Get tax smart with your investments in 2020

The new year is a fantastic time to get your finances in order.

One of the most powerful ways to do this is to make sure you are taking advantage of the tax-efficient options available to you when it comes to investing.

What are tax-free investments and why are they so powerful?

Tax-free investments are government supported investment products where you pay no tax on capital growth, interest or dividends – and there are no penalties for withdrawal (although restrictions do apply).

These investments are one of the most powerful tax-saving tools available to savers – especially when one stays invested in them for the long-term. You can invest up to R2750 per month and R33 000 per year up to a lifetime limit of R500 000) – but don’t dismiss these investments because you think the limits are too low. Even small amounts that are compounded over time can grow to become very significant savings. In fact, in 2019 we ran an analysis that showed that a TFI used effectively over a lifetime (say for your children) could result in enough savings for someone to live comfortably in retirement without needing to save. Find out more here.

How to use a TFI most effectively:

1. Start early. Start a TFI for your children.

2. Save for the long term and try not to withdraw.

3. Invest in Tax-free unit trust so that you don’t use up your interest exemption in a savings account or bank deposit product.

4. Do your research – make sure you invest with a reputable fund manager. Talk to your financial planner for assistance or use our rob-advisor to choose a fund that best suits your needs.

5. Maximise your allocation to your TFI every year (up to the limit) to make the most of the compounding advantages over time.

6. Don’t exceed the investment limits – but be sure to increase your contributions should the limits ever increase.

Don’t underestimate the power of the debit order

It’s easier to commit your future self than it is to commit now. Set up a monthly debit order for your investments so that each month, a set amount of money will be allocated to your investments without you needing to think about it. You also benefit from the consistency of investments regardless of the market – when markets are up you maintain your investment, when markets are down you are purchasing a larger portion of shares at a lower price which you could benefit from in the future when markets turn – and all this without having to consciously think about it.

Don’t forget about fees

We can get so focused on tax that sometimes we forget to consider the fees of an investment. Remember that your investment is only working for you if the fees are not eroding all the tax-efficiencies you gain. Make sure you know what fees you are paying and that all the fees are disclosed before you invest in anything.