Unlock the full potential of your TFSA with these 10 smart strategies

Tax-free investments (TFSAs) offer a powerful opportunity to grow your wealth without paying tax on interest, dividends, or capital gains. But simply opening an account isn’t enough—you need to use it wisely. Here are ten strategies to help you get the most out of your TFSA this tax year.

Understand the tax benefits

The biggest advantage of a TFSA is that all growth and income in the account is completely tax-free, meaning that you won’t pay tax on interest, dividends, or capital gains. However, keep in mind that contributions are made with after-tax money, meaning there’s no tax deduction (unlike retirement fund contributions). If you’re still building your retirement savings, consider maxing out your retirement fund contributions first to reduce your taxable income, then top up your TFSA.

Think long term

TFSAs are best suited to long-term goals. In the first few years, the tax savings are minimal, but over a decade or more, the benefits can be substantial. This makes TFSAs ideal for funding long-term objectives like your child’s education or supplementing retirement income. If you’re below the tax threshold and not paying tax on income, they’re still a useful way to grow wealth tax-free over time.

Automate your contributions

You can invest up to R36 000 per tax year (or R3 000 per month), with a lifetime limit of R500 000. Setting up a debit order is a simple way to ensure you stay on track. If your income is irregular, like commission earnings, consider contributing a fixed monthly amount with the flexibility to add lump sums when possible.

Avoid early withdrawals

While you can withdraw from your TFSA at any time, be careful. Once you withdraw, that portion of your contribution is lost forever. For example, if you’ve contributed R300 000 and withdraw R50 000, your lifetime limit remains at R500 000, but you can only contribute R200 000 more. That R50 000 can’t be replaced.

 Match your investment to your goals

Before investing, ask yourself: What do I want this money to achieve? If you’re saving for something 10+ years away, like retirement or your child’s university fees, choose a portfolio with higher growth potential, such as equities or balanced funds. Avoid using TFSAs for short-term or interest-bearing investments, especially if you’re under 65 and already receive tax exemptions on interest income (R23 800 under age 65, R34 500 if older). If your TFSA holds mostly interest-bearing assets, you may see little to no tax benefit unless your investment is very large. Growth assets, such as shares, unit trusts, and ETFs, offer better long-term results and maximise the tax benefits.

Choose a reputable investment platform

You can open a TFSA through a bank, asset manager, or investment platform. While banks offer fixed deposits and money market options, they often provide lower returns over time. A platform that offers a broad selection of local and offshore funds gives you better flexibility to build a growth-oriented portfolio. Ideally, choose a provider that lets you view your TFSA alongside your other investments (e.g., retirement funds, discretionary accounts). Note: You can transfer a TFSA between providers, but you must follow the formal transfer process. Withdrawing from one provider and reinvesting at another will count toward your lifetime cap.

Don’t exceed the contribution limits

If you contribute more than the annual R36 000 cap, Sars will penalise you with a flat 40% tax on the excess, regardless of your income level. This can happen unintentionally if you have multiple TFSAs, so track your contributions carefully across all providers.

Keep your TFSA for investing, not saving

Although it’s tempting to view your TFSA as a savings account, using it only for cash investments defeats the purpose. Cash rarely delivers the kind of growth that makes tax savings meaningful. To maximise returns, allocate your TFSA to long-term investments that would normally attract capital gains tax or dividends tax—both of which are eliminated in a TFSA.

Use it to boost your retirement strategy

TFSAs can be a valuable complement to retirement savings. Unlike retirement annuities or pension funds, there are no restrictions on how or when you can access your TFSA, and there’s no tax on withdrawal. For investors who expect to reach the retirement fund contribution limits, TFSAs offer a flexible, tax-efficient way to invest additional savings.

Declare your TFSA correctly

Even though all earnings in a TFSA are tax-free, you are still legally required to declare them on your tax return. Ensure that your provider issues you with the necessary tax certificates and that your return reflects these correctly. Failure to do so may trigger compliance issues with SARS.

The TFSA is one of the most investor-friendly tools available to South Africans. Used wisely, it can generate significant long-term benefits—but poor choices, like early withdrawals or over-contributing, can erode its value. As with all investment decisions, make sure your TFSA is part of a broader, goal-driven financial plan.

* Odendaal is a Certified Financial Planner at Crue Invest.

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