RA vs TFSA, which one is right for you?

RA or TFSA which one is right for you

For a lot of people a big motivator to start investing and to keep at it, is to make sure that there is a nest egg set aside for when they are ready to hang up their ‘9 to 5’ hat. Eventually we’re all going to stop working and will want to have a way of financing and sustaining our lifestyles once we decide to retire. 

The government is on board with this idea too, which is why you can get certain tax benefits when you save for your retirement. While some people use a tax free savings account (TFSA) as a way to save for retirement, others prefer to contribute to a retirement annuity (RA). An RA is designed to provide an investor an income when they retire. A TFSA is a discretionary savings account, which means it can be used for any purpose you want, including contributing to your retirement savings.

You might find yourself wondering which one could work in your own situation as there are some major differences in terms of both tax treatment, contribution limits, access to your money and investment choices with these two types of accounts. Here’s an #easy breakdown to help you decide which one is right for you:

RA

  • Contributions are tax deductible subject to a maximum of 27.5% of your taxable income (limited to R350,000 a year). You can read more on how tax rebates work with an RA here
  • There are no maximum contribution limits, you can invest as much as you like.
  • Normally you’d need to give a portion of any profit you make on an investment to SARS, but when you invest in an RA you don’t need to pay tax on the growth of that investment which includes interest income, dividend income and capital growth. 
  • You can only access your savings when you turn 55.
  • You are subject to the Pensions Funds Act Regulation 28 that places certain restrictions on the asset allocation of the portfolio such as the portfolio can invest at most 75% in equities and a maximum of 30% can be invested offshore.

TFSA

  • Contributions are made net of tax. This means that the amounts you deposit into your TFSA and invest with are done from your salary after all tax deductions have already been made. 
  • Contributions are limited to R33,000 per tax year with a maximum lifetime limit of R500,000
  • Normally you’d need to give a portion of any profit you make on an investment to SARS, but when you invest in a TFSA you don’t need to pay tax on the growth of that investment which includes interest income, dividend income and capital gains. Read more about the types of tax you pay when investing here.
  • You can access your savings at any time without any limitations
  • There are no asset allocation restrictions, but you are limited to investing in Collective Investment Schemes only – on EasyEquities that means exchange traded funds (ETFs) or managed portfolios. This allows you to invest, for example, 100% of your money in an ETF that invests offshore, whereas an RA would only allow you 30% exposure to such a position.

Decide what works for you

Deciding between an RA or a TFSA is a personal choice that’s going to depend on a lot of factors unique to your situation and investing style.

A TFSA allows you greater flexibility with your money, both to withdraw whenever you like as well as greater flexibility in investment (can have any allocation to equities and international). An RA, however, restricts your withdrawal and investment flexibility, but provides greater tax savings as contributions are tax deductible up until a limit. Furthermore, It can be argued that withdrawal restriction of an RA is a benefit not a bug as it forces you to save for retirement whereas you might have the best of intentions when saving via a TFSA, however, you may end up withdrawing more often than is ideal and thus not have enough money for retirement.