Why a Tax-Free Savings Account could be one of your smartest money moves

A Tax-Free Savings Account (TFSA) is among the quieter building blocks of long-term investing.

A TFSA is not just for those with a high income, but rather a tool for anyone looking to save for the future, said Smith.

He explained that the account’s purpose is to encourage South Africans to save without being taxed on their investments.

It differs from a normal investment account primarily because you pay no tax on interest, dividends and capital gains.

“Every savings or investment in South Africa, at some point, will be liable for some form of tax. About 90% of South Africans invest in their retirement annuity, and depending on what you do with that money, and how you use it, it will be tax applicable,” he said.

A TFSA is limited to a contribution of R36,000 per tax year (1 March to the end of February) and a lifetime limit of R500,000, with a 40% penalty on excess contributions.

Money can be withdrawn at any time, but withdrawals do not increase your annual or lifetime limit.

Smith emphasises the importance of understanding the mechanics of how the account works so that you are able to maximise the benefits.

“If you have a short-term goal (six months to a year), you have to look at things like administrative costs, investment charges or advisor fees. If you are paying those fees and take the money out after six months, your investment may not have even recouped the fees.”

To listen to Smith in conversation with 702 and CapeTalk’s Aubrey Masango, use the audio player below: