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Five mistakes people make with their TFSA

by | Mar 11, 2022

For seven years, South Africans have been able to contribute to a tax-free savings account (TFSA). This account was introduced to encourage a savings culture in South Africa. Although the uptake of this savings vehicle has been relatively good, many people still don’t quite grasp how the TFSA works and are not making the most of this fantastic savings tool.

The key thing to understand about the TFSA is that it is for the long term. You will not have to pay any tax on the interest, dividends, or capital gains on withdrawal.

This is an investment you put away each month and leave to grow. It should not be used for your emergency fund, or for the deposit on a car or home. It is for a long-term goal – maybe your new-born child’s tertiary education, or to supplement your retirement fund.

Mistake one: Over-contributing to your TFSA

You can invest up to a maximum of R36 000 per year into a TFSA. This R36 000 limit is for your total contributions for the year – not per fund. If you have three TFSAs, then the combined contributions across all three may not exceed R36 000. If you do put in more, you will be taxed at a hefty 40%, so it’s not worth it.

But the good news is that your entire family gets to utilise their own R36 000 – even your kids. Anyone with an SA ID number can open a TFSA and start investing. A family of four could contribute a total of R144 000 per annum if they each have their own TFSA investment.

Mistake two: Thinking you can ‘catch up’

Due to the cap on annual contributions, you cannot ‘catch up’ if you did not utilize your R36 000 the year before. Each year, the maximum you can contribute is R36 000, no matter how much you contributed the year before.

This also applies to withdrawals. If you withdraw R20 000 during the year, you cannot ‘replace’ it over and above your maximum R36 000 a year.

The lifetime limit of R500 000 will also be affected by withdrawals. Currently you can contribute a maximum of R500 000 to your TFSA during your lifetime (although we hope that level will be increased). If you contributed the maximum each year, you would reach that level in less than 14 years.

However, if you make a withdrawal of R150 000 for example, you cannot replace that by exceeding your R500 000 limit.

This is why using your TFSA for short-term savings does not make sense, which brings us to Mistake three.

Mistake three: Using your TFSA as an emergency fund

While banks actively market TFSAs, the truth is that an interest-bearing bank account is the worst vehicle for your TFSA.

Firstly, as explained above, this is not a fund you want to be withdrawing from on a regular basis, so you should never store your emergency fund in your TFSA.

Secondly, you get the maximum bang for your buck out of the TFSA if you invest it in growth assets such as shares. This is because we already receive a generous tax exemption each year for interest income. We can earn R23 800 each year in interest without paying any tax on it. This equates to the interest on an investment of R500 000 earning 4.5% per annum.

Therefore, if you do want to keep a large sum in cash, there is no tax benefit to placing this money in a TFSA. The power of a TFSA is that you are exempt from the capital gains tax and dividends tax that is levied on growth investments like shares.

Over time you want to be benefiting from the compound growth of shares listed on the stock market. Over time these investments outperform cash, with long-term averages of around 11% per annum.

Research by Sanlam showed that over a 20-year period, your investment could be worth 30% more than if you had not invested in a TFSA structure. This is the benefit of not paying those investment taxes.

Mistake four: Thinking that the limit makes it insignificant

R36 000 per year might look insignificant but in the long term, it all adds up. This is because of the power of compound growth, plus the fact that you will not pay any tax on the funds.

Example:

If you contribute the R36 000 every year for the 13.9 years, you will have contributed the R500,000 lifetime limit, but if you add in compound growth, it makes things a little more exciting.

If we were to assume that the fund you are invested in grows on average at 10% per annum, you will have just over R1 million totally tax-free! A contribution of R500 000 that has grown to R1 million means that there has been a capital gain of R500 000. Depending on your tax rate, you could pay as much as R82 000 in capital gains tax if you had invested that money outside of a TFSA.

Mistake five: Thinking you can’t invest offshore with a TFSA

You can invest in any South African registered fund, including those that invest offshore. Although you invest in Rands, and will eventually withdraw the proceeds in Rands, the investment fund itself can invest anywhere in the world.

You can open a TFSA with any unit trust company including household names like Ninety-One, Allan Gray, Coronation, and Sanlam. They all offer a range of TFSA unit trust funds including those that have offshore exposure.

Another great option is to open a TFSA with one of the low-cost online investment providers. Through these providers you can even select a fund that tracks a variety of global stock markets. The only catch is that you will pay dividends tax on the offshore shares, so it is not quite as tax effective as investing in local shares. However, you still benefit from not paying capital gains tax.

Examples of low-cost online TFSA providers include Sygnia, Coreshares, Satrix, etfSA, and EasyEquities.

This article first appeared in City Press.

9 Comments

  1. Hi. Is there a limit to how long you can take to reach the lifetime limit of R500 000?

    For instance, if I deposit R36 000 every year I will reach the lifetime limit in 13.9 years but if I contribute smaller amounts it will take me longer than 13.9 years to reach the lifetime limit.

    Reply
    • There is no limit to how long it takes to reach the lifetime limit. The only limit is that currently you can only contribute up to R36 000 a year so you cannot make up lost years. In other words, if you contributed only R20 000 last year, you cannot now contribute an additional R16 000 + your annual R36 000 this year – you would be limited to the annual R36 000. Hope that makes sense

      Reply
  2. Hi Maya, just want to make sure I understand correctly.

    1. So as a parent, I cannot deposit R36,000 into my own TFSA account, plus R36,000 into my child’s TFSA account. I would have to share the R36,000 between the two accounts not to attract 40% tax?
    Does it also apply to a Trust who wants to assist its beneficiaries?

    2. If you earn interest/dividends from an Investment TFSA, must you deposit less as the interest/dividend earnings might push the income over the R36,000 limit for that year?

    Reply
    • If the TFSA account is in your child’s name, then you can deposit their full R36 000 allocation as they are a separate person. You would be donating the funds to them. Anyone can deposit funds into the child’s TFSA as long as the total contributions into the child’s TFSA does not exceed R36 000. Any growth or dividends do not form part of the R36 000 – this is only for contributions. So you can earn dividends and interest tax-free without affecting your annual limit.

      Reply
    • 1. Please read Maya’s post carefully: Each person with a SA ID can have R36 000 deposited into their TFSA in their name (doesn’t matter who deposits)
      2. The limits (yearly and lifetime) is on the CONTRIBUTIONS paid into the TFSA. Dividends etc INSIDE the TFSA can be reinvested.

      Reply
  3. We rarely think about these mistakes and the related consequences. I am guilty of withdrawing my TFSA contributions thinking I can replace it later. Lesson learned and hopefully novice investors don’t fall victim to this. Great article.

    Reply
    • @Cecilia. Both you and your daughter and any family member are treated as different people. R36 000/R500 000 for each of you. Think of it as per each ID number and tax number. Your daughter’s investment will be in her name. The only downside will be if you withdraw along the way as Maya pointed out. Also your daughter won’t be able to start one of her own later as she would already have one.

      Reply
  4. I would love to receive more of these savings tips.

    Reply

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Maya Fisher-French author of Money Questions Answered

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