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By Carly Barnes*
There are a lot of South African’s who have already started taking advantage of Tax Free Savings Accounts, an incredibly beneficial savings vehicle which some people predict could turn the retirement annuity business on its head. Offering you the ability to pay no tax on any growth on your investment, you’d think opening and making use of a TFSA would be a no brainer, but there are still a lot of people who don’t know very much about them.
Some team members from EasyEquities offer key points to consider about TFSA’s and why you should be taking advantage of their super saving capabilities:
They trump a traditional savings account
Jono Bruton explains: “If you are holding your money in a regular savings account or similar and have not yet opened a TFSA, you’re ultimately missing out on the triple whammy it offers. When investing in a TFSA you are not taxed on capital gains tax, dividend withholding tax, or interest income tax. Let’s not forget that the interest offered in a savings account is usually less than the inflation rate. Which means you could be bleeding money… and nobody likes to bleed money!”
You can only invest in certain ETFs in TFSA
The TFSA was put together by SA government as a way to encourage everyone to save. To make that easier and safer for South Africans, a few regulations were put in place to help investors. “To reduce your risk exposure, you can only invest in certain Exchange Traded Funds in your TFSA,” says Odwa Magwentshu. “The ones that you are allowed to invest in may not have more than 10% exposed to any single share/commodity. Furthermore, with ETF’s you don’t only diversify your investments but they can be freely purchased and sold throughout the trading day. They’re also the affordable option as they transact like a single share, offering you lower fees than if you had to invest in each individual equity.”
Cost and choice
There are a number of TFSA providers, so it’s important to consider the approach you would like to take. Some people prefer a more managed solution, which will always mean slightly higher costs than the DIY route. A managed TFSA may require a minimum investment, carry a higher brokerage fee and might not offer access to all the ETF’s available in the TFSA space. “DIY solutions like the TFSA account you automatically get when opening an EasyEquities account allow you to manage your own portfolio, gain full access to all available listed ETF’s, and offer the flexibility to trade within the account, whenever you want! In addition, there are no minimum deposits, and you can start with whatever amount you can afford,” comments Waylon Smit.
Congratulations @GT_247 @EasyEquities for winning Best Tax-Free Savings Accounts at the #TopStockBrokerAwards
— JSE (@JSE_Group) September 29, 2016
What ETFs to invest in?
One of the most popular investment questions people have is around what shares to buy, and ETF’s offer you a few different options. There’s some helpful research available on the different ETF’s from Intellidex which is certainly worth a read. Considering that investing is largely about exposing your funds to the areas of the market that will offer you diversity, growth and protection, you might want to think about having a portion of your funds invested in global assets. “The good news is it has never been easier for you to invest your hard earned Rands in Rand hedges or indirect offshore invests without the money physically leaving South Africa. The best example of this is the DB X-tracker ETF Funds which provide access to index tracking portfolios of equities in major markets – with the db X-tracker MSCI World Index ETF being the most diversified of these funds,” remarks Bryan Stewart.
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If you’re looking for a really easy solution when it comes to selecting ETF’s for your TFSA, Lee Scott points out that you could also look at investing in an ETF basket. “Our ETF baskets are not managed, however they do introduce newbie clients to the idea of passive and active investing in either exchange traded funds or managed funds. In constructing baskets on the EasyEquities platform we have catered for all risk appetites and it’s important to remember that they’re available on both a TFSA and standard EasyEquities account.”
Setting a TFSA up for your kids
Nkulie Gwala, a mother of two girls, shares why she uses a TFSA to save for her children’s education. “As it stands I am looking at paying on average R220 000 per annum for my kids to pursue a BCom degree and around R180 000 in residence fees. So when the TFSA was introduced I didn’t even give it a second thought. I opened one for each of my kids and I make sure I contribute to them each month. Since you don’t pay any tax on the growth of your investment, TFSA’s are the most effective way to save for longer term goals like education, or even retirement.”
TFSAs vs Retirement Annuities
According to Martin Harris, retirement annuity (RA) investments can be quite complicated and are subject to constraints as outlined in Regulation 28 of the Pension Funds Act. On the other hand, a TFSA allows you to invest in any regulated Collective Investment Scheme. “In a very simplistic world: The TFSA is best suited to the lower tax payer who needs access to an investment in the medium term or is committed to the long term. The RA suits the higher tax payer for the long term where access to the investment is not a concern.” Martin goes on to highlight some the basic differentiators between the two: “Contributions to TFSA accounts are not tax deductible, like they are for RA contributions – what this means is that you would first be taxed on your salary, and then as a post-tax event you invest your money. In an RA, your investment is a pre-tax event – and it reduces your taxable income. TFSA investments are also much more liquid and can be sold easily without explicit penalties whilst RA investments have a relatively certain horizon that is mandated by law and you would incur penalties if you withdrew your funds before retirement maturity.”
- Carly Barnes, Brand Manager EasyEquities
