By Mariska Comins
Building wealth involves a combination of strategic financial planning, personal discipline and maintaining a long-term perspective.
Unlike chasing short-term gains or quick returns, building wealth is a process that takes many years and requires consistent action. By way of an analogy, it’s a marathon rather than a sprint. Part of planning for a successful financial future involves tax-efficient choices and for many investors, that starts with opening a tax-free savings account (TFSA).
Access to the power of long-term thinking
Investors can make contributions up to R36 000 per tax year, with a lifetime limit of R500 000. The unused portion of annual allowance, R36 000, will not roll over to the subsequent year. Any growth on the investment is tax exempt, meaning that in the long term, the accumulated value of a TFSA typically outstrips that of a taxed investment product (assuming it is invested in similar underlying funds) – often by a wide margin. This is particularly true of growth on tax-free investments over the longer term, that is for 7 years or more.
At the end of the investment period, the tax-free lump sum can be used to supplement a retirement fund. purchase an asset or settle an interest-bearing liability. Many investors choose to use a TFSA as a way of saving for their children’s tertiary education – a longer time horizon, provides a reasonable amount of time to grow returns for this purpose, tax free.
It is also possible for parents to take out TFSAs in their children’s names. Bear in mind that the child will use their own annual or lifetime limits. Ultimately, given that the funds can cover the cost of further education or setting a young adult up for a successful start in life, many parents consider it a reinvestment into generational prosperity.
Your risk, your prerogative
An additional benefit of having a TFSA is that Regulation 28 of the Pension Funds Act does not apply. Regulation 28 place certain limits on the asset allocation allowed within retirement products like retirement annuities. Tax-free investments, however, can be allocated to any combination of asset classes that meet the clients’ needs. This gives investors a high degree of flexibility, to invest in instruments that suit their risk appetite, align with their goals and fit into their broader financial plan.
The advantage of flexibility
A distinct advantage of TFSAs is the level of flexibility the product offers. Withdrawals can be made at any time and any contributions can be started or stopped without incurring any penalties. Although TFSAs are best viewed as longer-term investments, they also offer the ability to request withdrawals as and when required. Thus, they can be used to provide an additional source of income in retirement. Bear in mind that withdrawals do not increase the respective contribution limits.
TFSAs therefore have a real-time adaptability factor that makes them a great addition to most investor portfolios.
As is the case with other investments, consulting an adviser can go a long way in helping individuals find what works for them. Advisers are best equipped to offer advice and guidance on how to bring a TFSA into the investment mix as a capital booster and financial solution to meeting different goals.
* Comins is the head of technical support at PSG Wealth.
PERSONAL FINANCE