How to maximise your tax-free savings account

MANY South Africans are looking to reduce their tax burden and improve overall tax efficiency, and one of the most effective tools available is the Tax-Free Savings Account (TFSA). With an annual contribution limit of R36,000 and no tax on interest, dividends, or capital gains, the TFSA offers significant long-term benefits although it's important to ensure that you align your TFSA with your broader investment strategy. Here’s how to get the most from your tax-free savings.

- ALEX ODENDAAL

Use your tax-free allowance wisely: The TFSA has become a key component of long-term financial planning because all income and growth earned within the structure, including interest, dividends, and capital gains, are tax-free. Note, however, that contributions are made with after-tax income, and no tax deduction is available on contributions such as in the case of retirement fund contributions. While it, therefore, makes sense to first maximise your retirement fund contributions, the TFSA remains an exceptional long-term investment vehicle.

Think long-term from the start: The tax benefit in the early years of a TFSA is fairly small, with the compounding tax savings only becoming meaningful after about a decade. With this in mind, a TFSA is best suited to long-term investing and is not ideal for an emergency fund. It can, however, be used to supplement retirement savings or to meet other long-term goals, such as funding a child's tertiary education.