TAX-FREE SAVINGS ACCOUNTS A vital part of any financial plan
SENSIBLE SAVINGS
By Roenica Tyson, Investment Product Manager- Glacier by Sanlam.
he benefits of Tax-Free Savings Accounts( TFSAs) are well-known by now – no tax on
T interest or dividends received, and no capital gains tax or tax on funds withdrawn.
Making a TFSA work for you to your best advantage, and within the context of your overall investment portfolio, requires some consideration, and professional financial advice in this regard is invaluable.
First ensure that you have an emergency fund in place and that your debt repayments are under control. It will take investors 16.5 years to reach the maximum lifetime contribution limit of R500 000 to their TFSA. While you can access the money at any time, any amount withdrawn will be regarded as a further contribution( towards your lifetime contribution limit) when re-invested in the TFSA. Given this negative impact of withdrawals on your contribution limit, your TFSA should be viewed as more of a long-term investment; there are other investment vehicles more suited to short-term savings or emergency funds.
Other important considerations involve weighing up contributions into a TFSA versus a regular investment plan, as well as into a TFSA versus a retirement annuity.
TFSA vs Investment Plan
If an investor is currently investing, for example, R5,000 a month into a discretionary savings plan and does not have the means to make additional savings, it will make financial sense to split the investment, i. e. invest R2,500 into the discretionary savings plan and R2,500 into a tax-free savings plan.
TFSA vs Retirement Annuity
Weighing up contributions to a retirement annuity( RA) versus a tax-free savings account is a slightly more complex decision. Together with your adviser, you need to look at the advantages and disadvantages from a tax perspective. The RA offers the benefit of tax-deductible contributions and a tax-free lump sum on withdrawal( up to certain limits). It also provides a form of disciplined, forced saving – for those who need that – because the funds can only be accessed from age 55 upwards.
However, it needn ' t necessarily be an ' either / or ' choice. Using the two in combination can deliver superior results. It will pay, however, to discuss the differentiating aspects with your adviser when making an investment decision.
Investing on behalf of your children
Parents can also open tax-free savings plans for their children, i. e. a family of four, with two children, can save up to R120,000 a year, tax free. This is an ideal way to save for a child ' s education and can also help to cultivate a savings ethic from a young age.
Note that donations tax – of 20 % of the amount donated or invested on behalf of your children – is payable. Investors have an annual donations tax exemption of R100,000.
Investors are encouraged to consult with a qualified financial adviser to ensure their investment portfolio is in line with their personal circumstances and risk profile.
sensible finance Nov16 Mar17
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