Jaco van Tonder, director, advisory services at Investec Asset Management, looks at the implications of opening a TFSA in your child’s name.
The tax-free advantage of a Tax Free Savings Account (TFSA) can be very powerful. Imagine holding off on buying yet another toy or computer game this month and rather investing that money in a TFSA on behalf of your child?
There are some practical considerations however, that we do need to highlight. Remember you’ll only save tax if you’re already liable for tax. Children are rarely liable for tax until they are deep into their twenties. They are also not going to pay a significant amount of tax until they are close to 30 years of age.
Are you saving to assist your child to start their own business when they are in their early 30’s? Or are you saving for them to go on a year-long sabbatical after finishing high school?
In the case of the first example, a TFSA in the name of the child is a great option. But not in the case of the second example. Remember a TFSA only allows for a lifetime investment limit of R500,000. If you start saving when your child is five years old, and the full investment withdrawn at 22, you have exhausted your child’s tax free savings allowance– without having benefitted because the child’s tax liability up to that point would have been minimal in any event.
If the goal of the investment is to pay out before your child becomes a taxpayer, you could rather take out the TFSA in the parent’s name. Whether you ultimately pick a normal investment vehicle or a TFSA, it is never to early start saving for your and your children’s future.
Get the right advice
We always advocate the benefits of independent financial advice, and if you have an advisor, ask them for guidance. However, many people starting out may not yet have a trusted advisor, and to these investors my recommendation is to keep it simple. Look at the TFSAs at an institution that has a reputable brand or with which you have an existing relationship.
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