Is the TFSA an appropriate investment vehicle to save for my child’s college education?


While the investment case for this college savings vehicle is strong, there are several other important considerations to be aware of.

Tax-Free Savings Accounts (TFSAs) are generally considered ideal for investors who want to achieve capital growth over longer-term investment horizons. Therefore, many people who plan to send their children to college for the long term consider using this investment product to achieve this goal.

With annual TFSA contributions limited to R36,000 and lifetime contributions limited to R500,000, investors can benefit from capital gains tax savings.

Consider the following example of the significant tax savings investors can enjoy by using TFSAs for long-term investments:

If an investor contributed R36,000 per year to a high-end mutual fund or equity portfolio over the past seven years, they would have contributed R252,000 to the investment over that period. Assuming a compound annual return of 9% has been achieved, the current market value of this investment would be R361,025.06. In the event of full withdrawal of this investment, a capital gain of R109,025.06 would be realised. Given the current maximum effective tax on realized capital gains for individual investors of 18%, an amount of up to R19,624.51 could be due to Sars. By opting for a TFSA instead, this tax liability can be avoided.

From a purely financial perspective, the benefits of using Tax-Free Savings Accounts to save for long-term investment goals, such as saving for children’s college education, are quite clear. There are, however, several other important considerations to be aware of:

  • Using this proceeds to fund higher education, if held in the child’s name, they will not have the full lifetime contribution allowance available to save for their own personal financial goals.
  • As soon as the child turns 18, if the investment is held in the child’s name, he gets full control of the investment.
  • If the parent is using their own TFSA to fund their children’s college education, it could divert valuable contributions from their own personal long-term investment goals, such as retirement.

Even though the investment case for this college savings vehicle is strong, it is important to ensure that an informed decision is made and that the decision is aligned with the institution’s holistic investment strategy. investor.

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