Maximising your tax-free savings could be beneficial in your retirement years

Saving for retirement, the earlier you start the better

There are many ways to maximise on having a tax-free savings account (TFSA) and later using the returns towards other long-term investments such as your retirement savings or annuity.

You can use this investment strategy wisely and reach your financial planning goal at a faster pace.

“Many people ignore the benefit of having a TFSA and only consider it for their short-term saving and investment goals like emergencies, deposit for a new car or house.

“Whilst this is good, we also like to challenge investors to think broadly and strategically diversify the use of their investments focusing on the long-term benefits,” says Samukelo Zwane, Head of Product at FNB Wealth and Investments.

The investment benefits of TFSAs are not designed for regular withdrawals over the short-term as you can’t top up your TFSA again after a withdrawal.

A once-off or regular withdrawal from your TFSA will result in premature use of your tax benefits, while at the same time wasting a part of your lifetime contribution and losing out on potential investment returns over the long-term.

The value of a TFSA is maximised through the tax-free compounding returns over the long-term.

Maximising your tax-free savings could be beneficial in your retirement years

Zwane highlights that “tax-free growth can be significant for those who have 20 or 30 years until retirement.

“If you start investing early into a tax-free savings account when you are in your twenties, you will have contributed the maximum total amount in 15 years,” he explains, “but that invested capital will continue to grow, at a rate of return of the underlying investments, for as long as you leave it untouched, which means that at retirement, you could literally have a couple of millions rands worth of additional tax-free capital at your disposal.”

The reality is more than 90% of South African’s have not saved sufficiently for retirement. Therefore, a TFSA is a great vehicle to supplement your traditional retirement savings such as retirement annuity, pension funds or preservations funds.

The added benefit of drawing down income tax-free in a TFSA goes a long way in retirement when you need your retirement savings to last throughout your retirement years.  Different asset classes are allowed as possible investment in a TFSA these include, unit trusts, bank deposits, exchange traded funds etc.

“Another factor to consider with a TFSA is that it can be included as part of the rest of your assets in your Will and estate planning. The proceeds of your TFSA can be bequeathed to your beneficiaries. On the death of a TFSA holder, the value of the TFSA forms part of the estate for the purposes of calculating estate duty.

“Growth on the TFSA will remain tax free as long as it is held in the TFSA. The balance of a TFSA cannot be transferred to the TFSA of a beneficiary.  It is advisable to review your beneficiary list on a regular basis, if not annually, as circumstance change in our different life stages,” says Johan Strydom, Growth Head at FNB Fiduciary.

Retirement savings – pension fund, provident fund, and retirement annuity – are typically long-term products; therefore, it is important to ensure that when investing your TFSA for retirement purposes, you invest in asset classes whose returns beat inflation over the long-term. 

“Typically, TFSAs are used to invest over a long period supplementing retirement savings. As you set up your retirement investment strategy a TFSA can rank side by side with contributions you make to other retirement wrappers such as a retirement annuity or pension fund. Take time to reflect on the benefits of having a TFSA and consult with a financial advisor on how you can effectively use a TFSA for your long-term savings goals,” concludes Zwane.

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