Treasury Tax free savings accounts launching 1 March:  A good deal?

The Treasury department has been encouraging individuals to save more for several years and is following up on this by launching tax free savings accounts (TFSAs) on 1 March this year. How will it work? It is for individuals and allows them to invest R30,000 per annum until a threshold of R500,000 is reached. Thus a couple will be able to invest up to R 1 million but it will take more than 18 years to get to this limit.   Parents can it seems also invest in TFSAs for their children – a family with three children could save R150,000 per annum per family. The advantage of this is all income received is tax free. This includes dividends (where 15% withholding tax is normally deducted), interest and capital gains. There will be no restrictions on withdrawals from this fund as opposed to retirement funding and it would seem that one of the rationales for TFSAs is that individuals needing to access money will draw on their TFSA and leave their retirement funding intact. The penalties for withdrawal will be kept low and withdrawals are to be paid out within seven to thirty two business days depending on the type of investment. It will not be possible to transfer existing investments into TFSAs as the intention of this measure is to encourage new savings. From 1 March 2016, individuals will be allowed to move existing TFSAs to other TFSAs. Who can issue TFSAs and what type of investments can be used in TFSAs? Banks, long term insurers, managers of collective investments schemes/unit trusts, government, mutual banks and co-operative banks may set up TFSAs. The net for investments is fairly wide and you may use unit trusts, endowments, fixed deposits, bonds and certain exchange traded funds. Treasury want to see simplicity, transparency and suitability in the products allowed. Funds that charge performance fees are excluded from participating in TFSAs and fees charged are to be reasonable. Penalties Failure to comply with the regulations will result in the TFSA losing its tax free status. What do the returns look like? Projections done by investment analysts show that TFSAs should produce returns slightly more favourable than retirement saving products. For investors who only want interest bearing products, the return should be nearly double that of similar non TFSA products due to the tax saving. Over the next few months most financial institutions will be launching TFSAs. This promises to be an attractive product for serious long term investors. This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.

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