As a young professional, estate planning might sound like a topic that you don’t have to concern yourself with until you reach that top income tax bracket. We are all however motivated (sometimes by fear) to start with our retirement planning as soon as possible, which to be honest, is probably the best advice you can receive as a young professional. What we don’t realise is the effect that your retirement planning might have on your estate going forward.
So the question is, how can an effective retirement plan be implemented without negatively impacting your estate (and positively impacting the pocket of the taxman)?
Luckily for us, SARS has implemented some tools to assist us with limiting our tax exposure while implementing an effective retirement plan. These tools are Retirement Annuities and Tax Free Savings Accounts. Discussing each of these in detail will take some time and let’s be honest, no-one wants to read a short dissertation to get some basic advice. So the summary below is merely to bring these tools and some of their benefits to your attention. We leave the rest in the capable hands of your financial advisor to get you across the line and communicate all the fine print such as contribution limits etc.
1. Retirement Annuities (RA)
A RA is basically an investment account which holds some investments. A RA can however be both an investment and an estate planning tool. It saves you tax both in life and on death. Firstly, you get a tax deduction for your contributions in the year that you make them. Secondly, you enjoy tax-free growth on the value of the investments in the RA. Thirdly, it is excluded from your estate on death.
As if all those benefits aren’t enough, when you die, any contributions for which you have not yet received a deduction are not taxed in the hands of your beneficiaries.
2. Tax Free Savings Accounts (TFSA)
Say welcome to the new kid on the block and the must have for any young professional. Just like an RA, a TFSA is basically an investment account which holds some investments. Unlike RA’s however, the money you put into a TFSA cannot be deducted from your income for tax purposes. In other words the money you invest will be after tax money.
So what is the benefit of a TFSA? All your investments in a TFSA will be protected from the taxman while inside of the TFSA. That means your returns will be super charged because of the tax protection you get and, unlike an RA, there is no tax payable when accessing the money inside a TFSA. Because you use after tax money to make contributions to a TFSA, the taxman has already taken his cut, and so he is happy to let you keep everything that comes out of your TFSA.
As a final statement and perhaps to calm some nerves for those who now have to choose between these two options, here is the great news – when it comes to investing for retirement through a RA or a TFSA, while simultaneously keeping your estate in check, there actually is no right and wrong choice.
It is really a choice between great and awesome. The only mistake you can make is not picking either a RA or a TFSA!
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