Benjamin Franklin famously wrote "in this world, nothing is certain except death and taxes", and for the most part he was right. But occasionally the tax man does give us a break. One example of that is the Tax-Free Savings Account, or TFSA.
How it works:
The account is exempt from tax on all returns
A maximum contribution of R36 000 per annum and a maximum of R500 000 in a lifetime is allowed
You can access the investment anytime, but withdrawals cannot be topped up again
The trick is to start investing as early as possible in order to benefit fully from compounding growth.
The chart below highlights the difference in growth between a tax free and taxable investment made in real terms, from birth to retirement age. In essence, your tax free investment value can be double over this period.
Assumptions used:
Maximum investment of R36 000 per annum from birth until the limit of R500 000 is reached at 14 years and held until retirement age of 65
Full Marginal Tax Rate of 45%
Inflation of 5% per annum and real growth rate of 6% - in line with long term averages
30% of portfolio invested in interest bearing assets which generate 6% interest per annum;
67.5% of portfolio invested in equity which generate dividends of 3% per annum;
Remaining 2.5% of portfolio invested in property which distribute an income of 0.5% per annum; and
Assumed sale at the end of the investment period and the CGT incurred was modelled over the projection period for illustrative purposes.
Based on those numbers, an investment made for your child at birth and left untouched until they retire will result in an investment value of R16.5m in today’s value - that's enough to earn a retirement income of R70 000 per month. The trick is to start early, and to leave it alone!
Apart from an excellent opportunity for yourself, why not consider leaving a life-changing legacy for your children, grandchildren, godchildren? Contact us for more information on how you can use a TFSA to create long-term wealth for yourself and security for your children.
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