From this month, investors can finally switch from one tax-free savings account to another. What should you be looking for in such a product?
The introduction of tax-free investing in South Africa was a great innovation. Introduced in the February 2015 Budget, it initially allowed consumers to save R30 000 a year tax-free. Then, in last year’s Budget, the annual limit was increased to R33 000. The 2018 Budget saw no changes to the annual limits and the lifetime limit remains R500 000.
There are restrictions as to what one can put into a tax-free savings account (TFSA). Exchange-traded funds (ETFs) are allowed, and they are the best product to buy. Unit trusts that do not charge a performance fee are also allowed, as are structured products that only use derivatives to protect downside (not enhance returns). Cash is naturally also an option, but a very boring one considering that taxpayers already get a tax-free allowance on interest earned.
Lastly, government retail bonds can be included. Again, as they pay interest and interest already has some tax-free status, I still prefer ETFs.
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