Retire: TFSA and retirement

Carina Jooste Latest, Retire

coreshares global dividend ETFIn our previous Retire post, we looked at endowments as a vehicle for supplementing your retirement savings. This month, we’re delving deeper into a firm favourite amongst many an investor: tax-free savings accounts (TFSA). 

What is it?

Created to make South Africans better at saving, TFSAs promote a culture of saving by being exempted from tax. This means you don’t pay tax on any interest, dividends and capital gains earned during the investment period.

We’ve covered TFSAs extensively on this website and in The Fat Wallet Show, but in a nutshell, TFSAs have the following rules and regulations:

  • An annual contribution limit of R33,000 and a lifetime contribution limit of R500,000 apply. If you exceed this limit, a 40% tax liability on the excess amount will be levied by SARS.
  • You can invest tax-free in everything but the kitchen sink, including ETFs, unit trusts, endowment policies and fixed deposits. 
  • If you withdraw from your TFSA, your contribution limits prevent you from replacing the funds it will be considered as a new contribution. 
  • You can have more than one TFSA. However, the annual contribution limit applies to the sum total of all the contributions across accounts.
  • You can move your TFSA to a different provider. 

What are they good for?

TFSAs should be part of your long-term investment strategy, as the fruits of compounding truly come to the fore with a tax-free savings account. They are also the ideal retirement savings vehicle for freelancers and people who don’t earn a fixed income every month. Where retirement annuity providers require a fixed contribution every month, a TFSA offers more freedom in terms of monthly contributions. However, it is important to keep your retirement number in mind, as the lifetime contribution limit of TFSAs might not be sufficient to provide a comfortable retirement. 

TFSAs and retirement

As we all know, diversification is key in any investment strategy. But the products one invests in should be equally as diverse. If all your eggs are in a retirement annuity(RA) or pension fund, your retired self is truly at the mercy of one provider. If you divide your eggs up into different baskets, then you are also mitigating risk. 

Supporting cast or lead role? 

Just One Lap contributor Njabulo Nsibande refers to his TFSA as his “tax-free retirement fund” while Stealthy’s numbers firmly places TFSA as the lead role in a tax-free retirement plan for the young and savvy. Data scientist, Herman Carstens, supports this notion and recommends to max out your TFSA first, and save what’s leftover in your RA.

And that’s the beauty of a TFSA – the choice of products you invest in and the role it plays in your retirement strategy is 100% yours. Enjoy!

Saving for retirement is the biggest investment most of us will ever make. Sadly, it can also be very complicated. In this monthly blog, we try to answer some of the retirement questions we hear most often, ranging from which products are best suited to different circumstances to efficient tax treatments. Words by Carina Jooste.

Retire blog

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