Tax Free Savings Accounts – Why TFSAs are a no-brainer for kids

Tax Free Savings Accounts (TFSAs) have been part of the investment landscape in South Africa for a few years now, and while they can be a powerful savings tool, they don’t always make sense for adult investors.

For minors however, investment options are limited, especially those offering tax benefits to parents. Traditionally these would take the form of trusts and endowment type policies, which come with their own constraints.  This is where TFSAs are extremely useful.

The critical issue to highlight for parents is that, outside of a TFSA, all tax obligations (income, dividends and capital gains) accruing to investments made on behalf of minors form part of the parents’ taxable income. The typical taxes an investment will attract are:

  • Distributions / Dividends Tax @ 20%;
  • Income Tax @ your marginal tax rate on any interest earned over the R23,800 interest income threshold (for persons between the ages of 18 and 65); and
  • Capital Gains Tax (which can be minimised if the minor takes ownership of the assets and does the actual selling after turning 18 years of age)

As an aside Donations Tax should not be an issue for parents (or grandparents), as the annual maximum contribution to a TFSA of R33,000 per person means that contributions to TFSAs for 3 separate children would still be below the current R100,000 annual donations exemption.

Other benefits of TFSAs include:

  • Investment funds can be accessed at any time, as no lock-in periods or minimum ages apply;
  • Investments are not constrained by Regulation 28, so 100% equity and/or offshore allocations are allowed; and
  • The Total Expense Ratio (“TER”), which is to say the cost of investing, is not negatively affected in any way by placing the underlying investments in a TFSA, so it won’t cost you more.

The benefits of TFSAs can be demonstrated with 2 simple examples.

Example 1 : 100% Equity Fund within a TFSA versus outside a TFSA


  • Child currently aged 3 with an investment time horizon of 15 years (up to 18th birthday);
  • Initial lump sum of R33,000 invested now before the tax year end;
  • R33,000 invested every year at the beginning of each tax year;
  • 10% average annual return in equity markets in ZAR terms (net of all investment fees);
  • 3% average dividend yield, dividends are reinvested;
  • 20% Dividends Tax; and
  • Capital Gains Tax, assuming the minor sells the investment at age 18:
    • 40% inclusion rate
    • 18% marginal rate
    • Base cost of R500,000 (sum of the contributions).

Invested in a 100% Equity Fund the TFSA enjoys a break from Dividends Tax, which adds ~R145k (~9%) to the final portfolio value. Should the investment realise a capital gain (assuming the minor sells out), the Capital Gains Tax benefit adds a further ~R78k (~5.5%), taking the total benefit to ~R222k (~14.5%).

Example 2 : 100% Fixed Income/Money Market Fund within a TFSA versus outside a TFSA

Same general assumptions as before, except:

  • 7% average annual return in ZAR terms (net of all investment fees); and
  • 45% maximum tax bracket for parents.

Invested in a 100% Fixed Income/Money Market Fund the income stream earned within the TFSA won’t be subject to Income Tax, which adds ~R270K (~36%) to the final portfolio value. Relative to a 100% Equity Fund, a Fixed Income/Money Market Fund will have a lower expected return, however the relative tax benefit is much more advantageous.

The 2 graphs below compare the yield enhancement of the TFSA and the expected values across our theoretical portfolios. We add a Balanced Fund (75% Equity, 25% Fixed Income) as a blend of the two for comparison.

If you would like to start saving via a TFSA, whether for yourself or your children, or you would simply like to learn more, please get in touch.

Posted in Blog, Financial Planning, Investments, Tax, Tips, Uncategorized.