Integrate a Tax-Free Savings Account into Your Investment Portfolio


The term Tax Free Savings Account (TFSA) is a very broad term for a savings account that can take the form of a bank account, a fixed deposit, a money market fund, a ” a portfolio in trust or an ETF, and investors can choose to open a TFSA through a bank, asset manager, life insurer or even broker in securities.

They are fiscally advantageous in that no taxes are paid on profits or income, and are attractive investment options because they are not subject to regulatory restrictions as to how money can be. invested. The type of TFSA you choose and its asset allocation will depend on the purpose for which you have allocated the funds, although as a general rule, if you are using it as a long-term investment vehicle, you will likely benefit. an investment in growth. assets rather than conservative allocations such as bonds and cash.

Regardless of income, a TFSA can be a useful tool in your investment portfolio to achieve investment growth over a longer period of about ten to fifteen years.

The purpose of tax-free savings accounts

The term “savings account” is somewhat misleading, as a TFSA is actually better suited to a long-term investment horizon, as the tax benefits are only realized over a longer period of time because of the compound interest. As such, TFSAs are suitable for investing in your child’s higher education, saving for a long-term goal, or supplementing funding for your retirement. Due to their structure, they are not suitable for short-term savings or as emergency financing vehicles.

The Tax Benefits of Tax-Free Savings Accounts

In general, investors will be taxed according to the type of vehicle in which they invest. For example, if they invest in mutual funds, investors will pay interest on amounts earned on bonds and cash, subject to an exemption of R 23,800 for individuals. under 65 and R34,500 for people over 65.

If investing in stocks, investors will be required to pay dividend tax at a rate of 20% which is withheld by the entity before the balance is paid to the investor or reinvested. Those who are invested in real estate investment trusts will have to pay income tax on the distributions they receive at their marginal tax rate.

Finally, investors will have to pay tax on 40% of the gain made on any investment, which is then included in the investor’s taxable income, subject to an annual exclusion of 40,000 Rand. This means that an investor will only have to pay tax on the 40% gain to the extent that it exceeds 40,000 Rand in that tax year.

What makes TFSAs particularly attractive is that individuals can invest in various asset classes without having to pay income tax, dividend tax, or capital gains tax on returns. That being said, keep in mind that your TFSA contributions are not tax deductible like retirement annuities, and all contributions made to your TFSA are made with after-tax money, so which means that, from a tax efficiency perspective, retirement pensions always come first.

The only tax you may be liable for is in the event of death where the balance of your TFSA is part of your deceased estate and is subject to inheritance tax. In view of the above, it is always advisable to use the tax deduction on RA contributions first where individuals can invest up to 27.5% of their taxable income on a tax deductible basis before investing. invest in a TFSA.

You may also want to consider using your annual tax-free interest exemption of Rand 23,880 per annum to reduce your tax liability before using a TFSA structure.

Contribution limits

Currently, individuals are allowed to contribute an amount of Rand 36,000 per year to a TFSA, with a cumulative limit per investor of Rand 500,000. Keep in mind that this lifetime limit only applies to the lifetime contributions you have made to the investment, and there is no limit to the growth you can earn on your contributions. There is also no limit to the number of TFSAs a person can have in their name, but it is important to note that the limit of Rand 36,000 per year applies to all accounts. This means that the total amount an investor can contribute to all of their TFSAs in a single tax year is limited to Rand 36,000.

Think carefully before setting up a TFSA in your child’s name, as any contributions made to this investment will be deducted from your child’s lifetime contribution, which in turn will affect their ability to save in the future. Any excess contributions made in a tax year will be taxed at 40%, so investors are advised to closely monitor their TFSA contributions to ensure they do not exceed their annual limits.

It’s also important to keep in mind that any unused portion of your annual membership fee cannot be carried over to the next tax year. For example, if you contribute R26,000 to your TFSA this year, your unused R10,000 allocation will not carry over to the next year and you will still only have R36,000 to invest next year. .

Another great feature of a TFSA is that it does not require an initial contribution commitment, which means you can stop and restart contributions, set up a regular debit order, or make one-off contributions to your investment at any time. This flexibility makes TFSAs ideal for reinvesting your tax refund, housing your annual bonus, or making one-time contributions as you earn a commission.


While you can withdraw money from your TFSA as you wish, any withdrawal should be carefully considered as it is deducted from your cumulative contribution limit. For example, if you contributed 200,000 Rand to your TFSA and you withdraw 100,000 Rand to pay for an emergency expense, you will only have 300,000 Rand available to invest in the future. For this reason, TFSAs are not ideal for short-term savings or emergency spending, as regular withdrawals will eat away at your lifetime allowance. When making withdrawals, your service provider will need to make your funds available within seven days, except in the case of a fixed deposit account which would require 32 days notice for withdrawals.

Transfer between TFSAs

Investors can move from one TFSA to another, although they need to ensure that their funds are transferred directly from one provider to another. An investor cannot withdraw funds from a TFSA and then reinvest them with another service provider, as this will be considered a withdrawal and the amount withdrawn will be deducted from your cumulative limit.


From a regulatory perspective, TFSAs must be transparent, fees must be reasonable, and no performance fees can be charged. The growth you earn on your money is not limited and all interest, dividends and capital gains on growth assets are tax free. Penalties on early withdrawals may vary from provider to provider, but cannot exceed R500. For ease of administration, some providers stipulate a minimum monthly contribution of R500, so you will need to do your research in this regard.

Setting up a TFSA should never be done in isolation, but rather as part of a well-structured investment portfolio designed to achieve a set of predetermined goals. While such a structure has significant tax advantages, optimal tax savings and investment growth will only be achieved if your TFSA is strategically established with a complete view of your retirement savings and discretionary investments.


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