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TFSA questions answered

The Tax Free Savings Account (TFSA) Series

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

Q1 : Who should be using TFSA Accounts?

Shaun Williams, Avior Wealth Services answers:-

Firstly, one needs to consider that TFSAs are not for short-term investment purposes. TFSAs were developed to encourage long-term investment. For example, on current limits of a maximum contribution per year of R33,000, it will take just over 15 years to reach the lifetime limit of R500,000. To get the full benefits of the tax-free savings account, you would need to be invested for the full period or longer. If you want a short-term investment, a TFSA would not be the ideal investment for you.

Secondly, one needs to consider factors such as age, income, tax bracket and investment objectives. For example, the maximum benefit of a TFSA would be for an income earner in a high-income tax bracket that has invested in a TFSA for the long-term. An individual who pays no tax or a lower tax rate would experience less benefit from a TFSA. Therefore, when considering what the best investment is for yourself, it is best to speak to a financial advisor to determine how to best achieve your investment objective, together with aligning your risk profile and needs to the investment.

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

TFSA’s are a good investment choice for most individuals, because they are flexible and accessible and allow you to choose a variety of underlying investment options. Investors should note however, that the benefits really add up in the long-run. Using these with a short-term view (withdrawing too soon) can mean you are not maximising the actual long-term benefit, which is way more powerful than the tax savings when viewed on an annual basis. If you are using these to save for your kids, be disciplined and don’t withdraw. If you do, by the time your child wants to save in a TFSA they won’t be able too, given the life time limit that applies to this investment.

Q2: If I have a Provident Fund, why would I need a TFSA?

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

You can normally only access a Provident Fund when you retire, or if you leave your employer. TFSA’s are completely flexible investments and you access these at your discretion. That said, there are benefits to remaining invested for the long-term. Moreover, because your investment income in a TFSA is not taxed, they also offer a tax advantage and are a good supplement to your retirement income.

Shaun Williams, Avior Wealth Services answers:-

There is no right or wrong answer when it comes to investing in a Provident fund, an RA or a TFSA. One needs to understand that the “one-size-fits-all” approach does not apply when investing and planning for retirement savings.

The investment chosen is dependent on various factors specific to the individual investor’s circumstances. Moreover, TFSAs were not introduced to replace RAs or pension funds.

If the investor’s priority is to invest for retirement purposes, we would recommend using a provident fund/pension fund or RA as the main savings for retirement. Provident funds and RAs offer protection against yourself from access to your money. For example, you cannot access the money from an RA until you are 55 years old. One also receives tax benefits from RAs and provident/pension funds. Contributions to these investments are untouchable should you go bankrupt whereas contributions to a TFSA could be attached by creditors.

Regarding a TFSA, an investor would need the discipline to not withdraw the funds invested which can be difficult in times of financial struggle or when one wants a particular material item. However, if one can maintain the discipline, TFSAs can supplement and diversify some of your retirement savings. The addition of a TFSA together with a pension fund will help lower your overall tax rate at retirement. We believe investing needs a balance between the various investment vehicles together with specific factors that relate to the unique investors needs or objectives.

Q3: If I have an RA, why would I need a TFSA?

Shaun Williams, Avior Wealth Services answers:-

The TFSA is an additional investment to save without losing returns by being taxed. THE RA can only be accessed at retirement. The TFSA can be drawn from.

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

You can normally only access a Retirement Annuity when you retire. TFSA’s are completely flexible investments and you access these at your discretion. That said, there are benefits to remaining invested for the long-term. Moreover, because your investment income in a TFSA is not taxed, they also offer a tax advantage and are a good supplement to your retirement income.

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.

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