8 reasons to set up a TFSA before the end of February 2022

As we move towards the end of the 2021/2022 tax year, focus invariably shifts towards the maximisation of tax benefits and savings in order to achieve optimal returns on one’s various savings and investments. If you are not yet contributing towards a tax-free savings account, here are some reasons to consider doing so. 

  • Take advantage of its tax benefits

Although your contributions towards a tax-free savings account (TFSA) are not tax deductible, TFSAs still provide investors with significant tax benefits. This is because all growth and income received on your TFSA investment are free from tax, meaning that you will not be liable for CGT, dividends withholding tax or tax on any interest earned in the investment. In fact, the only tax that you may be liable for if invested in a TFSA is estate duty, to the extent that the net value of your deceased estate is dutiable. The level of tax savings achievable in a TFSA structure will largely depend on the type of assets you choose to invest in. For instance, if you are invested primarily in bonds and cash, your tax savings will largely emanate from tax-free interest earned. On the other hand, if you’re heavily invested in equities, your tax liability will be reduced by not having to pay dividends withholding tax on your investment returns. 

Note: The tax benefits of a TFSA are not realised overnight but rather over a period of ten years ore more, making TFSAs more suitable for longer-term investment goals.

  • If you’ve maximised your RA contributions for the year

While no investment comes close to beating the tax benefits of a retirement annuity, a tax-free savings account still provides investors with very attractive tax benefits and, as such, should be considered as a viable investment option once you have maximised your annual RA contributions. Remember, while your retirement annuities have the same in-structure tax benefits as a TFSA in that no CGT, dividends withholding tax or interest are payable on the investment growth, they have the added advantage of providing investors with tax-deductible contributions up to 27.5% of pensionable income. It therefore makes sense to maximise your tax-deductible RA contributions and to then maximise your annual TFSA contribution of R36 000. 

Note: Now is a good time to chat to your financial planner or advisor to ensure that you have taken full advantage of your allowable RA contributions before setting up an appropriate TFSA. 

  • If you’ve maximised your annual interest tax exemption

If you have a discretionary investment portfolio in place and are currently making full use of the annual tax exemption on the interest income earned, then it is worth considering setting up a TFSA. Remember, if you are under the age of 65, you enjoy an annual tax exemption on interest income of R23 800 per year and on capital gains of R40 000 per year. So, if you’ve already made use of these benefits, it makes sense to take advantage of the tax exemptions afforded within a TFSA structure.

Note: In order to fully benefit from these tax advantages, you will want to ensure that the funds in your TFSA have some exposure to bonds and cash so that any interest earned in respect of the asset classes is free from tax.

  • To achieve a long-term goal

When it comes to the naming of tax-free savings accounts, the word ‘saving’ is a misnomer because the vehicle is actually best suited for long-term investing. Because the tax benefits of investing in a TFSA only really become meaningful after about ten years, TFSAs are ideal vehicles for achieving long-term goals such as funding for education or supplementing retirement income. When setting up your TFSA, be intentional about the long-term goal you intend using the investment for as this will help ensure that the investment strategy you choose is well-aligned with your timeline and objectives. 


Note: If your intention is to save for your child’s tertiary education, beware of the implications of setting up the investment in your child’s name. By doing so, you will effectively use up a part or all of their lifetime contribution limit making it impossible for them to save in a TFSA later on in life.

  • To create a savings habit 

Investing in a TFSA is a great way to instil good savings habits, specifically because the structure is designed to disincentivise investors from withdrawing prematurely from the investment. As a TFSA investor, you are permitted to invest up to R36 000 per year towards your account, with a lifetime contribution limit of R500 000. But any withdrawals that you make from your TFSA will be deducted from your lifetime contribution limit, meaning that withdrawals in the short-term make no financial sense and are to be discouraged.

Note: If you contribute R100 000 to your TFSA and then withdraw the full amount, your lifetime contribution limit is reduced by R100 000, and you will only be able to invest R400 000 into your TFSA over the remainder of your lifetime.

  • Reasonable fee structures

Tax-free savings accounts generally include favourable fee structures, keeping in mind that regulations require that the fees are reasonable and transparent. When setting up your TFSA, your provider may insist on a minimum contribution – typically between R500 and R1 000 per month – to ensure that the investment is viable from an administrative perspective. Your provider is permitted to charge a reasonable penalty for early withdrawals although once again these penalties must be reasonable.

Note: Your provider must provide you with an upfront breakdown of fees and penalties to ensure you know what you are signing up for. 

  • Flexible contribution structures

As a TFSA investor, you are free to devise a contribution structure that suits you. If you are not a regular income earner or earn commission, you may want to consider making an annual contribution to your TFSA rather than setting up a monthly debit order. You can also make ad hoc contributions to your TFSA should you, for instance, receive a tax refund or an annual bonus. However, keeping tabs on your overall annual contribution – especially if you have multiple TFSAs in place – is important to ensure that you are not penalised.

Note: Unlike over-contributions towards a retirement annuity, you will be penalised on any over-contributions you make towards a TFSA. Regardless of your personal tax rate, you will be penalised at a flat rate of 40% on the amount that exceeds your annual limit.

  • Wide range of investments to choose from

Depending on your objectives and timeline, you have a broad range of TFSA structures to choose from. Your TFSA can take the form of a fixed deposit, collective investment scheme, retail savings bond, ETF, or even certain endowment policies issued by long-term insurers. From an administrative perspective, you are able to choose an investment platform that meets your service level expectations. Most service providers have full internet capabilities allowing would-be investors the ability to set up their TFSAs online.

Note: Remember, you are free to transfer your TFSA from one provider to another at no cost, although your provider may insist on a minimum investment amount before accepting a transfer. When conducting a transfer, it is important to ensure that the funds are moved directly from one TFSA to another. You cannot withdraw your funds from a TFSA and then reinvest them into another TFSA as this will result in your lifetime contribution limit being reduced.

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