Tax-free savings help young people create nest eggs

Tax-free savings help young people create nest eggs

Over ten months into the tax year, a crucial option for taxpayers to take advantage of tax regulations is by contributing to a tax-free savings account (TFSA).

The South African government launched TFSAs in 2015, and each taxpayer can contribute a maximum of R36 000 annually. The maximum lifetime contribution is R500,000. Up to the yearly limit, all capital gains and income, including dividends and interest, earned on TFSA investments are tax-free.

Sunday World interviewed Kelin Pottier, a product development consultant at 10X Investments, regarding how readers can maximize their TFSA benefits.

Start investing without delay.

It takes up to 14 years to meet the TFSA lifetime contribution limit, so begin investing as soon as possible.

Invest in the future

Investing in a TFSA over the long term is profitable since savings compound. Investing in a TFSA, for instance, results in tax savings that increase an investor’s annual return by 1%.

Tax savings can account for about a quarter of a TFSA’s total value after 20 years.

Pottier stated that the scenario was based on three hypotheses:

First, the growth rate of the investor’s TFSA portfolio is inflation plus 6.5%.
The investor is also subject to the maximum marginal tax rate of 45%.
Third, rewards are distributed equally across income, dividends, and capital gains.

Invest in assets with rapid growth

Investors should ensure that their TFSA portfolio is heavily weighted toward growth assets such as stocks and real estate.

Pottier stated, “high growth investments result in high tax benefits, while low growth assets result in low tax benefits.”

Resist the need to make withdrawals.

Investors should resist the urge to remove funds from their TFSA. If an investor withdraws funds from a TFSA, that withdrawal cannot be replaced with a new contribution.

Don’t exceed the contribution caps.

Avoid contributing more than R36 000 in a single tax year to a TFSA or a combination of TFSAs. A 40% tax penalty applies to any excess contributions made to a TFSA by an investor.

Enhance your TFSA

If you can only afford to invest R3 000 every month, which equates to R36 000 year, invest more funds when you receive a bonus or have leftover funds at the end of the month.

Consider your TFSA neither a savings account nor an emergency fund.

Pottier advised investors to avoid withdrawals because their contribution ceiling is fixed.

“Every time you withdraw funds from your TFSA, you have less money to invest.

“As it is a long-term investment, please do not utilize it as a savings account. Your TFSA is not available for use if you wish to take a vacation or pay for an unexpected bill.”

When the government established TFSAs, according to Pottier, banks were the first to offer them. As a result, the general public frequently equates TFSAs with transactional bank accounts, which can lead to TFSA holders using them similarly to their bank accounts.

Invest for your children’s or grandchildren’s benefit

Pottier stated that many parents and grandparents desired to invest in a TFSA for their children and grandchildren.

“The contention is that, on the one side, you are removing a tool from the minor’s financial toolbox once they reach the age of majority, and they will no longer be able to contribute to a TFSA.

“However, they would have seen compound growth for up to 14 years.

“Assuming the child does not touch their TFSA, the returns from the account will compound, which significantly outweighs beginning contributions at age 18.”

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Jabu Tshabalala


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