Top seven investor questions on TFSAs

The end of the tax year in February often sees something of a scramble as everyone pushes to get their applications in ahead of this deadline. Rising tax rates not only mean that it is more important to save smartly than ever before, but also emphasise the importance of taking a holistic approach to maximising your tax savings.

Tax-free savings accounts (TFSAs) are some of the most popular tax-efficient products, and the looming tax year-end in February means you should act soon if you still want to maximise your tax savings for this year.

TFSAs are flexible and tax-efficient savings vehicles that were introduced in 2015 with the specific purpose of encouraging South Africans to save more. Below are eight common questions we receive, the answers to which we hope will help you to optimise your tax savings.

1. What are the main benefits of a TFSA?

You don’t pay any tax on investment income (interest and dividends) earned in the product, or any capital gains. Asset allocation restrictions do not apply, and no minimum investment period is required. You are also not limited on the withdrawals you can make from your investment.

2. Is there a limit to how much I can invest in a TFSA?

National Treasury recently increased the annual contribution limit to R33 000 and the lifetime limit is R500 000. You will not be penalised on investment growth above these amounts. However, you will pay a penalty tax of 40% on income and growth earned on the amount you contribute above the limits. Once a contribution is made, it will always count towards the annual and lifetime limits, even if you withdraw some or all of that amount.

3. Who can invest in a TFSA?

This product is only available to individuals who are South African tax citizens.

4. Can I open a TFSA on behalf of my child?

Yes, this may be an effective way of saving for your child’s future provided they also have a bank account. However, bear in mind that the contribution limits will apply and if you reach the lifetime limit, your child will not be able to contribute more later.

5. What options are available to invest in via a TFSA?

You can invest in a range of unit trusts that do not charge performance fees. The fund selection covers a wide range of asset classes and includes offshore funds.

6. Can I transfer into a TFSA from another product?

You cannot convert existing investments in other products to a TFSA, even if the underlying assets are the same. You will have to withdraw your existing investment and reinvest. Product transfers between existing TFSAs are not currently allowed, although these transfers are expected to be permitted from 2018 onwards.

7. Are my contributions flexible? What if I encounter a tough time in my personal finances?

You can make debit order investments or lump sum investments. TFSAs are completely flexible investments. The minimum initial lump sum investment for the PSG Wealth Tax Free Investment Plan, for example, is R6 000, and the minimum amounts for debit order investments are R500 a month, R1 500 a quarter, R3 000 half-yearly and R6 000 yearly. There are no penalties if you miss, stop or reduce recurring contributions.

Consider the tax savings and boost to your future wealth you could make today.