RA vs TFSA Priority

[SauRoNZA]

Right so with me changing jobs and getting out of the forced pension scheme I'm back in full control of my finances.

So I came to the interesting conundrum of which makes more sense to priorities...funding the TFSA first and then the RA, doing only the RA and maxing it as far as I can and only once I hit the cap do the TFSA.

Or a balance of both.

I can't afford the full 27.5% RA contribution at this stage, not before settling my home loan anyway which is a few years away so I was thinking of a starting point is to take the 15% of CTC and then subtract the R2750 from that and use the remaining value to fund my RA with the TFSA being fully funded and then increase the RA contribution over time as I settle into the new cost structure.

Of course there are tax implications all round to consider and hence the question.

Alternatively, I can maybe throw a R1000 at the TFSA above and beyond the 15% and then use the tax refund annually to fund the rest but that requires more discipline to make it happen and far less automatic than a debit order.

How have other people tackled this?

 

[mr_norris]

I have prioritised my TFSA because I can choose what I want to invest in. RA is there just to get a bit back from the tax man. Is that the right thing to do? Probably not. Is it the most tax effective way? No - well, I doubt it.

It's a tough one really, and I think it comes down to personal preference. I have gone my chosen path because I prefer the option of having access to my money, even if I intend on not touching it until retirement. I also don't like the idea of the government deciding what my retirement fund can or can't be used for.

One thing you could do is pump in as much as you can in the RA, and then use the rebate you get from submitting your tax return to fund or partially fund your TFSA.

 

[Belix]

All the current talk of prescribed asset requirements is putting me off contributing to my RA, so lately I’ve been trying to max out the TFSA. Down side is you don’t get anything back on assessment like you do with RA contributions...

 

[zerocool2009]

Right so with me changing jobs and getting out of the forced pension scheme I'm back in full control of my finances.

So I came to the interesting conundrum of which makes more sense to priorities...funding the TFSA first and then the RA, doing only the RA and maxing it as far as I can and only once I hit the cap do the TFSA.

Or a balance of both.

I can't afford the full 27.5% RA contribution at this stage, not before settling my home loan anyway which is a few years away so I was thinking of a starting point is to take the 15% of CTC and then subtract the R2750 from that and use the remaining value to fund my RA with the TFSA being fully funded and then increase the RA contribution over time as I settle into the new cost structure.

Of course there are tax implications all round to consider and hence the question.

Alternatively, I can maybe throw a R1000 at the TFSA above and beyond the 15% and then use the tax refund annually to fund the rest but that requires more discipline to make it happen and far less automatic than a debit order.

How have other people tackled this?

How did I tackle this in the last few years. After winning ombudsman cases with RA firms I totally lost my faith in RA's (even with the 15% perk from Sars to be honest).

I try to max my TFSA yearly (oversea exposure), and I use my money much more wiser than what a RA can achieve.

 

[SauRoNZA]

All the current talk of prescribed asset requirements is putting me off contributing to my RA, so lately I’ve been trying to max out the TFSA. Down side is you don’t get anything back on assessment like you do with RA contributions...

That’s a point I forgot to mention in my initial post but yes part of my thinking to fund the TFSA fully first and then smash the RA.

Don’t get anything back now, but stand to get a whole lot more down the line.

Given a long enough window you could live virtually tax free down the line.

 

[Gaz{M}]

If I'm paying 41% tax on my extra salary, instead of maxing out my company retirement fund, just to extract more money into my pocket, then how do I calculate how many years I have to earn above average returns to get back that 41% tax?

So assume my retirement fund is getting 6% per annum (bad SA economy) and I can get about 10% on my own investments, that means I need to wait about (4% compounded over 9 years = 41%) to break even?

 

[Scooby_Doo]

If I'm paying 41% tax on my extra salary, instead of maxing out my company retirement fund, just to extract more money into my pocket, then how do I calculate how many years I have to earn above average returns to get back that 41% tax?

So assume my retirement fund is getting 6% per annum (bad SA economy) and I can get about 10% on my own investments, that means I need to wait about (4% compounded over 9 years = 41%) to break even?

Yes, but also take into consideration how tax will be calculated during draw down between an RA and discretionary investments.

 

[paul5186]

Fund your RA, then when you get tax money back put the full R33k into the TFSA for the year?

 

[Jehosefat]

If I'm paying 41% tax on my extra salary, instead of maxing out my company retirement fund, just to extract more money into my pocket, then how do I calculate how many years I have to earn above average returns to get back that 41% tax?

So assume my retirement fund is getting 6% per annum (bad SA economy) and I can get about 10% on my own investments, that means I need to wait about (4% compounded over 9 years = 41%) to break even?

