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Is a TFSA an appropriate investment vehicle to save for my child’s tertiary education?

Even though the investment case for this means of saving for university is sound, there are several additional important considerations that one needs to be aware of.

Tax-free savings accounts (TFSA) are generally considered ideal for investors who wish to achieve capital growth over longer-term investment horizons. Consequently, many individuals who plan to send their children to university in the long term consider making use of this investment product to address this goal.

With annual contributions to TFSAs being limited to R36 000 and lifetime contributions being limited to R500 000, investors can benefit from saving in capital gains taxes.

Consider the following example of the significant tax savings investors can benefit from by utilising TFSAs for long term investments:

 If an investor contributed R36 000 per year to a high equity unit trust or share portfolio over the last seven years he would have contributed R252 000 to the investment over this time. Let us assume an annual compounded return of 9% was achieved, the current market value of this investment would be R361 025.06.  Should this investment be withdrawn in full, a capital gain of R109 025.06 would be realised. Given the current maximum effective tax on realised capital gains for individual investors of 18%, an amount of up to R19 624.51  could be owed to Sars. By rather opting for a TFSA, this tax obligation can be avoided.

From a purely financial point of view, the benefits of using tax-free savings accounts for saving for long-term investment goals, like savings for children’s tertiary education, is quite clear. There are however several additional important considerations that one needs to be cognizant of:

  • By utilising this product to fund tertiary education, if held in the name of the child, they will not have the full lifetime contribution allowance available for saving toward their own personal financial goals.
  • As soon as the child reaches the age of 18, if the investment is held in the name of the child, they will gain full control of the investment.
  • In the event the parent uses their own TFSA to fund their children’s tertiary education, this might direct valuable contributions away from their own personal long term investment goals, like retirement provision.

Even though the investment case for this means of saving for university is sound, it is important to ensure that an informed decision is made and that the decision is aligned with an investor’s holistic investment strategy.

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Tanya Joubert

PSG Wealth Pretoria-East

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