With only 5 weeks left of the current tax year, the focus naturally shifts to maximising tax benefits and boosting savings for optimal investment returns. If you’re not yet contributing to a tax-free savings account, now is the time to consider it. Here are key reasons why opening one could benefit your financial future.
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Take advantage of its tax benefits
Although contributions to a tax-free savings account (TFSA) are not tax-deductible, investors still enjoy significant tax advantages. All growth and income within a TFSA are completely exempt from tax, including capital gains tax (CGT), dividends withholding tax, and tax on interest earned. The only tax liability you may face is estate duty, depending on the dutiable value of your estate. The extent of tax savings within a TFSA depends on the assets you choose to invest in. For example, if you focus on bonds and cash, the primary benefit will be tax-free interest. Conversely, if your portfolio is equity-heavy, your tax relief comes from not paying dividends withholding tax. Ultimately, the structure of your TFSA allows for flexible and tax-efficient investment options, making it an attractive vehicle for long-term growth without the burden of ongoing tax liabilities on your returns.
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If you’ve maximised your RA contributions for the year
While retirement annuities (RAs) offer unparalleled tax benefits, a tax-free savings account (TFSA) remains a highly attractive option and should be considered once you’ve maximised your annual RA contributions. Like RAs, TFSAs provide in-structure tax benefits—no capital gains tax (CGT), dividends withholding tax, or tax on interest earned. However, RAs offer the additional advantage of tax-deductible contributions of up to 27.5% of your pensionable income. It’s therefore wise to first maximise your tax-deductible RA contributions and then make the most of your annual TFSA contribution limit of R36,000, allowing for further tax-efficient growth in your investment portfolio.
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If you’ve maximised your annual interest tax exemption
If you’ve already maximised your annual tax exemption on interest income within your discretionary investment portfolio, setting up a tax-free savings account (TFSA) is a smart next step. Under 65s benefit from a R23,800 annual exemption on interest income and a R40,000 exemption on capital gains. Once these limits are reached, a TFSA provides additional tax relief by offering growth free from interest, capital gains, and dividends tax, making it an ideal option for further tax-efficient investing. Taking advantage of both exemptions ensures you maximise the tax efficiency of your portfolio and enhance your overall returns.
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To achieve a long-term goal
Despite the name, tax-free savings accounts (TFSAs) are more suited to long-term investing than short-term saving. The true value of their tax benefits becomes significant after about ten years, making TFSAs ideal for long-term goals like funding education or supplementing retirement income. When establishing a TFSA, it’s important to clearly define the long-term objective for the investment. Doing so ensures that your investment strategy aligns with your timeline and goals, allowing you to maximise the account’s tax advantages over time. This approach positions your TFSA as a powerful tool for achieving meaningful financial milestones with sustained, tax-efficient growth.
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To create a savings habit
Investing in a TFSA is a great way to instil good savings habits, specifically because the structure is designed to disincentivise investors from withdrawing prematurely from the investment. As a TFSA investor, you are permitted to invest up to R36 000 per year towards your account, with a lifetime contribution limit of R500 000. But, any withdrawals that you make from your TFSA will be deducted from your lifetime contribution limit, meaning that withdrawals in the short-term make no financial sense and are to be discouraged.
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Reasonable fee structures
Tax-free savings accounts typically offer favourable, transparent fee structures, as regulations require fees to be both reasonable and clear. When setting up a TFSA, your provider may require a minimum monthly contribution, usually between R500 and R1,000, to ensure the investment’s viability. Providers are allowed to impose reasonable penalties for early withdrawals, though these penalties must also comply with regulations, ensuring that costs remain fair and aligned with the purpose of long-term investing.
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Flexible contribution structures
As a TFSA investor, you have the flexibility to tailor your contribution structure to suit your circumstances. If you’re not a regular income earner or work on commission, making an annual contribution may be more practical than setting up a monthly debit order. You can also make ad hoc contributions, such as from a tax refund or bonus. However, it’s essential to monitor your total annual contributions—particularly if you hold multiple TFSAs—to avoid exceeding the limit and incurring penalties, ensuring your investment remains fully tax-efficient.
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Wide range of investments to choose from
Depending on your objectives and timeline, you have a broad range of TFSA structures to choose from. Your TFSA can take the form of a fixed deposit, collective investment scheme, retail savings bond, ETF, or even certain endowment policies issued by long-term insurers. From an administrative perspective, you are able to choose an investment platform that meets your service level expectations. Most service providers have full internet capabilities allowing would-be investors the ability to set up their TFSAs online.
Have a fantastic day.
Sue
