Every South African Needs This Investment Account transcript

Some South Africans are going to retire millionaires completely taxfree. Many other South Africans still don't know that there is an account that exists that can make you millions taxree. And no, this doesn't mean that you need an income of millions or it doesn't involve any day trading or crypto meme coins or any lottery winners. A simple investment account that anyone in South Africa can open if you've got a South African ID number and it's called a tax-free savings account, but you need to use it in the right way.

I've helped over a thousand people to become smart investors and I've seen firsthand the mistakes that people make when it comes to tax savings account. Like Ruene, she's a 50-year-old South African and she's a director of a company she works for. She had a taxree savings account for a while, but she didn't know that she could invest the money in the tax reavings account. She was just saving it. After doing my course, she realized that she can put that money into a broad stock market ETF instead of just letting it sit in cash.

That simple change could easily add millions to her portfolio over time. Not because she's earning millions, but because she's letting her existing investment do the work for her. The money is already there. It's just investing it in a smarter way. I'm going to break down one, the basics of a taxfree savings account, and then my threepart tax-free savings account power plan to make sure that you can also retire with millions more taxfree.

And I'm going to answer some common questions that I get about taxree savings account. Before we start, make sure to sign up for my free investing master class that's happening soon. The master class will be packed with free information. It's very valuable and I hope it's going to get you to start investing confidently. The link is in the description. I hope to see you there. So, what is a tax re savings account? If you don't know yet, it's a special account available to South Africans.

And in this account, you can invest money for however long you want to with a certain contribution limit. And the best part is that you don't get taxed on the interest, dividends or capital gains earned in this account. And yes, the money can be invested. There is a limitation around what you can invest in. For example, you can't invest it in crypto, but you can invest it in broad ETFs, which we are going to discuss.

In other words, source doesn't get any of what you gain from this account. One exemption is foreign dividends, which remain taxable in the country that it's fake from. How do you use this to your full advantage? Drum roll. Part one of the power plan. The first pillar of a tax-free savings account power plan is maxing out your contributions as early as you can. You're allowed to invest up to 36,000 rand a year per tax year and you've got a lifetime limit that you can contribute of 500,000 rand.

But growth beyond this is unlimited and completely taxree. That means the earlier you cap out your 500,000 contributions, the more money you have in there that can compound over time taxree. Let's look at some numbers. One person starts at the age of 13 and the other at the age of 35. if they each contribute 36,000 rand a year up to their 500,000 limits and get an average annual return of 13% which is the average annual return on the MCI world global stock market index and ETF that tracks the global stock market since inception and this return is in rand very important not in dollar the person starting at age 35 has 11.2 million in their taxfree savings account by 65 but the person starting 5 years earlier at 30 ends up with 20.8 8 million in their tax free savings by 65.

That's a 9 million extra for starting 5 years earlier. Of course, you have to think about inflation because 20 million in 35 years time is not going to be the same as 20 million today. But it's similar to 3.7 million in today's term, which is not a bad amount to have in your retirement fund taxfree. The time value of money should not be underestimated. The earlier you contribute and invest, the more powerful the compounding becomes.

So, my rule is before you make any other stock market investments, max out your taxfree savings account first, cuz it's the only account that's going to be taxfree and allows you to have 100% offshore exposure should you wish. If you almost feel ready to start maxing out your taxfree savings account, but you want to learn a bit more, you can join my free upcoming investing masterass. Use the link in the description to sign up.

So, part two of the power plan is to be an investing in and not a savings alley. I know the name sounds misleading because it's called a tax-free savings account. People think it's for saving, but really it should be called a taxfree investing account. It can serve as a brokerage account that allows you to deposit money in, but then obviously limits what you're allowed to invest in. But you can invest within that account.

Investing in and saving Sally both start at the age of 13 and they max out their TFSAs until they reach the 500k cap, but they have a different strategy. One invests and the other saves. investing in AS was treating it as an investment account for the long term. Your saving Sally was happy with her 7% interest that she earned and she left it earning interest for 35 years. Big mistake because by the age of 65, In has more than 20 million in her TFSA and Sally only has 4 million in her TFSA.

So that's five times more that Ines has by investing. Also, these are just assumptions that are based on past returns and we don't have any guarantees that it will turn out like this in future. But I guess that's the best assumption that we can make at this point. For long-term goals, it's very important to invest and not to just earn interest. The difference between 7% interest and investing. Even though there is volatility, in the long term, the volatility evens out and the difference can be millions.

