Did you know the seeming innocuous Tax-Free investment can have a significant impact? Far more than most people understand.
Tax-free investments are often used for a short-term goal e.g. to buy something or go on a holiday etc.; however, the real power of a Tax-Free Investment is when it is allowed to grow once you have reached the investment cap of R500,000.
The fact that the investment growth is tax-free as well as any withdrawals you make, provide for unique and effective retirement opportunities.
To illustrate the potential, consider the situation it you took out a Tax-Free investment for your 5-year-old child with the following assumptions:
- You contribute the maximum monthly amount of R3,833.33
- You stop once you reach the R500,000 limit (in just under 11 years)
- You do nothing thereafter.
Assume that the investment return is 10% (conservative as there is no tax) and that your child retires at 70 years old. On their retirement they would have an amount available to fund their retirement of over R297 million or R11.6 million in todays terms assuming an inflation rate of 5%.
In 11 years, by the time they turn 16, you would have sorted out their retirement plan before they even have started to work!
The impact it can have obviously depends on your age of the person taking out the tax-free investment.
Generally, I recommend that the Tax-Free investment that is underpinned by Momentum’s MFP Focus 7 TFSA (tax free savings account) Model Portfolio – designed to maximise growth. The minimum monthly contribution is R500.
Please email me on derek.pettitt@momentum.co.za if you are interested i
