIKE AN EMERGENCY CASH FUND?

Not necessary, you can withdraw money from your tax free savings account at any time without any penalties. Ideally, this investment should be for a period of 5 years or more. Because you’re allowed a maximum contribution of R500 000, if you withdraw, you can’t deposit more to top it up. It’s what you’ve deposited, not what’s in the account that matters.

3. IT MAY BE THE LONGEST
RELATIONSHIP OF YOUR LIFE

After 20 years, the value of the tax free savings becomes substantial relative to the size of the original contribution. It’s the time and not the timing of the market that matters.

“Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn’t ... pays it” — Albert Einstein.

4. SHOULD I START RIGHT NOW?

Yes, the sooner the better. The longer you leave the money in the account, the better the returns will be.

5. WHERE IS THE MONEY INVESTED?

Tax-free saving accounts are not restricted as is the case with pension funds and retirement annuities, in terms of the asset classes in which the money can be invested. Having few restrictions means it’s riskier. While the returns are potentially bigger, they could also be smaller. Asset allocation should reflect the fact that it’s a long-term view, with more equities and offshore exposure rather than cash, which provides a much lower return over the long term.

6. WHICH FUND DO I CHOOSE?

There are plenty available to choose from, it all depends on the amount of risk that you are prepared to take and the term you want to invest for.

7. HOW WOULD IT WORK?

If you start saving in a TFSA monthly as soon as your child is born and you contribute the maximum amount R2 750 per month, you would be able to contribute for just over 16 years before you reached your maximum allowance of R500 000.

Say your investments returns were 10% per annum after the cost, the value of your investment could be about R1.2 million.

Taking into account inflation, the equivalent value in today’s money would be in the region of R478 000.

This article, is an excerpt from Fairlady by Jaco van Tonder of Investec.

You could contact me at 083 399 3905, my office at 032 944 3051 or e-mail me at juggieg@telkomsa.net for an appointment or further information and any other financial advice.

Disclaimer

The information is only intended to be of a general nature and should not be relied upon by any part without obtaining full details from a licenced financial service provider.

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