My road to 500k - TFSA

 

Road to 500k – TFSA

 It’s been just over 8 years since Tax-Free Savings Accounts (TFSA) were introduced in South Africa. The TFSA program was officially launched on the 1^st of March 2015, as part of the National Treasury's efforts to promote a culture of saving and financial independence among South African citizens. It was introduced under Section 12T of the Income Tax Act from 1st March 2015.

As someone who took advantage of this investment vehicle from the beginning, and has maxed out contributions every year, I have just over 5 years left to reach by lifetime limit (even though I am still hoping that the lifetime limit will be revised). This is my TFSA journey so far:

My TFSA: Road to 500k
Financial Year ending	Annual Contribution	Cumulative Contribution	Dividend Income	Portfolio Value	Portfolio Growth	Percentage growth
2016	R30,000	R30,000	R0	R30,227	R227	0.8%
2017	R30,000	R60,000	R1,130	R61,841	R1,841	3.1%
2018	R33,000	R93,000	R2,266	R105,520	R12,520	13.5%
2019	R33,000	R126,000	R3,199	R141,692	R15,692	12.5%
2020	R33,000	R159,000	R0	R174,017	R15,017	9.4%
2021	R36,000	R195,000	R0	R276,847	R81,847	42.0%
2022	R36,000	R231,000	R48	R341,110	R110,110	47.7%
2023	R36,000	R267,000	R310	R417,167	R150,167	56.2%
2024	R36,000	R303,000	R5,332	R527,105	R224,105	74.0%

Yes, the 2023/2024 year is still underway, but I am fortunate enough to have already maxed out my contributions just a few weeks ago and have already received over R5000 in dividend payments this year.

My TFSA journey started in January 2016 (just a few weeks before the end of the 2015/2016 financial year) on the ETFSA platform. At the time ETFSA introduced 3 options for the TFSA – Balanced Portfolio, International Portfolio, and the Equity Portfolio. I chose the Equity Portfolio which consisted of 6 ETFs (Exchange Traded Funds). 

Over the next few years, the Equity Portfolio underwent multiple changes as the number of JSE listed ETFs expanded, from just 71 ETF/ETN (Exchange Traded Notes) products in 2016 to over 200 as of November 2023.

In 2018 Treasury started allowing transfers of TFSAs from one institution to another. I then transferred my entire portfolio to Easy Equities in the second half of 2019 and initially narrowed down my ETF selection to just 2 ETFs.

 I initially overlooked dividend paying ETFs when I made the big switch; I rectified this in the last 2 years. My portfolio now consists of 3 ETFs (2 of which pay dividends) and will most likely remain as is since this strategy works for me. My selection has consistently beaten the JSE Top 40 and FTSE 100 Indices. 

If I extrapolate my current returns, assuming that the current trends continue, and I continue to max out my annual contributions until I reach the R500 000 lifetime limit, the estimated portfolio value in 10 years (by 2033) would be approximately R6 000 000 (keeping in mind that this calculation is based on historical data and assume a constant annual rate of return, which may not be accurate in the future due to market fluctuations). 

At the time of the TFSA launch, you could contribute up to R30 000 per year with a lifetime limit of R500 000 in your TFSA. 2 years later, in 2017, the annual limit was increased to R33 000, and then again in 2020 the annual limit was increased to R36 000. The lifetime limit, however, remains at R500 000. With this account you can invest in a variety of investment options, such as bank accounts, unit trusts, and ETFs. All proceeds, which include interest income, capital gains and dividends from these accounts, are tax free. You can open a TFSA with any of the approved service providers, such as banks, insurers, fund managers, or investment platforms. You can withdraw money from your TFSA at any time without penalties, but once you’ve reached your annual (or lifetime) maximum allowance, you can’t top up again after a withdrawal. SARS will impose a 40% penalty on any amount that you invest above the annual or lifetime limit.

A TFSA is a great way to save for that long term goal such as sending your kids to university, a deposit on your forever home, or just to simply supplement your retirement income. Your investment horizon should be at least 7 – 10 years for you to realize the full benefits. You definitely should not use this account for short term savings.

I hope this inspires you to open that TFSA account or continue with your contributions if you already have one, despite all that is against us in Cyril’s Economy. 😊