That’s why the Tax-Free Savings Account (TFSA) is such a powerful tool. This is a gift from the government that guarantees we can talk about multiple percentage points, all without taking added risk – but only if we take advantage of it. 

Since 2015, South Africans have had this free pass to invest without paying any tax. No capital gains tax, no income tax on dividends and no tax on interest. Zero. 

Let’s take just one example. Capital gains tax (CGT) for individuals has a maximum effective rate of 18%. Beyond any other exclusions that may apply, if you’ve made those capital gains through a TFSA, that 18% becomes 0%. All without any expensive financial planning, advanced investing knowledge or luck. Now, multiply that saving over a lifetime. 

Too often we find that investors are overwhelmed by jargon and technicalities. Fortunately, the TFSA is designed to help all South Africans save and invest. Several common mistakes around utilising the tax-free pass of the TFSA are also easy to avoid. 

First, there is potential to lose out by treating your TFSA as a rainy-day fund. We all know the temptation to access invested money for unplanned expenses. But tapping your TFSA can be a costly error. 

You can currently put a total of R36 000 per year into a TFSA, up to a maximum lifetime limit of R500 000. Withdrawals from your TFSA do not reset the upper limit. In other words, you can only ever put in R500 000, regardless of how much you withdraw.  

Consider a practical example. If you had diligently invested the maximum each year since the TFSA originated in 2015, you’d have an accumulated R309 000 (ignoring any returns). If today you remove R100 000 to meet an urgent need, your effective lifetime upper limit becomes R400 000. You are losing out on the potential lifetime tax savings on all of the returns that additional R100 000 might have brought you. 

Further, the withdrawal rule above applies to the annual R36 000 limit, too. If, for example, you withdraw R5 000 today to pay a bill, that sum is not added back to your annual upper limit. That is now practically R31 000. At the same time, your lifetime limit comes down to an effective R495 000. You’re turning down the gift of tax-free returns on the lifetime value of the R5 000. 

Second, the current annual maximum of R36 000 does not carry over to the next year. You have between the start of March each year to the end of February the next year (South Africa’s tax calendar) to invest that R36 000. 

This makes planning key. If you forget to use the full allocation this year, you can’t make up for it next year by exceeding the R36 000 limit. 

A third benefit that many investors don’t appreciate fully about the TFSA is the freedom it provides. There is a misconception that investing with a TFSA means you are limited to cash or a generic set of assets. In fact, you have great scope. Asset management firms make a variety of unit trusts available for you to buy via your TFSA. 

In addition, the TFSA is not subject to the same restrictions that apply to retirement savings under Regulation 28. This means you have scope to be more – or less – aggressive. You can invest more than 75% of your funds in equities and more than 45% offshore. It’s up to you. 

One final mistake – which we postpone until the end on purpose – is the annual mad scramble to fill your TFSA before the tax year ends. Often investors sit down in February to ensure their taxes are in order ahead of year-end, only to realise they haven’t maximised their TFSA allowance. They then rush to put as much of the R36 000 maximum into the account as fast as possible. 

Of course, R36 000 in one month without planning for it is a lot for most of us. So, investors tend to miss out. Moreover, this approach means you’ve foregone the potential gains from the preceding 12 months. 

Investors who systematically add to their TFSA each month are better positioned. And those who can afford to will maximise the power of the account by injecting the entire R36 000 at the start of the tax year in March. 

We can summarise the power of the TFSA – if properly utilised – with a single chart. Each of the three lines in the image below represents the returns achieved with a different approach to the TFSA, all using the performance history of the South African FTSE JSE ALSI (TR) equity index as a typical expected return. 

The lowest line (grey) is our “mad scramble” investor, lets’ call him “Last Minute Larry”. He finds the entire R36 000 in the closing days of each tax year. In his lifetime, investing the maximum of R500 000, he ends up with R1 148 000. A pretty good outcome, but he has left money on the table. 

The diligent investor, let’s go with “Timely Thembi”, who puts R3 000 into her TFSA each month via debit order (the blue line) and turns that limit of R500 000 into R 1 161 000. 

But we can do better than that. To squeeze every rand of benefit from the TFSA, consider the approach of “Low-Tax Max”, who invests the maximum allowable R36 000 each year on day 1 of the tax year, the first of March. In this case, the invested R500 000 grows to R1 255 000. 

That counts for R107 000 more than the least effective strategy. 

One universal rule applies to all three scenarios: the earlier you start, the better. Imagine maxing out your child’s TFSA before his or her 16th birthday. Let’s assume that generates the full R1 255 000 in example 3 above. Now, that can keep growing throughout your child’s life. Tax free. 

Now we’re no longer talking fractions of percentage points. We’re talking university fees, houses and early retirement. 

In a world where fractional gains must be hard-earned, freebies are rare. Big tax savings made available explicitly by the government are gifts. Failing to take full advantage of the TFSA is, as the saying goes, leaving dollar bills and rand notes on the pavement. 

 If you’re ready to take up the full benefits of tax-free investing, consider these multiple Laurium funds designed to be invested in through a TFSA: 

• Laurium Flexible Prescient Fund
• Laurium SA Flexible Prescient Fund
• Laurium BCI Strategic Income Fund
• Laurium Africa Bond USD Prescient Fund
• Laurium Stable Prescient Fund
• Amplify SCI Balanced Fund (Managed by Laurium)
• Nedgroup Investments SA Equity (Managed by Laurium)

You can learn more about each fund on our website (www.lauriumcapital.com). DM/BM

Mike Titley, Business Development, Laurium Capital