Tfsa a Vital Part of Any Financial Plan | Legacy BlueStar | Sanlam Financial Planners Bellville, Cape Town

Financial Planning

Tax-Free Savings Accounts– A vital part of any financial plan

The benefits of Tax-Free Savings Accounts (TFSAs) are well known by now – no tax on interest or dividends received, and no capital gains tax or tax on funds withdrawn.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.

Investors should first ensure they have an emergency fund in place and that their debt repayments are under control. It will take investors just over 15 years to reach the maximum lifetime contribution limit of R500 000 to their TFSA, should they invest the maximum of R33 000 per year. While you can access the money at any time, any amount withdrawn will be regarded as a further contribution (towards your lifetime contribution limit) when reinvested in the TFSA.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.

 

TFSA vs Retirement Annuity

According to Glacier by Sanlam, 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 it – 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.

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 R132 000 a year, tax free. This is an ideal way to save for a child’s education and can also help to foster 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 should consult with a qualified financial adviser to ensure their investment portfolio is in line with their personal circumstances and risk profile.

 

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