Why would one save money to a Tax Free Savings Account (TFSA) instead of a savings account?
Let's say I have R10 000 left every month after I paying income tax, rent etc. The remaining money is in my cheque account with whatever bank I'm at. I have two options:
- transfer the money to my savings account where it can earn 3.9% interest annually (depends on what bank your with ofc, but let's say that that's how much I am offered from my bank)
- Save R7 000 to savings with bank, and R3 000 to a TFSA.
Questions
Why would one do the second option? TFSA is of course tax free, but do I even pay tax when I withdraw money from my normal savings account with my bank in the first place? Where am I saving money w.r.t. paying taxes?
Does the money in TFSA earn interest? If so, how much?
@mjt1k987 You can have a look at this video where I go over what a TFSA is in some detail.
EasyEquities allows you access to most JSE listed ETFs within your TFSA. You can buy Top50, S&P500, Total world or regional & specialized ETFs which will give you a far better return than your bank over time.
The time frame for using a TFSA should be retirement though. This is not a 3-5 year savings account. It's really a retirement investment account.
@mjt1k987 You would pay tax on interest earned in a normal savings account when you withdraw.
You pay no tax on interest earned in a TFSA. Some platforms allow you to invest in index funds under a TFSA where you can earn a lot of interest.
Max it out as soon as you can.
What is the interest rate on TFSA? I want to calculate whether the interest I earn on any other account after tax might outweigh the interest earned on TFSA.
EDIT: sorry this is a stupid question, you already said that I can earn interest via stocks from TFSA
When I open a TFSA, what is the maximum down payment one can make?
@mjt1k987 It depends on the platform you use and what you invest into within your TFSA. Do some research on different platforms. Easy Equities is a good place to start IMO.
@mjt1k987 Your first R23,800 in interest is tax free.
One thing to keep in mind you only have a 500k contribution limit to the TFSA over your lifetime so once you contribute say 10k to the TFSA and take it out again a month later the limit will not increase again. So with that in mind the TFSA is best used for long term savings so that you can get maximum advantage from not paying taxes on the returns.
So I would not recommend anyone use it for money they need in the short term, also since it is long term I would side more on investing in stocks and not savings account since historically stocks has outperform most other asset classes over the long term.
@mjt1k987 I would advise you to do some research into the SA tax system.
Every person has a limited tax exemption on interest earned. It's around R 20k. So about R 20k earned in interest is tax free for every person. You need a lot of money in an interest bearing account to max that out, so don't waste your time buying into TFSAs that only pay fixed interest.
Use your limited TFSA contributions (R 35k per year and R 500k per life) to purchase higher risk ETF's with money you don't need for 30 years like an S&P 500 index fund. That way when you make 10000 % on that money in 30 years, you pay 0 % tax on all of it!
@mjt1k987 If you spent 5 mins searching how a TFSA works you would've gotten all your answers. People have become so lazy to search things on their own, everything must be spoon fed.
@greenleaf62 If you spent 5 minutes being helpful instead of being a doos it would have been even better. I can bet if you spend 5 minutes simply searching on the net for how a TFSA works you'll get a wide variety of explanations and some of them contain objectively horrible advice. So I think OP made a good choice in using their 5 minutes by asking on this platform. This is after all what this sub is for!!
@jacob1122 You don't come on reddit for financial advice you idiot. It took longer to type that whole segment question than a quick google search.
A wide variety answers from registered FSP (AG, Coronation, all banks...)?? They will all give you the SAME CORRECT information. But you rather suggest financial advice from unregistered redditors?
@greenleaf62 Did you intentionally completely miss my point that the stuff you find when you Google "how a TFSA works" is not always very helpful and quite often objectively bad? Or did you just respond before actually reading what you're commenting on?
@jacob1122 Do you know how a Google search works or are you narrow minded? The fact that OP is on a reddit clearly shows he has competence to search for information on the web. How about you search what you said above and come back if you really struggle to get all the information - then I'll gladly give all the info, but I promise you he didn't even try and that's my point.
@mjt1k987 I started off on Easy equities where you can use said tax free savings to invest and gain interest over time and that interest will also be non-taxable. However with the economic climate I didn't want to have to worry about the markets or how my investments are doing and checking the portfolio etc so I transfered to Discovery TFSA which offers 5% and I can just leave my money there and not worry about anything.
Edit: worth mentioning I'm not planning on leaving the money for 10+ years as I'll probably leave the republic in the next 5 or so years so that also motivated the move so that the funds can be easily accessed when needed. And it's more of a short term savings account then.
