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Which tax-free investment account should I consider?

If you are looking for a low-cost tax-free investment account, you should consider the one in the form of an ETF (exchange-traded fund).

I currently have a tax-free fixed deposit account with Investec, which I opened in 2016. I have been contributing the maximum allowable annual limit since then. The amount in the fixed deposit is approximately R200 000. It matured in March 2021. Due to the current low-interest cycle, I want to convert this tax-free fixed deposit to a tax-free investment account. Can you advise on a suitable product (decent returns with low fees)? Any other considerations in this regard?

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Dear reader,

It is good to see that you have been taking advantage of the tax-free savings account (TFSA) since the product was introduced in South Africa.

The decision to transfer your tax-free fixed deposit to a tax-free investment account is a good idea, as a tax-free savings account should be utilised as a long-term savings vehicle, and therefore an allocation into a tax-free investment account is more appropriate.

The tax-free fixed deposit account that you are invested in is held in cash. Presently, you receive no tax savings as you are not exceeding the R23 800 annual interest exemption for persons younger than 65 (or R34 500 for persons older than 65).

If you are looking for a low-cost tax-free investment account, you should consider the one in the form of an exchange-traded fund (ETF).

Benefits of such an account include:

  • You do not need a broker to set it up, and there are several online platforms available.
  • Transferring your tax-free account will be easier, as the funds are held in cash, thus not requiring a transfer of instruments.
  • You can choose to transfer a portion of your TFSA or the full value.
  • The tax-free savings account is liquid, and there will be no penalties on withdrawals.
  • This is a passively managed platform; therefore, you have a choice of a wide range of approved EFTs and can choose the ETF that is suitable for you.
  • The wide range of approved ETFs offering is both locally and globally.
  • This option is suitable for an individual with a long-term investment horizon, as investing in ETFs will increase your exposure to risk.
  • The investment platforms will provide you with information documents, such as the Minimum Disclosure Document and other documents about the ETF.

When doing the transfer:

  • Contact the new provider to provide you with the forms and requirements that will be required to transfer the tax-free deposit account to the tax-free investment account.
  • Do not allow the funds to be paid into your bank account; they should be paid directly to the new service provider.
  • If funds are paid to your bank account, this will be deemed a withdrawal, which will reduce the lifetime allowance by the amount you have contributed.

I wish you all the best in your investment journey, and may it yield great results.

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COMMENTS   8

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Easy Equities has some nice baskets, i personally use the ‘Leave a Legacy” basket. you see your dividends and you get a little bit of everything.

I’m sorry but I can’t get excited about this. You can invest up to R36 000 p.a towards a TFSA, with a maximum lifetime contribution of R500,000. Hence it will take 13,8 years to fully utilise the allowance. Are the benefits real? (1) Tax free interest: At an interest rate of 5% you will need to have R690,000 saved before your annual tax free portion of R34,500 (over 65yr) of interest is used in any case. For under 65 yr it is R476,000. So no real benefit here. (2) No dividend withholding tax: On shares of R500,000 and a dividend of 2,5% you will receive R12,500 of dividend of which you will save 20% of dividend withholding tax i.e. R2,500. Is that a big deal? (3) Capital gains tax: This depends on the growth you get on the assets when you sell them but the first R40,000 gain qualifies for the annual exclusion in any case. So I am not convinced.

Your comment – and the article itself – assumes that these are the only savings this person has.

If they already have substantial cash investments outside of the TFSA, and are already using up their exempt interest every year, then it might make sense to earn any additional interest in a TFSA. Even R5k worth of tax saved every year can make a difference over 10 or 20 years.

And yes, they may also have substantial sums already invested in equities, making their cash investments a relatively small percentage of their overall portfolio.

This scenario is not unusual.

Agreed but then section 12T is not achieving what Treasury intended and that is a savings product for the middle to low income classes. Then it becomes another tool for the super rich to save. If that is indeed the case then it will likely be repealed like section 12J the venture capital company regime.

If you take out a Tax Free Investment ETF for your child, you would reach R 500k at 14 yrs old (no movement in limits). If this is allowed to grow until they are say 45/50 yrs old the savings from local dividend tax & CGT will be substantial. Educate the kids!

No sure the question was fully answered

Invest in Unit Trusts. Foord etc. Choose them carefully.

I have nothing against TFSA, just remember that you won’t become rich using them. However for diversity they are an option. I have never ever made much from TFSA – could be my fault.

End of comments.

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