There is value
The recent tax free savings account (TFSA) presents value for everyone by escaping the taxes which are levied on interest, rental income and capital gains tax. Depending on the funds that you invest in, this could reduce the return by a few percentage points. This makes a big difference in the compounding over time. So, there is a distinct value proposition found here.
Fees still apply
Don’t ignore the fees, however, as they still apply. You will pay fees to the administrator, the fund manager and the financial advisor (if you use one).
Depending on the funds chosen for the investment the collective fee could be as high as 2%. So, if the fund performs at 10% the actual return which will be 8%. If tax was applied this would be further reduced. This which is where the real value of the TFSA is found.
You can invest a maximum of R30 000 per annum (R2500 per month) with a maximum life time contribution of R500 000 which will take around around 17 years to reach. The ceiling will probably be adjusted over time to compensate for inflation as there is no provision for automatic inflation increases if you take up the maximum annual allowance.
The same investment principles apply
The investment is liquid, meaning that you can withdraw at any time. You should be careful, however, if you have a short term view. In which case, more cautious funds should be considered as opposed to funds invested in equities which need time to smooth out the risk of loosing capital.
You can invest online but do your homework and understand the T’s and C’s before signing up. Understand the funds and the relative costs along with the mechanics of investing and withdrawing.
In a highly taxed environment such as ours, any tax break on investments should be taken advantage of to improve your savings over time.
Read more from Paul Roelofse at www.investforlife.co.za
This article first appeared on 702 : Tax Free Savings Accounts – a MUST for everyone?