The Fat Wallet Show with Kristia van Heerden

Podcast: Your first tax-free investment

In Latest, The Fat Wallet by Kristia van Heerden

While the rest of the world is getting in supermarket fights over toilet paper, life at Just One Lap carries on. Lesego, who is only 24, is ready to start their investment journey. This week we hold their hand through their first tax-free purchase. We explain what tax-free accounts are, what ETFs are and why we like to go for a diverse, global investment. 

If the investment world is new to you, you don’t want to miss this episode. The video below is a deep-dive into tax-free investments, presented by Chuckles himself. 

If you’re buying ETFs at the moment, enjoy the sale.



Win of the week: Lesego

I am completely clueless regarding tax free savings accounts.

I went onto the easy equities app but I have no idea which ETF so even select or how everything actually works because I would like to invest before the end of the financial year.

I listened to the podcast and they mentioned it won’t be enough having just a tax free account so I would like to open a retirement annuity fund as well but have no cooking clue how to even delete a company for that.


Jaco 

Let’s assume you are 35, earning R240,000 and have R33,000 pa to contribute to a TFSA or RA.

Assuming fees and growth are the same, there’s no difference between the two, since both funds grow tax-free until withdrawal. 

If you reinvest the tax saving from the RA back into the RA, the RA value will naturally be higher at the end of the term due to the additional contributions. The higher amount will give you a bigger savings pot to draw an income from. 

Is the higher savings amount available at retirement offset by the income tax payable in retirement on income?

You need to look at the tax saving on the contributions and the tax payable on the income.

Tax saving on contributions:

A 35-year-old earning R240 000 pa will have a marginal tax rate of 26%. The tax saving/deduction on the R33 000 contribution is R8 580 (tax saving = contribution*marginal tax rate). The tax saving is 26%, which is equal to the marginal tax rate of 26%. So on contributions, your return on the saving of R33 000 is R8 580 (26%)

 Income tax payable:

At retirement age 60, if you keep your income at R240 000, your marginal tax rate will still be 26%. But the tax you pay on your retirement income will be taxed at your effective tax rate. A marginal tax rate of 26% is equal to an effective tax rate of 13.55% (the rate at which you pay tax). The effective tax rate is lower than the marginal tax rate due to the rebates and sliding tax scales. So the “cost” on your retirement income of R240 000 is R32 512 or 13.55% (R32 512/R240000).

Based on the above, the tax saving on RA contributions is 26% or R41 580 (R33000+R8 580), and the tax payable on retirement income is 13.55% or R32 512. Because the tax saving is > the tax payable, contributing to an RA is net-net positive.

I recommend if your marginal tax rate is above the tax-free threshold, and you are happy with Regulation 28 to first contribute to an RA. 

The higher your marginal tax rate, the bigger the tax-saving, the bigger the benefit of contributing to an RA. If you have liquidity problems, earning an income below the tax-free threshold or want to increase your offshore/equity exposure, the TFSA is the better option.


Joshua 

What is the practical difference in taking money offshore using Interactive Brokers vs using EasyEquities USD Platform? 

Do you suggest opening an offshore bank account and is this possible? The issue with the local banks offerings, for example FNB’s linked Global account, is that interest is only earned at around 0.5%.


Ollie

In episode #178 you considered the options for a listener who was planning to move to the Netherlands. One of the options canvassed was the potential of leaving money in a TFSA in the event of a market decline prior to emigration. 

One element of this approach not considered, is that the overseas jurisdiction may consider the account taxable, meaning that the tax-free benefit of saving through a TFSA will be negated from the moment that the person migrates to the new jurisdiction. This varies on a country by country basis but should probably be considered by anyone before planning on leaving money in a South African investment vehicle whilst living abroad. 


Innes 

Since I am a little risk averse given how high developed markets are – I decided to buy some of this NFGovi ETF in my TFSA (about 25%) to give it some more diversification and less risk (and to hopefully receive a better return than cash/interest due to it being linked to bonds).

