We all want nothing less than the absolute best for our children’s future and that includes enabling them to one day go study whatever they want (and perhaps even more important for a South African parent these days, wherever they want).
My dad always told me and my brother that the payment of our studies would be our inheritance. I never fully understood the value of this gift until I started working and didn’t have that burden of a study loan hanging over my head. And that is why, even if there isn’t anything else to pass on to my children, I will also make sure to give them this gift.
For this very reason, I believe that the tax free savings account is probably the best thing since sliced bread!
What is a tax free savings account (TFSA)?
TFSA’s were created by the National Treasury in 2015 to try and encourage South Africans to save more, and just as the name suggests, it is an investment on which you do not pay any tax. So, unlike a Standard Collective Investment/Unit Trust you don’t pay tax on interest, dividends, and capital gains, which means your investment has the potential to grow faster.
Additionally, you can nominate a beneficiary, so the investment does not have to go to your estate when you pass away, making it free of estate duty and executor’s fees as well.
The following limitations do apply:
- Maximum annual contributions of R36 000
- Maximum lifetime contribution of R500 000
- If you withdraw a portion of your TFSA, you lose the lifetime allowance equal to the amount you withdrew.
What difference does the tax make on my child’s investment?
Let’s assume you start saving for your child’s tertiary education when they turn six and you invest it aggressively (since we have a very long investment horizon) in a pure equity fund.You invest R3 000 every month (not escalating this amount annually) and your investment give you an average annual return of 11%, the capital value will be approximately R907 618 at age 18.
Capital Value: R907 618
Amount invested: (R468 000)
Capital Growth: R439 618
Tax Free Savings Account:
No tax payable! At all!
Standard Unit Trust:
You will be taxed on the capital growth of the investment. How much that tax will be, will depend on the year’s annual exclusion, the inclusion rate and the investor’s income tax rate.
If you are a parent who wants to enable their child to one day receive only the best tertiary education, please contact me at firstname.lastname@example.org to help you set up a TFSA for them and help them to make their dreams come true.