Cash club: TFSAs and saving for your child

When I first started to buy ETFs for my son, I used a standard account and not a TFSA. Why? Because Simon said so. But then I started to ponder the implications of saving using a standard account vs a TFSA, and what it would mean for me, my son and ultimately our family.

I didn’t just follow what Simon said blindly, but he did make a compelling point regarding the use of a TFSA as a savings vehicle for minors, as it can negatively impact their lifetime limit over the years (especially when you’re planning to use the money when they turn 18.)

We can save about R20,000 a year towards his education. That’s a lot of money for us in our current income bracket. And considering how expensive education is in our country, we would have to use every cent of that investment.

Using this amount, I looked at how much it’ll increase every year until he’s 18 years old when we would need the money to pay for university. I then considered what it would take to reach the R500,000 limit, given what I can afford and the tax-free benefit of the investment.

I then calculated how much our contribution towards his education would eat into his TFSA lifetime limit – it equates to more than half of the R500k limit.

In the end, I decided that until we’re in a position to save an amount that takes too big of a chunk out of his lifetime TFSA limit, it’s better to invest tax-free.

The point is to first run the numbers based on your situation. We’re not all in the same income bracket, and we won’t stay in the same income bracket forever. When making this sort of decision, it’s important to understand and know why you’re saving, because that should drive every decision: from the type of account, to asset allocation, asset classes etc.

Also, be cognisant of what you can afford, especially when taking advice from someone else. Not every piece of advice you receive is tailored to your personal situation. Good as it might be, it might not be right for you. It might need to be tweaked to suit your needs and goals.

Because I am currently a low-income earner, I won’t be able to contribute vast amounts of money towards my son’s investment, maxing out the lifetime limit on his TFSA.

Hopefully, our government will be kind enough to extend the limit in the future. However, I’ll keep track of our contributions over the years. Perhaps it will be smart to switch back to a standard account when I reach a certain threshold in his TFSA account, depending on our income level.

I’ll teach him the basics of investment and wealth generation, and the knowledge that I have will also grow over the years.

While investing for your child, invest in your child – Anonymous

Njabulo Nsibande is a Just One Lap user-turned-contributor and a founding member of an investment club. His “Cash Club” blog details his experiences balancing the financial obligations of a young parent with his investment aspirations.

Follow Njabulo’s journey here every month. You can also follow his trading journey by listening to his Village Trader podcast.

Find him on Twitter: @njabulo_goje.