If all goes well then the wife and I will be expecting our first child in the new year. So I'm now investigating options for an education fund. We are a bit older (we will be 54-55 by the time our kid should be starting varsity) and that got me thinking about using a unit trust type RA because of the tax benefits. Any advice would be appreciated.
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RA as education fund
- Thread starter broloks
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AlmightyBender
Executive Member
That should work quite nicely I think. Can't think of any reason why this is not a great idea.
supersunbird
Honorary Master
This. But there are ways to go about using it to meet your aim.
You can take a maximum of 33.3 percent out as cash (a portion will be tax free) at retirement (maybe use that for the first years fees carry over, and the following years textbooks and registration fees and such), the rest needs to be put into a pension generating fund. So you will get an income from it that can be used to pay for the following years studies (and all the monthly costs that the studying may include) as well.
And a side benefit, it will keep giving you income even after the child has completed his/her studies.
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AlmightyBender
Executive Member
Hmm if you could save enough so that the 1/3rd cash can cover the university fees, and then the rest could suppliment your retirement income, that could be a good situation.
I have an RA and a pension fund, and the wife has an RA. We are married out of community of property with an ANC. I'm exploring the pros and cons of getting another RA just as an education fund. As far as I understand, even if the contributions are more than the maximum allowed (for a tax refund), you can build up tax credits which can be used in the future. Can anybody point me to some good references please.
Ok as I understand it:
* 1/3 of the RA taken as lump sum will be taxed,
* 2/3 must be used for compulsary annuity.
One can then buy a living annuity with the 2/3 and take the maximum draw of 17.5% per year.
Can anyone give me a rough estimate of the tax implications of this with compared to just investing a small amount (R600 - R700pm) for now (increasing with inflation) and then paying capital gains tax on the investment?
* 1/3 of the RA taken as lump sum will be taxed,
* 2/3 must be used for compulsary annuity.
One can then buy a living annuity with the 2/3 and take the maximum draw of 17.5% per year.
Can anyone give me a rough estimate of the tax implications of this with compared to just investing a small amount (R600 - R700pm) for now (increasing with inflation) and then paying capital gains tax on the investment?
AlmightyBender
Executive Member
You will not pay any capital gains tax. Your lump sum and your annuity income will both be taxed at your marginal tax rate as income. The first R300000 odd of the lump some is tax free I think, not sure if this applies to RA's. While your investment is still within the RA it is exempt from tax.
Nerfherder
Honorary Master
Just look around because there are specific education investment products that might actually work better.
I agree with the logic though... but there might be another issue, you might get taxed differently for having lots of RA's... I assume you have your own one for your actual retirement.
I do yes, but as I understand it you can build up tax credits if you pay more than 15% of your taxable income to an RA. And these credits can be redeemed in later years.
supersunbird
Honorary Master
That is correct, the living annuity can have a drawdown of 2,5 to 17.5%. And if I recall correctly you can change the drawdown rate once a year on anniversary of the annuity. The capital in a living annuity is also inheritable by your beneficiaries.
Obviously the tax free lumpsum will increase at discretion of treasury in 20 years time.
supersunbird
Honorary Master
No, you only pay capital gains tax when selling the investment (on the capital gains itself and if there are capital gains). You pay tax on dividends (15%) and interest (if the interest returned is above R22 500 per year but not sure of the tax rate) yearly.
Yes, that is what I understand as well.
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Nerfherder
Honorary Master
OK... didn't know about that.
I do really like your idea... its something that might work for me as well. Worse case its money you save up, it will always come in useful.
supersunbird
Honorary Master
Just realised, at the moment you will only be able to take that R300 000 and something tax free lumpsum from one of the RAs you have. So you cant rely on that lumpsum.
So you might just go the maximum drawdown route.
So you might just go the maximum drawdown route.
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Ah yes. Forgot about that. I will try to do a tax comparison analysis tonight.
I always thought I could get that benefit from each policy...
What if I take the 300k from my pension at retirement, can I also get that benefit from a RA, or does it apply to all Retirement Products?
supersunbird
Honorary Master
It applies across all your products. Obviously it will be much more than that in 20 years or whenever you retire.
Jozsef Borbely
Well-Known Member
Also keep in mind the income draw form the annuity is taxed according to the income tax tables. Thus in your later years you might be paying more tax then expected, which defeated the whole point of using the RA for tax reasons.
The second thing I would like to add is that the future value of the tax benefit might be worth less then you think. Assume you contribute a R1,000,000 over the limit this year, assuming a inflation rate of 6% over a 20 year period, that R1,000,000 will only worth R311,000 in present value terms in 20 years time.
These two factors together with the fact you lose flexibility in terms of accessing the investment and the fact that you already seem to be contributing to RA's make a flexibility investment option a more logical route to take.
Hope this helps.
The second thing I would like to add is that the future value of the tax benefit might be worth less then you think. Assume you contribute a R1,000,000 over the limit this year, assuming a inflation rate of 6% over a 20 year period, that R1,000,000 will only worth R311,000 in present value terms in 20 years time.
These two factors together with the fact you lose flexibility in terms of accessing the investment and the fact that you already seem to be contributing to RA's make a flexibility investment option a more logical route to take.
Hope this helps.