TFSA, Children and Maximums

The Tax Free Savings Account (TFSA) Series

In this article we will answer the next set of  TFSA questions as part of the WellSpent TFSA Q&A Series.

Q4: Should I open a TFSA for my child, and if so when?

Jan van der Merwe, head of Actuarial and Product at PSG Wealth answers:-

You can open a TFSA in your child’s name. Whether it makes sense to do so will depend on individual circumstances you should consider consulting a financial adviser. As an example, you need to ensure you are disciplined if doing so, don’t withdraw their savings, and maintain their savings within the TFSA well into their life cycle when they become tax payers. If you do withdraw too early, you have not used the tax-free benefits optimally. If you do get it right, however, and really do invest for the long-run, the benefits of compound interest can really stack up given the long investment horizon.

Shaun Williams, Avior Wealth Services answers:-

There are two factors to note when considering a TFSA for your child. Firstly, benefits from TFSAs are experienced when invested over the long-term. Secondly, you can invest in a TFSA in an individual’s name irrespective of their age. All you need is a birth certificate and you can start investing in a TFSA in your child’s name when they are born. This will allow the investment to have a long-term horizon which would see the maximum benefits of the TFSA investment vehicle for your child. One should start investing in a TFSA for one’s child as soon as possible to allow the investment to grow tax free once the full lifetime limit is reached and the child becomes liable for tax. This would allow maximum benefit of the TFSA investment for one’s child. Money withdrawn can only be paid out into a bank account which is in the child’s name. Further, any amount withdrawn cannot be replaced or topped up in the TFSA.

Q5: If I open a TFSA for my child can I prevent them from drawing down?

Shaun Williams, Avior Wealth Services answers:-

A parent/legal guardian would be allowed to make changes to the account and prevent withdrawal from the account until the child reaches the age of 18 years. Again, it is advised that the child not withdraw from the account until they become liable for tax. If they withdraw funds when they are not liable for tax, the tax benefit would be minimal. However, if the child allows the investment to carry on growing tax free in the account until they are in higher tax bracket, the tax benefit increases significantly.

Jan van der Merwe, head of Actuarial and Product at PSG Wealth answers:-

Your child won’t be able withdraw from their investment without your consent until they reach 18 years of age. Once they are no longer a minor, however, you will not be able to prevent them from using the money as they see fit. Ensure you educate your child about money as early as possible.

Q6: What happens to my TFSA when I reach the maximum allowable life-time contribution?

Jan van der Merwe, head of Actuarial and Product at PSG Wealth answers:-

Contributions above the limits will be taxed at 40% Therefore, it does not make sense to continue contributing when the maximum level is reached.

Shaun Williams, Avior Wealth Services answers:-

Once you reach your life-time limits, you may not invest any more funds in a tax-free account.  If you invest further funds into a TFSA beyond the limit, SARS will impose penalties on those contributions of 40% on the excess. Once the lifetime limit is reached, there is no obligation to withdraw the funds. An investor may leave the funds in the account and let it continue growing tax free. The maximum benefit of the TFSA is that as the funds in the account grow due to the impact of compound return on your investment, you earn returns on your returns which will be tax free. Thus, the longer the money is left in the account, the greater the benefit you will gain from your TFSA.

Q7: Is it likely that the maximum allowable contribution, monthly and annual, likely to change?

Shaun Williams, Avior Wealth Services answers:-

This is a challenging question to answer as it is difficult to predict what the Treasury will do with tax legislation in the future. However, as time goes on, it is probable that the Treasury will adjust the contribution limits as it is a Government incentive to encourage people to save. Given that it is a Government initiative to save, it is probable that investors’ rights will be protected with any future changes that are implemented.

Jan van der Merwe, head of Actuarial and Product at PSG Wealth answers:-

Government reviews the limits from time to time. The maximum has already been increased once since these products were introduced in 2015. They may amend these in from time to time.

Remember, you can access all of the TFSA Questions and Answers here.

Please feel free to engage on our social-media pages if you have any TFSA-related questions or comments.

The Editors

Tax Free Savings Accounts – The Questions

Here are the TFSA questions we put to the experts:-

We trust that the information we have provided is helpful and we would encourage you to engage with us, through our social-media accounts or contact us here if you require any additional information.

The WellSpent Editors.

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