How to maximise TFSA contributions

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By Leslie Greyling*

Many South Africans have difficulty finding a silver lining as the rand hits new lows and the cost of living keeps soaring. Staying committed to a financial plan can be challenging in these conditions, especially when a greater portion of monthly budgets are eaten up by debt and interest payments.

One antidote to this – see if you can squeeze out extra gains from Treasury’s generosity in the form of the Tax-Free Savings Account (TFSA) benefit.

If you’re not aware, you’re allowed to save a maximum of R36,000 a year into a TFSA product, up to a lifetime limit of R500,000. The big drawcard is that these contributions plus growth are exempt from any tax. That means you pay no tax on interest earned and on the capital gain.

Considering the tax you save; this translates into a worthwhile savings vehicle.

Don’t fall into the ‘savings’ trap

Before moving onto the main thrust of this article which looks at the difference between saving monthly vs annually, I want to quickly share the best way to maximise your TFSA contributions.

Even though the word ‘savings’ is in the name, the interest/growth offered by Banks barely keeps pace with inflation. Because Tax-Free savings is a longer-term investment, you can select more aggressive investment portfolios, as the market fluctuations will be less severe over the long term. 

The easiest way to maximise your TFSA is to choose a market linked TFSA product. There are more investment fund choices available on most platforms.

The biggest long-term benefit you get from investing is earning compounding interest, although you also want to make sure your returns are higher than the average inflation for that period. Savings accounts and money market accounts unfortunately don’t offer such attractive rates. 

So, you’re doing the right thing by saving, but you’re losing buying power every month because inflation is eating into the value of your savings.

Annual deposits maximise your returns

The second way to benefit from this tax-free initiative is to use compound interest by making an annual deposit rather than monthly deposits.

Interest is calculated daily, so if you can start earning interest on a full year’s contributions from the first day of the year, then you have 364 days of compound interest in your favour.

Not everyone has the resources to put away R36,000 in one go, but as I’ll demonstrate you do benefit from adopting this approach.

We’re assuming you make your annual deposit on the 1st of January and will continue doing so until you’ve reached your R500,000 lifetime contribution limit. This will take about 14 years. 

If, over this 14-year time period, your investment has grown at an average of 10% per year you will end up with R969 403 with an annual contribution, compared to R934 622 if you’d made your contributions monthly. That gives you a gain of just short of R35,000 for no extra effort or risk.

The above illustration assumes no annual increase in contribution, at this stage maximum allowable contribution is R36 000 per year and R500 000 in your lifetime, but this amount may be increased by Sars in future.

Integrate TFSA with your investment plan

A word of advice about TFSA’s – apart from ‘stay away from purely savings accounts’ – is that you will gain the most benefit if you incorporate this as a strategy as part of your wider financial plan.

One prudent way to use the tax-free benefits is to open an account for your children to give them a healthy kickstart in life. They enjoy the same benefits and are subject to the same contribution thresholds as you are, so saving on their behalf is a great way to leave a legacy.

I’d suggest you discuss this strategy with a financial advisor because you could benefit from expert insights into the right kind of TFSA instrument to use. Knowing what to expect of the future is especially difficult when you’re looking at a timeframe of at least 15 years.

Dozens of tax-free options are available on various platforms that are open to individual investors. Popular providers to consider include Allan Gray, Sygnia, and NinetyOne.

The ease of use and regular contributions – from R500 to R3,000 a month, or R36,000 a year as explained – make TFSAs a worthwhile proposition. Especially if the tax-free incentives get more South African families to save for their future.

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