When tax-free savings accounts (TFSAs) were first introduced in South Africa in 2015, many criticised the small annual contribution limit of R30 000 (which was increased to R33 000 for the 2018 tax year and R36 000 for the 2021 tax year) and whether it would ever grow into a meaningful investment for investors. Unfortunately, as a result it has taken investors some time to embrace the material benefits of TFSAs.
However, six years later an investor who had maximised their annual investment limit would have contributed R195 000 by the end of February 2021. Interestingly, the largest TFSA account value at 28 February 2021 on the Ninety One Investment Platform (IP) was approximately R362 000, i.e. tax-free growth of R167 000! And in aggregate, TFSA investors at Ninety One IP now have a total of approximately R1.7 billion invested, of which almost 90% is advised; this built up by a combination of the smallish annual contributions and tax-free market growth.
Maximising the long-term tax benefits of a TFSA
A key insight when setting up a TFSA is that the underlying investment portfolio should be consistent with the long-term nature of the investment. Based on the current annual limit, it...