Which Tax Free Investment Account Should I Consider?

If you are looking for a low cost, tax free investment account, you should consider one in the form of an ETF (exchange traded fund).

Through Thulisile Nkomo

Apr 21, 2021 12:00

I currently have a tax-free term deposit account with Investec, which I opened in 2016. Since then, I have contributed to the maximum annual limit allowed. The fixed deposit amount is approximately R200,000. It matured in March 2021. Due to the current low interest rate cycle, I want to convert this tax free fixed deposit into a free investment account. tax. Can you advise on a suitable product (decent returns with low costs)? Do you have any other considerations on this subject?

Dear reader,

It is good to see that you have been taking advantage of the Tax Free Savings Account (TFSA) since the product was introduced in South Africa.

The decision to transfer your fixed tax-free deposit to a tax-free investment account is a good idea, because a tax-free savings account should be used as a long-term savings vehicle, and therefore an allowance in a tax-free investment account is more appropriate.

The tax-free term deposit account you are invested in is held in cash. Currently, you do not benefit from any tax savings because you do not exceed the annual interest exemption of R 23,800 for people under 65 (or R 34,500 for people over 65) .

If you are looking for a low cost, tax free investment account, you should consider one in the form of an exchange traded fund (ETF).

The advantages of such an account include:

  • You don’t need a broker to set it up, and there are several online platforms available.
  • Transferring your tax-free account will be easier, as the funds are held in cash, thus not requiring a transfer of instruments.
  • You can choose to transfer part of your TFSA or the full value.
  • The Tax Free Savings Account is liquid and there will be no penalty on withdrawals.
  • It is a passively managed platform; therefore, you have a wide range of approved EFTs to choose from and can choose the ETF that’s right for you.
  • The wide range of approved ETFs are both local and global.
  • This option is suitable for someone with a long-term investment horizon, as investing in ETFs will increase your exposure to risk.
  • The investment platforms will provide you with information documents, such as the Minimum Information Document and other ETF documents.

During the transfer:

  • Contact the new provider to provide you with the forms and requirements that will be necessary to transfer the tax-free deposit account to the tax-free investment account.
  • Do not allow funds to go into your bank account; they should be paid directly to the new service provider.
  • If funds are deposited into your bank account, this will be considered a withdrawal, which will reduce the lifetime allowance by the amount you contributed.

I wish you all the best in your investment journey, and may it yield great results.

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