Taking advantage of these investment products can legitimately save tax and enhance your after-tax returns. Albert Einstein once said ‘Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.’
So ensure you get the most out of your investments by being tax-efficient and compounding these benefits.
Tax-Free Savings Accounts (TFSAs) provide local investors with a flexible way to save towards a specific goal or supplement their retirement savings.
The discretionary investment product is only available to individuals in South Africa and was introduced by the State to encourage a greater savings culture in the country.
What sweetens the deal, are the tax exemptions that come with it from withholding tax on dividends or interest to income and capital gains tax on any switches or withdrawals from the account.
The only drawback of the product is the R33,000 limit in annual contribution and R500,000 over an investors lifetime. But the view that those limits are pocket change is not true, as a built-up savings kitty eventually shows significant growth.
While a TFSA is beneficial for most investors, those with a long-term view are likely to reap the greatest rewards. By putting your money away for an extended period of time, you can multiply the returns of your investment through the compounding effect (essentially this is when you earn interest on interest).
If an investor utilises the maximum benefit allocation every year, it will take just over 15 years to reach the lifetime limit of R500,000.
At a rate of 12% in capital growth over 12 months, the investment should be worth approximately R1.4 million in 15 years’ time or R580,000 in today’s money terms (assuming 6% average inflation). That shows excellent value for money and is a more than plausible portfolio filler.
It’s important to remember that investing only for a tax benefit is likely to lead to disappointment. So, you should first always consider the merit of an investment product itself and only thereafter assess the tax advantages, if any.
Because deadlines for receipt of contributions to these products vary between institutions, we advise that transactions are completed before Friday 21 February to ensure you don’t miss out.