Calculate the potential returns on your Tax Free Savings Account (TFSA)

When I first heard that National Treasury had decided to gift its citizens with a Tax-Free Savings Account (TFSA) I was super excited for two reasons:

• Selfishly - free from dividends tax*, securities transfer tax and capital gains tax (probably the heaviest over a long investment period), it would enable me speed up the growth of my personal wealth.
• Altruistically - the purpose of the TFSA dovetails beautifully with our EasyEquities mission of bringing financial dignity to all, by enabling everyone access to a simpler tax-savings vehicle than had previously been available.

What I was initially most excited about was that I could open a TFSA for my daughters, who would benefit substantially from compound returns over a long investment period, and therefore save even more on capital gains tax.

There are a few critical investment principles to follow to succeed in investing, one crucial one of which is minimizing fees and taxes. The unfortunate thing I’ve found, particularly in trying to explain it to others, is that it’s very difficult to appreciate just how big an impact it can make.

Work it out

Building a spreadsheet to work out the potential returns on a TFSA investment is DEFINITELY not as simple as I initially thought. I want to be able to change some of the inputs and see what the effect is on the whole model, so after many versions and feeling a bit like I’m living in Groundhog Day I’ve come up with something that satisfies my inner detail orientated geek, but that hopefully isn’t too complex for a TFSA newbie to use. While a TFSA is pretty simple in its operation, the way a person chooses to ‘operate’ it could differ substantially. The current iteration of my calculator gives what I believe is a nice view of what a TFSA investment can look like over time.

Go big once off or contribute monthly?

My spreadsheet caters to both. You could make larger initial deposits in early years and then stop (for a period of time or all together) as life and difficult times might dictate, OR you could be a super-diligent early adopter that starts with zero contributions but sets up a monthly debit order of R3,000 a month in March every year to ensure you hit the full R36k annual limit each year and rush to the R500k lifetime limit in just under 14 years.

Let’s number crunch

Full declaration – this calculator is very much a work in progress and by no means perfect, so would the Excel virtuosos please hold the hate mail. In addition, I mentioned before that every investor operates their TFSA differently, and similarly everyone will have different needs, timelines, and levels of risk that they are comfortable with. This is just a way for you to play with different scenarios, but you will of course have to always consider whether the style and timing of your investment is right for you.

I’ll run you through the basics below, together with a simple scenario to give you an idea of how it all operates. You'll then be able to edit the model and personalise it for your lifestyle and what you think you'll be able to execute.

Plug in your details

The 5 shaded cells from C7 to C13 are all cells designed for you to input data / info particular to your situation. By inputting:

• Your Date of Birth (C7)
• Any contributions you have already made to your TFSA (C8) – ie. How much have you contributed to (deposited into) your TFSA account so far?
• The value of any contributions you have been able to make so far (C9).
• Annual return (C10) – the average annual return you expect / hope to make on your investment over time. I hope / expect to make at least 12% on average in returns each year, which is roughly the historic return of the Johannesburg Stock Exchange over the 10 years between 2009 and 2019. If you want to be a little more conservative in your outlook, the historic return of the US stock market over the last century is 10%. 
• Monthly contributions (C11) – if you plan to make frequent debit order contributions, specify the value here, together with the date you expect to start making them, in the Date field two cells below (C13). Simply type the month and year into the cell (eg. September 2019)

My example model explained

The model in the sheet when you open it, is based on the following:

1. A 23-year-old client - the Date of Birth was captured in cell C7,
2. Who received an amazing 21st birthday gift from family of R30,000 which they deposited immediately into their TFSA - their first contribution captured in cell C8,
3. That R30,000 contribution is worth R36,300 two years later - this current value of their investment is captured in cell C9,
4. An expected annual return of 10% (cell C10),
5. They have decided to start a recurring investment of R1,000 per month (cell C11) in June of 2023 (cell C13).

Et voila – the model tells me that if our 23-year-old client starts investing R1,000 per month in June 2023 on top of the original R30,000 with an expected average annual return of 10% per year, they will:

• Reach their R500,000 lifetime contribution limit in 2062 (cell C18), when they are 62 years old (cell C19)
• At that point in time, the R500,000 they have invested will be worth R7,6 million (cell C20) - WOW - how amazing is that growth?

Consulting the graph in the model, the growth in the first 10-20 years is painfully slow, BUT if you stay disciplined and stay the course, watch how the growth of your wealth accelerates beautifully up and to the right from roughly the halfway mark onwards.

Benefit of using your TFSA

In very simplistic terms, I could save as much as R1.28 million (cell H11) in capital gains tax. If I invested that money in a 'normal' non-TFSA account which is subject to CGT,  that would reduce my total holdings at the end of that investment period by 18%. I would have to pay SARS R1.2 million rand. 

So the use of a TFSA account brings a very substantial benefit which is important to consider in your investment journey.

Please play with the model

Looking at our example, our 23-year-old really wants to retire at age 55. Their current setup has them only reaching their lifetime contribution limit at age 62.

So, on reflection, if they want to get to the R500k by age 55, they need to either:

1. Increase their monthly contributions to reach that limit sooner - they can increase the monthly amount (cell C11) until the model shows that OR
2. Put in a few lumps sums each year. They can do this at any point in the model by entering anticipated / planned lump sum amounts in column G.

Increasing the monthly contributions to R2,000 per month, they hit the limit at age 43. The ultimate value of their investment at that point is much less at only R1,7 million BUT that is because there are 19 fewer years (62-43) for the effects of compounding to work.

If you jump down to the place in the model the limit is reached – you can use the handy hyperlink in cell D15 to do that – and then continue to scroll down to the same year (2062) in which I would have reached that limit had I stuck with the R1,000 per month, I can see that the ultimate value (if I don’t withdraw anything) is R12 million (R4.3 million more than the R7.6million) because the money has gone in quicker, allowing for compounding to work over a longer time, on a greater sum of money.

And this is the type of fun discovery / learning that can hopefully be made from the use of this model.

Here's a challenge

A 23-year-old, starting this year with zero initial contribution (zero in cells C8 and C9), and investing just R1,000 a month, would hit the annual contribution limit at age 65 with a cool R7,5 million in the bank and ZERO tax to pay on it. Investing R1,000 a month may be difficult initially, but should become significantly less difficult as they earn more each year.

Can you get started on your own personal journey? Now there’s a challenge.

*A TFSA will never be subject to dividend withholding tax if you invest in local ETF’s. The only time dividend withholding tax will be applied is when the ETF you've invested in has foreign holdings. In that case you will be subject to foreign dividend withholding tax, which will be applied to ETFs that have foreign holdings and receive dividends from the foreign companies.

Disclaimer: This compound interest calculator is provided to you by First World Trader (Pty) Ltd t/a EasyEquities (“EasyEquities”) as a guide only, should not be construed as investment advice and has no legal effect on any of your investments. You use this online calculator at your own discretion. The criteria, factors and/or formulae used by this online calculator are subject to change at any point. EasyEquities, its management, its employees, representatives, agents and affiliates, give no warranty, express or implied, as to the accuracy, reliability and completeness of any information, formulae or calculations provided through the use of this calculator and does not accept any liability for loss or damage of whatsoever nature, which may be attributable to the reliance on and use of this calculator. We do not warrant the integrity and security of this calculator or that it is free of errors, corruption, viruses, interception or interference. You should always seek appropriate financial advice before investing.