Should I even bother with a TFSA?

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The only necessary background information you need to have regarding Tax Free Savings Accounts (TFSAs) is the TFSA limits. You can contribute R33 000 per year and R500 000 over your lifetime. When people hear these amounts they have one of two reactions, “Where am I supposed to find that kind of money?” or “Why can’t I invest all my money tax free?”

None of these should be an issue. If you simply do not have R2 750 to invest per month, then every cent you can scrape together can be invested in a TFSA without reaching the TFSA limit. On the other hand, if you have millions to invest each year, a portion of that can be invested tax-free. Even if it only makes up a microscopic portion of your investments. Free money is free money. Obviously, Bill Gates and Mackenzie Bezos won’t see the appeal, but I do.

Let us say that you invested your R33 000 per year from the age of 20 to 34. At that stage, you would have to stop contributing because of the R500 000 lifetime investment limit. By the time you retire with an average stock market performance of 12.3%, you would have saved almost R46 million. This is comparable to R3.3 million in today’s money. That is not nothing. If you consider that both you and your spouse can invest that much, the average South African couple can retire tax-free.

Where to invest?

The next important thing that you need to decide is in which TFSA you are going to invest. The easiest thing to do is just going to your bank and opening a tax-free cash product that gives consistent returns. Alternatively, people go to fund managers and pick a balanced fund. The second option is not a bad option but going for a cash product is literally the worst decision you can make when opening a TFSA. Let me explain.

You are tax exempt from paying tax on the first R23 800 you earn in interest from a South African source. Reasonably you will be earning about 6% per year in a cash investment account. At least you will consistently beat inflation. But you will only be paying tax once your investment capital reaches R397 000. This is because 6% growth on R397 000 is when you reach the limit of R23 800. If you invested R33 000 per year at 6%, you will only save tax from your 10th year onwards.

In comparison, if you were to invest in exchange-traded funds (ETFs), you would save tax from the start. Everyone who knows how compound interest works will know that the more money you have at the beginning of the investment, the more your final capital. You will save the tax on the growth of your shares. You will also save the 20% dividend withholding tax that you would have paid on dividends.

Why open a TFSA?

You can withdraw the money invested in a TFSA, but you can never replace that amount. Well unless you pay 40% tax on it. However, when you need to withdraw some money, you can do so without paying tax. Whereas, with Retirement Annuities (RA) you will pay significant tax penalties if you need to withdraw the money early. I definitely prefer TFSAs (and even ETFs that are invested in regular accounts) above retirement annuities as explained in my article why I don’t invest in retirement annuities.

I am not the authority on retirement annuities by any means, but if I had to venture a guess, I think government prescribed assets in retirement annuities are coming. Although I’m all for providing housing in townships, I don’t think I will be investing in it. Especially as this is something taxpayers are already paying for. You can read more about it in the Moneyweb article “ANC still eyeing pension assets“.

I’m not saying that they will force us to invest in government-owned companies, but if the bill succeeds, nothing is stopping them. At the same time, you won’t be able to withdraw your money from your RA without significant tax penalties. For all we know, the prescribed assets will outperform everything available on the Johannesburg Stock Exchange (JSE), but I highly doubt it.

I would rather keep it simple and buy my ETFs in a TFSA and sleep soundly at night. Well not with the present JSE performance, but you know what I mean. I believe that ETFs are a better investment and if you can do some of it tax-free, I’m sold. Granted, the lifetime TFSA limit is not very high. The TFSA limit was set with regular South Africans in mind and not high net worth individuals. Hopefully, the lifetime limit will be raised sometime soon, but this is not deterring me.

Be safe out there,


Quote of the week

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Thank you for reading to the end. Apparently, the average person spends 8 seconds on a page, so you are special. If you have any suggestions, feel free to drop me a mail on the contact page. If I missed anything or you have questions, don’t hesitate to comment below. I might even notice it and respond. If you enjoyed this article and really want to throw me a bone, please share it.

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  11. Pieter ENGELBRECHT

    Hi Hendrik, thoroughly enjoy your blog. What is your opinion about the Post Office retail bond, could not believe the latest interest rate (11.5) over 5 years.

    For me as a person, who just retired at the age of 57, it makes total sense to invest a portion in retail bonds.
    I do have 2 annuities and get a monthly pension from the government.
    Your valued input will be appreciated.

    1. Post
      Hendrik Brand


      This is the first I’m seeing this and it really shocked me. I’m actually considering buying bonds (I did not think those words would ever come out of my mouth). It jumped from 8% in March to 11.5% in April. Well spotted.

      Bonds are an extremely safe way to invest, the only problem is the tax you pay on the growth. Also note that if you are over 60, you can have it pay out on a monthly basis. Point is, I will definitely look into this for myself as well.

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