Three common mistakes made with tax free investments

If you’re looking for a way to make your money work harder for you, consider a Tax-Free Investments (TFI).  With almost eight years of data now available, it’s clear that TFI’s are a great way to save for the long term while taking advantage of tax-free growth and income.

However, some investors are making simple mistakes that could be impacting the benefits they receive.

1. It is important to remember that a TFI is not an emergency fund. The tax benefits of a TFI only really accrue to those who remain invested for the full investment period, and if you withdraw some or all of your TFI, you cannot reinvest the amount withdrawn. Unfortunately, some TFI investors are using their accounts as transactional accounts, withdrawing most of what they contributed in the same year.
2. By investing earlier in the year, you could see an additional 10% pay out after 15 years compared to investing at the end of the year. Even if you can’t commit to a large investment upfront, initiating a monthly debit order of just R3,000 could result in an additional 5% compared to investing R36,000 at the end of each tax year. Unfortunately, many TFI investors are missing out on these benefits as they are waiting until the end of the tax year to top up their TFI.
3. When investing in a TFI, it’s important to consider the long-term nature of the investment. You are able to select an underlying portfolios that can range from cash to equity. The benefit of tax-free compounding means that the funds invested in the TFI should be invested for as long as possible and should therefore be the last funds accessed by the investor. The underlying investment portfolio should be consistent with this, and based on the current annual limit, it will take 14 years to reach the lifetime contribution limit of R500,000. This means that it’s crucial to invest for growth over the long term.

 In conclusion, TFIs are an excellent way to save for the long term and take advantage of tax-free growth and income. By maximizing your annual contribution early in the tax year and investing for growth over the long term, you could be reaping the material benefits that TFI have to offer.