YOUR MONEY: Tax-free saving for your kids can set them up nicely
We’re only allowed one tax-free investment fund, so let patience be your watchword in letting it grow
13 October 2022 - 05:00
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Should you invest in tax-free investments for your kids? If so, do you really want to donate that to them, and not treat that as their study funds? (The R500,000 is a lifetime limit, so you wouldn’t want to withdraw after 20 years when they’re at varsity.)
— Johann K
Answer:
A tax-free investment is one of the most incredible opportunities to build wealth in a tax-efficient manner, if utilised optimally. There are great benefits to starting this investment for your children, but as you can only have one of these investments in your lifetime, be sure to make the most of it.
You are allowed to invest R36,000 a year and R500,000 in your lifetime. The fund value can grow infinitely. If you invest your full R36,000 annually, it will take 14 years to reach the maximum allowed. Because of the nature of the investment — with taxes on interest, dividends and capital gains not being an issue — the recommendation would be to invest 100% in equity exposure. You can enjoy the upside of growth assets and none of the tax downside that is normally a problem with investing in discretionary funds.
If the investment accumulates an average return of 10% for another 40 years, your children can retire with a monthly (tax-free!) income of R198,473.88
If you could leave these funds for another 10, 20 or even 30 years, you can accumulate quite a significant portfolio. And the proceeds will be tax free. Allowing this investment enough time to reap the benefits of compound interest, you can essentially build your children’s retirement around it. My advice would be to take a much longer-term view of a tax-free investment, and not use it just 20 years down the line.
If we assume an annual growth rate of 10%, the R36,000 invested annually over 14 years will grow to R1,052,463.91. Now let’s look at a few scenarios over time if this amount remained invested (see table).
If we view this as a retirement option, we normally recommend a 5% drawing of the fund value. If the investment accumulates an average return of 10% for another 40 years, your children can retire with a monthly (tax-free!) income of R198,473.88 (not adjusted for inflation). Not bad for just spending some time in the market.
— Elke Brink, wealth adviser at R21 Wealth Management
Support our award-winning journalism. The Premium package (digital only) is R30 for the first month and thereafter you pay R129 p/m now ad-free for all subscribers.
READER LETTER OF THE WEEK
YOUR MONEY: Tax-free saving for your kids can set them up nicely
We’re only allowed one tax-free investment fund, so let patience be your watchword in letting it grow
Question:
Should you invest in tax-free investments for your kids? If so, do you really want to donate that to them, and not treat that as their study funds? (The R500,000 is a lifetime limit, so you wouldn’t want to withdraw after 20 years when they’re at varsity.)
— Johann K
Answer:
A tax-free investment is one of the most incredible opportunities to build wealth in a tax-efficient manner, if utilised optimally. There are great benefits to starting this investment for your children, but as you can only have one of these investments in your lifetime, be sure to make the most of it.
You are allowed to invest R36,000 a year and R500,000 in your lifetime. The fund value can grow infinitely. If you invest your full R36,000 annually, it will take 14 years to reach the maximum allowed. Because of the nature of the investment — with taxes on interest, dividends and capital gains not being an issue — the recommendation would be to invest 100% in equity exposure. You can enjoy the upside of growth assets and none of the tax downside that is normally a problem with investing in discretionary funds.
If you could leave these funds for another 10, 20 or even 30 years, you can accumulate quite a significant portfolio. And the proceeds will be tax free. Allowing this investment enough time to reap the benefits of compound interest, you can essentially build your children’s retirement around it. My advice would be to take a much longer-term view of a tax-free investment, and not use it just 20 years down the line.
If we assume an annual growth rate of 10%, the R36,000 invested annually over 14 years will grow to R1,052,463.91. Now let’s look at a few scenarios over time if this amount remained invested (see table).
If we view this as a retirement option, we normally recommend a 5% drawing of the fund value. If the investment accumulates an average return of 10% for another 40 years, your children can retire with a monthly (tax-free!) income of R198,473.88 (not adjusted for inflation). Not bad for just spending some time in the market.
— Elke Brink, wealth adviser at R21 Wealth Management
Send your questions to yourmoney@fm.co.za
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