The breakeven point in your example is actually 14.24 years and not 9 years.

RA value = (1+6%)^x
Other value = (1-41%)*(1+10%)^x

Set RA value = Other value and then you solve for x. Which gives:
x = log(0.59)/(log(1.06)-long(1.1))
x = 14.24 years

 

[Hamster]

TFSA. Contributions are relatively small and long term gains of a maxed out TFSA can be substantial.

With an RA you don't know what the tax climate will be coming.e retirement, nor if they they're going to force prescribed assets or if you're even going to retire here.

I'm in two minds about my RA atm. A part of me is saying keep it ticking over with a small amount every month but take thebulk and invest it offshore. The gains might be more than the tax benefit + gains of the RA and I have control.

 

[SafariTin]

Fund your RA, then when you get tax money back put the full R30k into the TFSA for the year?

I try and not be in the habit of correcting small mistakes in people's posts, but as this one relates to financial advise I feel I need to point out that the annual limit is R33,000.

Perhaps you could update your post to avoid confusing anyone in future?

 

[paul5186]

I try and not be in the habit of correcting small mistakes in people's posts, but as this one relates to financial advise I feel I need to point out that the annual limit is R33,000.

Perhaps you could update your post to avoid confusing anyone in future?

done

 

[mr_norris]

In terms of RA Vs TFSA priority, does the fact that an RA being a tax deferred vehicle make the TFSA slightly better and perhaps slightly worse at the same time?

So with an RA you dump money in (that you were taxed on), you get a refund, and late in life you're taxed on what you draw (I know I'm simplifying here).

With a TFSA, you dump money in (that was taxed on), you get nothing back from the tax man, but you aren't taxed when you draw.

 

[SafariTin]

In terms of RA Vs TFSA priority, does the fact that an RA being a tax deferred vehicle make the TFSA slightly better and perhaps slightly worse at the same time?

So with an RA you dump money in (that you were taxed on), you get a refund, and late in life you're taxed on what you draw (I know I'm simplifying here).

With a TFSA, you dump money in (that was taxed on), you get nothing back from the tax man, but you aren't taxed when you draw.

Some other considerations:

In both scenarios you have some capability of managing when and how much you draw in order to optimise your tax later in life.

RA's need to comply to regulation 28 and TFSA not, so TFSA could potentially all be put in offshore instruments. I recall that there are also regulations on RA's that limit how much can be drawn as a lump sum.

 

[Hamster]

I recall that there are also regulations on RA's that limit how much can be drawn as a lump sum.

R0.00 unless you retire or emigrate. On retirement you can draw a third as a lump sum and have to reinvest the rest into an annuity. That's now and may change (most likely it will become more restrictive if it is changed).

 

[SauRoNZA]

RA's need to comply to regulation 28 and TFSA not, so TFSA could potentially all be put in offshore instruments. I recall that there are also regulations on RA's that limit how much can be drawn as a lump sum.

And I think this was ultimately my decider to first fully fund the TFSA and then put anything extra in the RA.

Got more direct control of what I can invest in and more personal management of it all.

Still get a big enough tax return at the end of the year for a nice bonus that I won't feel guilty about spending instead of re-investing then.

 

[SauRoNZA]

Fund your RA, then when you get tax money back put the full R33k into the TFSA for the year?

It's a lovely notion but even as someone with strong self-discipline in this regard I just know it would be a typical case of something coming up that needs to have the money spent on.

Funding it every month instead still gives me quite a nice sizeable bonus and more money in my pocket than taking the RA rebate minus the 33k so work out better over all.

 

[SauRoNZA]

R0.00 unless you retire or emigrate. On retirement you can draw a third as a lump sum and have to reinvest the rest into an annuity. That's now and may change (most likely it will become more restrictive if it is changed).

That rule is a bit different for people in Pension/Provident funds before a certain date when the law changed isn't it?

 

[Hamster]

That rule is a bit different for people in Pension/Provident funds before a certain date when the law changed isn't it?

Can't comment on provident funds but I recall there was a rule change affecting this a few years ago.

Pension you can still cash out for now when you leave your company's scheme but I heard they're looking at changing that. I'm not risking it it, when I leave my current place of employment I'm cashing out and investing it offshore. But that's me.

 

[shadow_man]

I'm in a similar boat.

Previously all my contributions were to employer funds, so I simply cashed them out when moving on. Now my new employer has no fund - and thus I need to open my own to get the tax benefit...

However with this being a personal RA I won't be able to touch that money till 55, which scares me (with the ANC wanting to loot funds). Thus I'm also very curious as to if I should just do a TFSA that allocates funds to a non ZAR based savings vehicle...