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Understanding investments: Tax free savings account versus retirement annuity

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.

Financial fitness coach, Paul Roelofse help you understand the differences between the two, so that you are able to make a more informed and 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 R30 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 the higher your 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 anytime. 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 tax payer who needs access to the investment in the short and medium term. RA suites the higher tax payer for the long term where access to cash along the way is not an issue.

There is a strong case for investing in both.

Listen to the audio below for more information...

Read more from Paul Roelofse at www.investforlife.co.za

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