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Tax-free savings: Buy, hold, forget

Tuesday, 21 April 2015   (0 Comments)
Posted by: Author: Ingé Lamprecht
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Author: Ingé Lamprecht (Moneyweb)

Emergencies happen, but investors should restrain from using a tax-free savings account with the aim of withdrawing money after only a few years, as the real benefit of compounding in these accounts will occur in the very long term.

Speaking at a JSE Power Hour session, Simon Brown, founder of JustOneLap, said although investors have access to their money in these accounts at any point, withdrawals will weigh significantly on the compounding effect.

Tax-free savings accounts were launched on March 1 this year and allow individuals to invest up to R30 000 per annum. A capital contribution limit of R500 000 applies over the investor’s lifetime. All returns earned in these accounts (interest, dividends and capital growth) are 100% tax-free.

While National Treasury allows a variety of products within the accounts, including fixed deposits, unit trusts, certain endowments and structured products, Brown personally prefers exchange-traded funds (ETFs).

"To me a tax-free savings account in cash is a waste of a great vehicle to use.”

ETFs are attractive because it can provide superior performance in the long run at low costs, he argues.

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