Image: supplied I have two daughters, seven and five. Like most parents, when I’m not playing referee and dancing with the cats of Gabby’s Dollhouse, I’m thinking about saving for the future, and in particular their education. And like most parents who've done some Googling (and before I worked for 10X Investments), I thought the answer was obvious: Tax-Free Savings Accounts. Start early, let it compound, watch it grow. It's tax-free. What's not to love?
But I’ve decided not to use their TFSAs for their university savings. If you’re in a similar boat, you can check my reasoning below.
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TFSAs are 50 year, not 15 year investments
Really using a tax-free savings account properly means understanding the magic isn't in avoiding tax this year. It's in avoiding tax on decades of compounding.
If you contribute R46,000 per year (the maximum) until you hit the R500,000 lifetime cap, that’s just under 11 years of non-stop saving. Using 5% real growth (so taking into account fees and inflation):
- After 15 years, approximately R870,000
- After 40 years, approximately R5,000,000
You’ve stopped contributing after year 11, but the money hasn’t stopped growing. Over the next 29 years, you (or your children) earn around R5 million, which is more than 5x growth from compounding alone (i.e. with no new money going in).
That's what's at stake when you withdraw from a TFSA too early. You're not just spending the balance. You're also spending what it would have become given the right amount of time to grow.
I learned this the hard way. Years ago, I raided my own TFSA for something short-term; I think it was a new phone. Anyway, it was a silly thing to do. I spent the money and now I can never get that contribution room back. The R500,000 lifetime limit doesn't reset. Every rand I withdrew is a rand that will never compound tax-free again.
Tax-free savings account is actually a terrible name for this product, because it isn't a savings account at all. It’s a long term investment product, with no offshore limits. You should think about it like a retirement vehicle in disguise, because properly used it will likely be able to supplement your children’s retirement income very nicely.
Sometimes, speaking to an expert helps. Our investment consultants are always available, at no cost to you. They don’t give advice; they explain your product options and make sure you know how investment funds work. In short, they give you the facts, so you can make the right decision for you.
University is a different kind of savings problem
I recently saw a question online that captured this common trap perfectly.
A mother had opened a single TFSA, in her own name, to save for three children's university fees. The first child would need money in 15 years, the second in 17, the third in 20. Her plan was to contribute as much as possible, eventually maxing out at R46,000 per year.
But a TFSA in South Africa has a R500,000 lifetime contribution limit. That's total. Not per year or per child, and not resetting. If she maxes it out, she'll have about R870,000 in today's money by the time her first child starts university. Split that across three kids and multiple years of fees, and it might cover one degree.
And then there’s the real, albeit hidden cost. She will have burned her entire lifetime TFSA allowance on a 15-20 year goal. The 30+ years of tax-free compounding from age 50 to 80 is gone. The same applies if you open TFSAs in your children's names specifically for university. You're spending their lifetime allowance on a goal that ends at 22. All that tax-free compounding from 22 to 65 will be sacrificed for tuition.
What I'm doing instead
I use unit trusts for university savings. Specifically, unit trusts held in my children's names.
"But unit trusts are taxable," you might say. "That's the whole point of TFSAs, there’s no tax."
That’s true. But what most people miss is that a child with no income has surprisingly generous tax thresholds.
Let me be less glib and more specific. In South Africa:
- The first R40,000 of capital gains each year is completely excluded
- Only 40% of gains above that are included in taxable income
- The tax threshold is R95,750 - below that, you pay nothing
So let’s do the maths. A child with no other income can realise approximately R279,000 in capital gains in a single year before paying a cent of tax.
If you're selling units to pay for first-year fees and accommodation, you're almost certainly under that threshold. The investment was functionally tax-free—but you haven't touched their TFSA allowance. There are other advantages too:
- No contribution limits. What if their grandparents want to gift them R100,000? You can invest it all immediately in a unit trust. With a TFSA, you'd drip-feed it over three years to stay within the R46,000 annual cap, or even worse, lose the excess to penalties.
- Flexible timing. University costs arrive in chunks: registration, accommodation deposits, textbooks, laptops, the emergency flights home. A unit trust lets you withdraw what you need, when you need it.
- The TFSA stays intact. Your child graduates with a funded degree and an untouched TFSA that can compound for another 40+ years. That's a real gift.
I'm still contributing to my kids' TFSAs. But my message to them is that that money should be left untouched until they're approaching retirement. Their TFSA is there to help with financial independence near retirement, not to solve problems in their 20s and 30s.
Two savings goals, two different investment vehicles
University, First Car, House Deposit
- Time horizon: 10–20 years
- What I’m using: Unit trust in child’s name
Retirement, Financial Independence
- Time horizon: 40–60 years
- What I’m using: TFSA in child’s name
Both products matter. Both deserve funding. But they solve different problems over different timeframes. And remember too that you can invest in the same underlying funds with both.
I want my daughters to graduate without debt. I also want them to retire without stress. The way to achieve both is to match the right vehicle to the right goal, not to burn a 50-year tax shelter on a 15-year expense. DM
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