ETF: How do I buy a tax-free ETF?

The investment stage of your financial journey finally offers some excitement. You’ve spent some time getting your debt under control, building your emergency fund and sorting out the right insurance to protect your assets. These things are important, but about as exciting as watching paint dry.

After all this hard work, you can start investing in your first ETF. Terror and procrastination are common reactions at this point. We’re going to help you take back some power.

What type of account do I need?

You need a tax-free investment account that allows you to buy ETFs. Think of it as an account at an online share shop. Your annual tax-free allocation shouldn’t be used to save cash (unless you are already retired and don’t plan on living much longer). The account you open should be called a tax-free account. An ordinary share investment account can’t be turned into a tax-free account.

Where can I open a tax-free account?

Brokers are like online shops where you can buy shares and ETFs. Make sure you pay no platform fee (this is like an account fee at the bank) and a low brokerage fee. The brokerage fee is the cost of doing the transaction. You pay this whenever you buy and sell shares. Also make sure that you have control over what you invest in. You should be able to buy and sell ETFs without having to deal with a person. You don’t want anybody earning a commission on your money.

Some banks offer tax-free brokerage accounts. Although the banks don’t offer competitive rates, starting this process with your bank until you feel more comfortable is not a bad idea. You have the option of moving your tax-free account later. Be careful not to open a cash savings or fixed deposit account here. Make sure the bank lets you buy ETFs within the account.

You can also buy the ETF from the company that sells the ETF directly. This is a good idea if you only plan to buy ETFs from the same issuer. A brokerage account lets you buy shares from different ETF issuers on one platform, while the issuers only sell their own products.

Lastly, you can let a robot choose for you. The OUTvest robo service invests in unit trusts managed by CoreShares. Based on your goals and financial situation, the robot makes the choice for you.

What can I buy?

You can’t buy individual shares or commodities in your tax-free accounts. Even though it’s allowed, it’s not a good idea to use these accounts for cash savings, because you don’t pay much tax on cash savings anyway. The following investment products may be held in a tax-free account:

Fixed deposits
ETFs and unit trusts
Retail savings bonds
Certain endowment policies issued by long-term insurers
Linked investment products

We prefer buying ETFs in tax-free accounts. ETFs spread your risk by investing in a collection of companies and gives you a chance to own the entire market.

How do I move my account?

You can move your tax-free investments from one account to another. It’s very important not to withdraw your tax-free investment money from one account and redeposit it into another account. Once you withdraw the money, you lose your tax-free allocation. To move your tax-free account, contact the provider you want to move to. They will send you the correct forms to enable the transfer of your investments.