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Why you can’t afford not to have a tax-free savings account

National Savings month has passed, and August brings us half way through the tax year. We thought this is a great opportunity to write about Tax-Free Savings to remind you to use your annual contribution limits.

Most South Africans use money market- or fixed deposit accounts for their saving needs. Some people invest in unit trusts to put away part of their income, while more advanced investors use structured products, which can get complicated.

Depending on your financial knowledge and attitude towards risk, there are thousands of investment options available. Unfortunately, purchasing such investments attract taxes when your investment performs well or when interest is paid out.

Did you know? Tax-Free Savings Accounts (TFSA) have been introduced by the National Treasury to encourage savings with significant benefits. By investing through a TFSA, you pay no tax whatsoever. This becomes particularly important if you are planning on saving for an extended investment horizon, as your investment will benefit from higher returns due to the lack of taxes incurred.

Any interest, dividends or capital gains from your TFSA is free of tax and saving in such an account gives you flexibility, as you don’t have to commit to any future contributions. You can also withdraw from your investment at any time – without any financial penalty.

But, it is important to note that drawing funds could hamper you from reaching your savings goals, and will use up part of your ‘lifetime-limit’.

There are two constraints when using a TFSA. Your total annual contribution in a tax year may not exceed the annual contribution limit – currently capped at R33 000 per tax year. Also, the total lifetime contribution limit may not exceed R500 000 – so ensure you keep track of how much you’ve leveraged your TFSA to safeguard from exceeding your limit. Lifetime limits apply across all financial institutions, so it doesn’t matter how many financial service providers you utilise.

TFSAs also come in all shapes and sizes. Regulations allow registered entities such as banks, stock brokers, life insurance companies, asset managers, linked investment providers (LISPs) and government to offer investment products as TFSAs. This means you can invest in cash deposit accounts (through banks), exchange traded funds or managed portfolios of thereof (through stock brokers), life insurance wrappers (through insurance companies) and unit trusts (through asset managers and LISPs).

TFSAs can also be opened for children and pose an attractive way to save for their future education and assist them later in life. However, some consideration is needed as you will be using part of their tax-free allowance, which may limit their ability to save for themselves via this type of product.

As you see, TFSAs present significant benefits. So, don’t forget to use your annual contribution limit first for your long-term saving goals; you only have six months left.

Disclaimer: Igor Rodionov is the managing director of Advicement, which offers managed investment portfolios via Easy Equities. The Advicement portfolios consist of local ETFs and can be purchased in the TFSAs on the Easy Equities platform. To see which portfolio is right for you, try the easy-to-use Advicement online investment process.

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