By: Duma Mxenge

The National Treasury introduced Tax-Free Savings Accounts (TFSAs) almost 10 years ago, on 1 March 2015, to encourage South Africans to save and invest more, reduce household debt, and build a more financially resilient community.

10 key points when considering a TFSA:

Tax-free growth – earnings within a TFSA, including interest, dividends, and capital gains, are exempt from income tax, dividends tax, and capital gains tax.

Long-term investment is essential – the real tax benefits of a TFSA compound over time, making it most effective for an investment horizon of at least 10 years. The tax savings become significant after at least a decade of investing and market growth.

Annual and lifetime contribution limits – contributions are limited to R36 000 per tax year and R500 000 over a lifetime. Exceeding these limits results in a 40% penalty on excess contributions. If you are already investing the full R36 000 in a TFSA each year, and you have additional funds to invest, please speak to a financial adviser about other possible investment vehicles to add to your portfolio that will best suit your particular needs and goals.

Withdrawals reduce contribution room permanently – unlike your normal investment account, amounts withdrawn from a TFSA may not be invested back into that same TFSA. You can still add up to R36 000 each tax year, but you will not be able to add back the amount you have withdrawn. This means you’re denying yourself the benefits of tax-free growth on this amount over time. If you do add back any amounts withdrawn, and you’ve already invested the maximum contribution for that year, that will mean your total contribution for that tax year will be more than the allowed R36 000 and the contributions over the annual R36 000 will attract a 40% tax.

Flexible and accessible, but not for emergency funds – funds in a TFSA can be accessed at any time without penalties but using a TFSA for emergencies is discouraged because of the irrecoverable contribution limits. It’s recommended to have an emergency fund in place first so that you won’t have to withdraw from your TFSA over the short term.

No immediate tax deduction – unlike retirement funds, TFSA contributions are not tax-deductible upfront, meaning you’ll realise the tax benefits primarily over the longer term and not immediately.

Best for high-growth investments – since no tax is charged on earnings, TFSAs are most effective when invested in growth-focused South African unit trust funds or exchange-traded funds (ETFs) that provide exposure to equities or a high-equity balanced fund strategy. Cash and fixed-income investments are not ideal due to their lower returns.

No age restrictions – there is no minimum or maximum age for opening a TFSA. Parents can open accounts for minors to maximise long-term benefits.

Complementary to retirement savings – while retirement accounts offer immediate tax deductions, a TFSA provides long-term tax-free growth, making it an excellent addition to your overall retirement strategy.

Estate duty considerations – while your funds in the TFSA grow tax-free, the balance may be subject to estate duty upon death. However, it remains a valuable long-term savings tool.

Using a TFSA to teach the magic of compounding

A survey by Satrix towards the end of last year found that over a third of people were open to the idea of a gift or an investment for loved ones. Just 6% said they’d stick to traditional gifts, and 12.5% were keen on a mix of both traditional gifts and investment accounts.

50% of poll participants believed financial gifts are becoming more popular in South Africa. A TFSA is also a very convenient gift. Open an account – in your child’s name – and then fund the account with any amount, from as little as R10. An investment gift can also be a wonderful opportunity to teach children about the magic of compounding.

TFSAs are designed to encourage long-term savings by offering tax advantages, but it's essential to adhere to the contribution limits and understand the implications of withdrawals to maximise their full benefits over time.

* Mxenge is the head of business and market fevelopment at Satrix.

PERSONAL FINANCE