Change providers if your provider is not allowing you to invest your TFSA because it is possible. I'm going to discuss that at the end of this video. Here are the biggest mistakes I see people make with their TFSAs. Withdrawing too early. The time value of money is immense. So leaving your TFSA alone for as long as possible can earn you a big chunk of money extra. Taking money out early means you miss out on the extra tax-free growth.

This is the first account that you should be maxing out, but also the last account that you touch because it's your only chance at taxfree money. Another mistake is overcontributing. If you put more than 36,000 rand a year in a tax year into the account, so from the 1st of March until the end of Feb, that will be taxed as a penalty at 40% all the overcontributions. So definitely don't do that. You can have more than one taxfree savings account, but the combined contributions into all of your taxfree savings account cannot exceed 36,000 a year.

And the last mistake I see is people paying high fees in their taxfree savings account. This is something that you can very easily DIY. I keep my fees below 0.5%. And to help you understand the impact of fees, I use this chart. Notice how a 1% fee could mean 20% less value over 40 years. And a 2% fee could mean 35% less value over 40 years. 3% fee is more than 50% less value over 40 years. It's not just the fee that you're paying, it's the compounding that you're missing out on.

And this is the most crucial part. So now onto the common questions I get. Can I have a tax-free savings account for my kid? Yes. And I have a video where I discuss that, too. Remember, this is their one chance at having tax-free investments. So, it should not be an account that you're planning to use on their behalf in the short term. It should really be money that you're planning to give to them or to have them inherit and they can basically hold onto that investment until they retire.

It shouldn't be something that you're thinking, oh, let's use their tax savings account for their education fund. So, education fund should be separate. Then, can you transfer to another provider? Yes, you absolutely can. And remember, this is going to be a transfer between providers. So you're going to contact one provider ask them you want to transfer and then there will be a form to fill out between the existing and the new provider to affect the transfer.

You're not going to withdraw. Very important not to withdraw because then you're basically never going to get that contribution that you've already made. You're losing out on that. It's like a highle watermark. Once you have contribute and you take out, you don't get that space back again. And then the question is okay but if I put 36,000 rand a year in, is that enough? So, this is very dependent on how much you earn and how much you're going to need to retire to maintain your lifestyle.

And I would definitely encourage you to watch my other videos on the 4% rule, for example, to see how much you're going to need to retire. And a rough a very rough calculation is to say between 20% and 30% if you're starting later in life of your income should go towards retirement planning purposes. If 3,000 a month, which is 36,000 a year, is less than 20% of your annual income, then this is not sufficient for you.

You cannot only rely on a TFSA product to retire. Also, you can DIY this investment. You can do it yourself. It can be as simple as investing in a globally diversified ETF. And it's very possible to do it yourself and to pay very low fees this way. Then, can expats have a TFSA? So if you're an expat and you're a tax resident in a different country, then you fall under the tax rules of the new country. The question should be how will that country treat your TFSA in South Africa.

So how would they tax foreign investments? Most likely if it's like the UK for example, they are going to tax you on your global investments. But if you're in one of the tax havens like Dubai or Saudi, then a tax reach you on whether you have the money in South Africa or in a different brokerage account. I think you might as well then take advantage of having a tax free savings account in case you ever move back to South Africa to take advantage of the tax-free growth.

Then two more things that people for some reason are always confused by. If a taxfree savings account pays out dividends with into the account which is reinvested that doesn't count as contributions. Contributions is only money that you physically deposit back into your tax savings account. So make sure you've got the setting on that your dividends are automatically reinvested in your TFSA so that you can basically put the switch on for extra compounding when the dividends are reinvested.

And lastly is can you have a taxree savings account in a company or in a trust taxree savings accounts are only for individuals. So this is for individuals in South Africa to have a retirement or a tax-free retirement product available to them and not for companies or trusts. So, just a quick recap, max it out as early as possible and leave the money in as long as possible. Then, invest it. Don't just save it. And avoid the expensive mistakes that I mentioned.

If you follow this plan, your TFSA can become one of the best wealth buildinging tools that you have in your portfolio. And it's all tax-free. Before you go, remember to sign up to my free investing masterass. link is in the description and I can't wait to see you