Tax-Free Savings Accounts offer more bang for your buck

At least 150 000 people are already looking forward to getting more from their money. As Finance Minister Pravin Gordhan indicated this is the number of people who have opened Tax-Free Savings Accounts (TFSAs) to date and invested about R1 billion in these accounts.
Clearly, they won’t accept getting less when it comes to their savings. So why should you?
Tax-Free Savings Accounts enable people to get more for their money, because they don’t have to pay tax on interest, dividends and capital gains in these accounts. It makes a TFSA one of the most beneficial and attractive long-term savings vehicles.
If you are uncertain about some elements and benefits of TFSAs, here’s what you need to know:
1. What savings objectives are best served by TFSAs?
TFSAs are ideal for longer-term goals like a child’s education, because your money will grow faster in a TFSA than in any other investment. Furthermore, the tax relief means the effect of compound interest is increased.
The purpose and time horizon you have to save will determine which vehicle will best serve your various goals. For instance, while a TFSA is an excellent savings solution for your children’s education, it is not necessarily the best platform for retirement savings. All things being equal, a retirement annuity (RA) will give the same or better value for money compared to a TFSA when used for retirement savings. This is due to a number of post-retirement tax benefits offered by RAs, including the more favourable income tax rates compared to pre-retirement rates.
2. When using TFSAs to save for children’s education, what should one keep in mind?
You can open a TFSA in your child’s name and contribute up to the allowed R30 000 limit per tax year. But you should consider saving under your own name, unless you have already reached your annual or R500 000 lifetime limit. Also consider the fact that if you plan using the TFSA savings to fund for your child’s elementary schooling, you can withdraw money at any time, but you cannot replace the money you have withdrawn. It is more beneficial to leave the money invested for longer since the benefit of tax-free growth will only be experienced over the long term.
3. How do TFSAs differ from other saving vehicles like unit trusts?
Unit trusts also have a tax-free element up to a certain threshold. A tax-free threshold is the amount of interest you can earn on your investment before you start paying tax.
The current tax-free threshold on taxable interest investments is R23 800 per year for taxpayers under the age of 65 and R34 500 per year for taxpayers aged 65 years or older. On the other hand, all interest, dividends and capital gains on TFSAs, regardless of the amounts, are entirely tax free!
4. Do I need to use other saving vehicles if I have a TFSA, especially when other savings vehicles aren’t tax free?
A Tax-Free Savings Account should form part of every individual’s financial plan and it should be aligned with your specific medium- to long-term savings goals. A qualified financial adviser can help you determine which savings vehicle will best serve your various goals. You should consider different savings vehicles for short-term, medium-term and long-term goals respectively.
Contact Dorothy Davies on 014 763 2260 or 082 783 3298 for expert financial advice.
Sanlam is a Licensed Financial Services Provider.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.