In my last article I discussed the behavioural concepts of TFSA’s vs that of a retirement fund. Today I want to look at the secondary benefit, being tax.

The tax on the two types of savings accounts are quite different. The purpose of the Tax-free Savings Account was to create a savings culture in South Africa with immediate access to funds. On the other hand, it came with a condition that your contributions will be limited, both annually and for your lifetime. This makes using it, for retirement purposes, impossible as the only option, especially for older clients.

The benefit is that your TFSA will remain tax free. Unlike your retirement funds which will one day pay you an income that will be subjected to income tax, you can withdraw from your TFSA free of tax. One needs to look at the picture both pre and post retirement.

With a TFSA, the growth of your investment will not be subject to future taxes, apart from Estate Duty. With your retirement fund, your growth is tax free until you change the nature, i.e. when you withdraw or when you start drawing an annuity. You get real cashflow from your tax deduction, should you qualify, which if used cleverly can be added to that growth in the future. Another alternative for the cash back into your hands is to add that into a TFSA with a long-term view. This way you will maximise the growth and the tax benefit over the long term, whilst working with a limited cash flow.

With a TFSA, the growth of your investment will not be subject to future taxes, apart from Estate Duty. With your retirement fund, your growth is tax free until you change the nature, i.e. when you withdraw or when you start drawing an annuity. You get real cashflow from your tax deduction, should you qualify, which if used cleverly can be added to that growth in the future. Another alternative for the cash back into your hands is to add that into a TFSA with a long-term view. This way you will maximise the growth and the tax benefit over the long term, whilst working with a limited cash flow.

At retirement you are able with convert your retirement fund into an income generating asset, paying you an annuity income which is subject to tax. Since it is subject to normal income tax you will be allowed to claim normal expenses such as medical aid, and if you have disallowed deductions of your retirement fund.

With a TFSA, you can convert it into a tax-free annuity stream, if you keep the funds in your TFSA and withdraw a regular income. Since this will not be taxable income, you cannot claim any tax deductions against this.

There is another aspect that should be considered if you are looking to change your retirement plan due to prescribed assets. Currently there is no law that prescribes where TFSA monies should be invested, but that does not mean it cannot change. Should government decide to change this, there will be some structural changes to TFSA, especially those with an equity exposure, which you want to include since you want to achieve inflation beating returns for the long term.

In short, one cannot simply only look at a TFSA to fund your retirement, and a balance can be reached between a retirement fund and a TFSA. Investing in a TFSA, currently, allows you to limit the impact of prescribed assets on your retirement savings.

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