As Tax-Free Savings Accounts (TFSAs) approach their eight-year milestone in February 2023, they have been widely adopted by a range of financial entities such as life insurance companies, banks, unit trust firms, and investment platforms. With the increasing number of options and promotional material, the landscape can be perplexing. Jaco van Tonder, the Advisor Services Director at Ninety One, shares critical advice for investors.
Understanding the Fundamentals
Introduced in 2015 to incentivize saving among South African residents, TFSAs offer tax-exempt growth and earnings. You won’t owe capital gains tax (CGT) or income tax on dividends and interest. The annual contribution limit is currently R36,000, and there’s a lifetime cap of R500,000. Although withdrawals can be made at any time without incurring penalties, once the lifetime limit is reached, you cannot replenish the account.
TFSAs Aren’t the Sole Tax-Savvy Option
Contrary to the media hype around TFSAs, contributing to a registered retirement fund should be your primary savings goal. Only after meeting retirement fund commitments should you consider a TFSA. Additionally, don’t forget to utilize your yearly tax-free interest allowance; with current money market rates at 6-7%, you can hold up to R350,000 in a fixed income fund tax-free, ideally as an emergency cash reserve.
Long-Term Perspective is Crucial
The real financial benefits of a TFSA become noticeable after approximately a decade and grow significantly after 20 years. Given this, it’s advisable not to make premature withdrawals, especially since you can’t add funds once the lifetime limit is hit.
Select the Right Underlying Assets
The long-term character of TFSAs allows for a more aggressive asset allocation strategy. Unlike pension funds and retirement annuities, TFSAs are not bound by asset class regulations. A balanced approach could start with unit trust funds in the “ASISA South African Multi-Asset: High Equity” category or similar options. For investors with a horizon beyond ten years, even more aggressive portfolios could be considered. Ninety One’s most popular TFSA choice has been their Global Franchise Feeder Fund, an offshore equity fund.
Simplicity is Key
Establishing a TFSA can seem daunting given the myriad of products available from major South African financial firms. However, simplicity is often the best approach. Platforms like the Ninety One Investment Platform offer advantages such as:
- Access to a diverse range of local and international funds.
- Easy fund-switching capabilities, eliminating cumbersome TFSA transfers.
- Centralized monitoring of TFSA contributions to avoid exceeding annual limits.
- A unified view of your entire investment portfolio, which may also include retirement funds and discretionary investments.
By keeping these insights in mind, you can navigate the TFSA landscape more effectively and make informed decisions tailored to your financial goals.
