Now that the hype and fanfare has died down a bit, I would like to discuss tax free fee savings accounts (TFSA), which were introduced 1 March of this year. TFSA allow taxpayers the opportunity to save R 30 000 per year in a tax free vehicle with a maximum lifetime cap of R 500 000.
Without wanting to disparage any potential savers, as a serial saver, I am not really that excited about TFSA. TFSA are certainly not for everyone. For starters the 8.7 million South Africans who are unemployed will probably have no use for a TFSA, add to them the +- 10 million registered tax payers who pay no tax; this leaves approximately 5 million taxpayers who may or may not benefit from a TFSA.
Why do I say “may not”, surely everyone paying tax will benefit from a TFSA? Well yes and no. But let’s first take a step back and clarify the tax benefit of a TFSA. A TFSA investment pays no income, dividend and / or capital gains tax. The compounded tax savings provides investors with a much higher return vs. traditional savings vehicles, which are taxed, however not all traditional savings vehicles are taxed.
Retirement annuities have the same and additional tax benefits to that of a TFSA. Most importantly the contribution to an R/A is tax deductible within limits. The calculation is beyond the scope of this article, but given the tax deductibility of R/A contributions, if one compares the return of a TFSA vs. an R/A, the R/A wins. Another tax benefit of an R/A is that it is excluded from estate duty whereas a TFSA is not.
The nature or type of return is important in determining the suitability of a TFSA. The banks are all offering TFSA, which provide savers with tax free interest, but keep in mind, TFSA did not replace the annual individual interest exemption, which is R 34 500 for those 65 yrs+ and R 23 800 for those below 65 yrs of age. If your interest earnings fall below these limit’s you are not benefiting from a TFSA generating interest income.
Another issue is liquidity. TFSA allow investors to withdraw their funds, but all repayments are subject to the annual R 30 000 limit. So if you have already invested R 30 000 for the year and you withdraw funds you cannot put it back. TFSA may not be suitable as short-term accessible bank deposits.
I recommend anyone considering a TFSA get advice from a Certified Financial Planner to determine the suitability before committing. In my mind the ideal TFSA candidate is someone who is already contributing the maximum to retirement funds and who wishes to save more for retirement with a retirement date of 16 years or longer.
Mcomm, CFP®, HdipTax
T. 021-851 3746