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Tax-Free Accounts

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Tax-Free Accounts rank first for me as a saving and investment priority in my personal financial plan. If I could save nothing else that year, I would save my TFA contribution, that’s how seriously I regard it. They’re one of three investments I consider important to a well-rounded retirement investment strategy:

  1. Tax-Free Investments,
  2. Retirement Annuities,
  3. Index Investments.

Tax-free accounts were introduced in 2015, and they are, quite simply, the cat’s pyjamas. It’s essentially the government giving you a pass to ride a big, greased waterslide to generational wealth.

Tax-free accounts are a savings vehicle designed to help South Africans really punch up their long-term savings. They do this by eliminating any tax on this account: any interest income, capital gains, or dividend tax. The current contributions limit is R33 000 per tax year and R500 000 over a person’s lifetime. Sounds like a chunk, but not, like, enough to retire on, right?

That is until you realise that while the contributions are limited, the growth is not. That’s where this product is very special indeed.

Potentially, if you managed to max out your annual contribution every year for a little over fifteen years, you could have about just about R1 million – double your contribution limit, from that 15 years of growth! If you left it a further 15 years, that figure could be nearer R2.4 million, from purest growth. The money only continues to grow exponentially from there, totally free from any capital gain or dividend tax at all. It’s all reinvested back into the fund.

If a child had a tax-free account opened for them from birth and didn’t touch the money or save a further cent until age 65, they could be looking at a super comfortable retirement nest egg of over R26 million. If they could bear to leave the money alone that long, that is. They are legally entitled to it at the age of 18.

Anyone can open tax-free account with almost any financial service provider in South Africa by now, but there are a couple of things to consider before you do so.

TFAs are a long-term commitment

The real wonder of a Tax-Free Account happens over the long term. With all its earnings untaxed and reinvested into the fund, it can grow faster than just about any other investment vehicle, even very low-fee ones.

Therefore, it’s the last money you ever want to touch. And because of its stringent contribution limits, YOU ABSOLUTELY, POSITIVELY CANNOT treat this account as a transactional account. I would even refrain from using it as a big short-term goal-saving vehicle, such as for your kids’ schooling or a house or a wedding. Those are not all equally important considerations, but they’re also super not your freaking old age retirement plan.

Once the money’s invested, no more can be invested. You cannot replace it if you withdraw it. Your lifetime limit remains permanently lowered.

While it’s easy to get excited about hitting your TFA maximum as soon as possible, you want to be sure you’re going to leave the money where it is. Investing R2750 a month might be the slower, but more solid choice.

Not all TFAs are created equal

TFAs can be savings or investment accounts. TFSAs are still the most popular choice by far, and banks will give you not too bad interest rates on their tax-free savings accounts, but you will only earn bank interest. And since TFAs are long-term products with no capital gains or dividend or interest income tax on them, they’re absolutely made for an investment account.

Most financial product providers offer TFIAs (Tax-Free Investment Accounts) but can potentially sting you on fees. Shop around for low-fee offerings. I keep my TFIA with EasyEquities, which simply gives you a TFA when you sign-up, and you can buy index funds through their platform as easily as with their main account. You’re likely to only be able to invest your tax-free pot into index funds and ETFs because of the risk that investing in single stocks poses.

Day-trading in your TFSA is possible but not recommended.

If you want to move your TFA, do not cash it out. The procedure takes a few days and some paperwork, but you can move it directly from one TFA account into another. Contact both providers and they’ll have you sign two similar forms okaying the transaction.

Here’s two places you can open a TFIA and buy any exchange-traded fund you like:

Other financial service providers, like Satrix, Sygnia or Allan Gray and Standard Banks’ Online Share Trading Platform will also offer TFIAs, but also only their own products to invest in.

This article was originally posted on the Drawing Money blog. All figures were correct at time of publishing, Apr 13, 2019. Article reposted with permission.

Related: Tax-free savings account vs. Retirement annuity? Who wins?



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I’ve been a freelance artist in the film and animation industry since 2012 and I’m still alive! I am not a financial advisor nor am I legally enabled to give you financial advice. I’m a storyboard artist and a writer who’s made a lot of mistakes with money and consider myself well-read on the subject because I had to teach myself. The content on my blog is for educational purposes only and is my own experience and opinion and research.

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