Tax free investments for your child’s future
Jan van der Merwe, Head of Actuarial and Product, PSG Wealth
Ensuring there is money aside for the future of your children is an essential part of being a parent. Be it that you’d like to start saving for your child’s tertiary education or you would like a few years to get together a nest egg for your child to boost his or her own savings, a Tax-Free Savings Account (TFSA) can be a useful product to invest in.
A TFSA can be held by any natural person who is South African. These products exist because of government’s drive to improve South Africa’s savings culture, so it’s worthwhile considering the benefits.
It would take approximately 15 years to reach the tax-free savings lifetime contribution limit of R500 000 if you were to contribute the annual limit of R33 000 (these are the stipulated maximum amounts by law to invest in TFSAs). If you start saving when your child is a toddler, you would have a sizeable sum of money that would easily cover university expenses and provide your child with a considerable financial head start.
However, you don’t need to contribute up to the limit, and you are allowed to stop contributing as you see fit. The minimum, or more affordable investment limits may be paid either monthly, quarterly or annually, depending on the product provider you choose.
The good news is that even if you stop contributing, the investment will continue to grow as it compounds interest, all the while adding up to a meaningful sum of money for your child. It’s also an opportunity to teach your child about the importance of saving and how savings can grow when you exercise patience.
We all know how expensive university is, or the cost of buying a car for your child, as well as how difficult it is for young people to afford to put a deposit down on a house, so this savings plan could solve the costly necessities, or benefit your child’s own financial future exponentially, even serving as an emergency fund.
A TFSA ensures that investors (the person whose name the account is in, i.e. your child) will not pay any tax on the growth of the investment, or when the money is withdrawn. Money can be taken out of the investment at any time, but will not alter the contributions. The limits of R33 000 per year and R500 000 per lifetime are strict in exchange for the tax-free withdrawal benefit. Failing to stay within these limits will attract further tax consequences, so if you are able to contribute substantially, be aware of the ceiling.
It is important to note that the investment will pertain to your child’s name and ID number. If you don’t contribute to the limit, your child can take over saving into the account once he/she is earning. Though you as the parent are making the contributions, you will still be able to open your own TFSA as well, to give your personal savings a boost.
Catherine Riley: Claire Densham Communications
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