Tax free savings account versus retirement annuity….

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A tax-free savings account (TFSA) and a retirement annuity (RA) are excellent investments as they offer returns which are not taxed. This vastly improves the performance of the investment over time. Understanding the differences between the two will help to make a more appropriate investment choice. It boils down to different strokes for different folks.

The common ground
Both vehicles enjoy tax-free status on their investment returns. Capital gains tax, withholding tax on dividends and income tax on interest and rental income are all free. So they both offer the same tax advantage on returns.

The limits
The TFSA has a limit of R33 000 a year to a maximum of R500 000, whereas, there is no limit to the RA. However, the tax efficiency of the RA is more beneficial at a higher tax rate. The deduction is limited to 27,5% of taxable earnings.

The advantages
Liquidity is the main advantage of TFSA. You can access the funds at any time.
RA is inalienable – meaning that creditors cannot touch your investment. This may prove to be useful for business owners.

The conclusion
So TFSA is for the lower taxpayer who needs access to investment in the short and medium term.
RA suites the higher taxpayer for the long term where access to cash along the way is not an issue.

There is a strong case for investing in both.

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