However, looking at the price graph over the last 6 months – the return has been the flattest thing I’ve ever seen. And the 5 year historical return looked so promising and consistent when I was deciding to invest! I thought that bonds (and bond ETFs) were supposed to be “more certain/safer” than equities and have a better return than cash.

Why do you think the return for the govi has been so flat of late? Do you think this would continue to be flat if SA is downgraded to junk status?

I know you referred to the Ashburton 1200 as one of your favourite ETFs – would there be a certain bond or bond etf you would recommend and why? Are bonds or bond ETFs maybe a waste of time given their low (and not so certain) returns? Maybe I should be buying bonds and not bond ETFs? What platform would you recommend using to buy bonds? (If you would recommend them at all).


Hugo 

I love the innovation behind the product, one which will hopefully create a revolution in the investment domain.

I am a bit underwhelmed though with the fee structure of the product during the initial build-up phase of the portfolio.

There are current providers who can offer RAs with fees less than 1.5%, (10X and Sygnia come to mind) from the first rand invested.

Sygnia does there Skeleton 70 product for example at 0.55% all in.

Why not invest with a cheaper provider until you reach an amount where Outvest become cheaper, then make the switch?

For example:

R1 – R 818 000 at Sygnia = 0.55% / annum

R818 000 @ 0.55% = R4500 (Outvest cap)

R 818 000 to infinity at Outvest = 0.55% (decreasing to 0.2%)

We have to assume that the funds invested in are of course all the same – and I think we can argue that Reg28 investments, whether aggressive or moderate or low risk, will all more or less perform the same.

Am I missing something?


Eleanore 

I would like to transfer my RA from Allan Gray to Sygnia. Both Ag & Sygnia’s forms ask about a unit transfer. I’m not sure what to select. Assuming a unit transfer is possible in this case (for a transfer from AG Balanced Fund to Sygnia Skeleton Balanced 70 Fund), should I select this? Which is best, a cash or unit transfer? I don’t want to make a mistake and diminish my Retirement savings at this point due to a transfer mishap.


Robin

I received an Insurance payout which I have placed in an Investec Fixed deposit, drawing a compound interest of around 7.5%. 

We’ve bought two apartments off-plan in Cape Town, which will only be ready for handover towards the end of 2022. I’ve made upfront payments of 25% and 50% respectively on the apartments. These funds are sitting in the Conveyancers Trust Account drawing a 7.8% compounded interest per year. I am unable to touch this. 

Would it be better to move the money that is sitting in my Investec account into one ETF or a group of ETFs for three years. Or should I hold these funds where they are at the moment? 

My feeling was to keep it in a secure environment so I will be in a position to pay off the properties completely, and then draw rental income. 

However, the income derived from the Investec investment will be taxable, which will be lumped together with my other SA rental based income. Together the total income will be around R320K for the year. 

Should I put the R320K into my RA? When the time comes to settle the payment on the apartments at the end of 2022 I’ll draw from my Unit Trust Investment to settle the difference, or repatriate funds from my overseas investment. If I keep it in the Investec fixed deposit I will end up paying around R63,853.00 in tax.

One of your listeners from China (Podcast #169) was inquiring about where he can invest using Euros or USD. As an expat I use Internaxx – based in Luxembourg – https://en.internaxx.com  where I buy my international ETFs and stocks. I trust this will help your listener (sorry I don’t recall his name I was listening while walking).


Steven noticed we prefer ETFs to unit trusts and wants to know why. 


Eugene is keen on opening a TFSA for his spouse. He’s not keen on using EE, so he wants to know who else we can recommend. 


The Fat Wallet Show with Kristia van HeerdenThe Fat Wallet Show is a no-nonsense personal finance and investment podcast hosted by Kristia van Heerden and Simon Brown. Every week we answer questions by a growing audience of finance enthusiasts. Submit your pressing money and investment questions to ask@justonelap.com.

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