TFSA vs. RA for retirement?

I am doing both.

If i had to choose though i would say on a monthly basis ensure you max out the 2.5k into the TFSA. I am 25 so for me this thing has a lot of time to grow and is in pure equity.

I would also try get as close to the 15% as you can on the RA, at the moment i only do 12% on a monthly basis, i normally do a lumpsum at the end of the year to topup to the 15%.

The RA deduction become more critcal as your climb the tax ladder. To many variables to consider to be honest. Would have to open up excel and do some calcs.
 
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Another big advantage of an RA is that it is exempt from estate duty at death.

Costs are identical for RA's and TFSA's with low cost providers like Sygnia.

There are great ways to structure your retirement income, to minimise tax during retirement - an RA or pension fund is a great tool for this.
For eg. I know a retired couple who after more than 15 years in retirement spending about R500,000 per year (in 2015 Rands) have averaged an effective tax rate (income tax, CGT, Div tax) of less than 6%. The main technique used by them was to build up an RA fund in the husband's name, and discretionary investments in the wife's name. About 2/3 of their retirement capital was in the RA at retirement. The husband transferred the 1/3 lump sum to his wife. So he is only taxed on the living annuity drawdown (+- 1/2 of their expenses). The wife gets taxed on all other investment income.
He was able to build up this RA benefiting from the tax deduction at his marginal rate (up to 41%), and he now draws it down at his average rate, (+- 11% at present).
 
supersunbird said:
Just a small bit, can organise an aggressive RA with 75% equity and 17.5% (maybe even 20%?) listed property and 7.5% (5%?) bond fund...
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I bet you Listed property returns less than cash for the next 10 years to 6/5/2025.
 
Hamster said:
The question is not to replace the RA but if it is worth filling it with the first R30k every year before carrying on with the RA.
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For tax payers earning less than at least R2,000,000 pa it is better to max out the RA.
They will enjoy all the benefits of the TFSA on their investment
+ get a tax free portion and a low tax portion paid out at retirement
+ get the difference between their marginal tax rate during their working years, and the average tax rate during retirement
+ their heirs will pay less estate duty.
 
I'm 25 and have the company pension at 7.5%/7.5%. Besides my monthly investment of R1200 into an Old Mutual balanced portfolio, I also started putting R500 into a TFSA wrapper through them. (Also saving a bit of cash every month and started dabbling in online equity trading)

Should I be looking at getting an RA, or do I not qualify because of the pension fund I'm already contributing to?

EDIT: In the context of the OP's question, where he wants to know which he should first "max out". I really didn't know about the tax free threshold similar to that of the TFSA.
What is the threshold for RA's?
 
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X-Gamer said:
I'm 25 and have the company pension at 7.5%/7.5%. Besides my monthly investment of R1200 into an Old Mutual balanced portfolio, I also started putting R500 into a TFSA wrapper through them. (Also saving a bit of cash every month and started dabbling in online equity trading)

Should I be looking at getting an RA, or do I not qualify because of the pension fund I'm already contributing to?

EDIT: In the context of the OP's question, where he wants to know which he should first "max out". I really didn't know about the tax free threshold similar to that of the TFSA.
What is the threshold for RA's?
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Just so we get on the same page... what do you mean by threshold?
 
I know the TFSA is basically limited to 30k per year. The OP wanted to know which to "max out" first. I'm just not understanding what sort of limit or threshold the RA provides.
 
X-Gamer said:
I know the TFSA is basically limited to 30k per year. The OP wanted to know which to "max out" first. I'm just not understanding what sort of limit or threshold the RA provides.
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The "threshold" on the RA is the 15% (for now) of your gross that you can claim tax back on.
 
You can over contribute in a TFSA, over contributions will be taxed at 40%.

You can contribute more than 15% to RAs, but then its (the more than 15%) is just not something you can claim back on in your yearly tax return, no extra tax, the growth and income inside the RA is still untaxed. If you "over contribute" to the RA, the extra you put and the tax you could have claimed, gets deferred to the next tax year or till you retire and added to your tax free lump sum - if I understand what I have read up on it correctly.

I contribute 20%. 15% to work retirement fund and 5% to RA, I will probably up to 10% with the RA at some stage.

Saving 15% of your salary probably isn’t enough:
http://www.moneyweb.co.za/investing/saving-15-of-your-salary-probably-isnt-enough/
 
when you say that contributions over R30K to a TFSA are taxed at 40% - is this on the earnings? How does this tax rate get applied?
 
MikyMouse said:
when you say that contributions over R30K to a TFSA are taxed at 40% - is this on the earnings? How does this tax rate get applied?
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You can only put R30K a year into a TFSA. Anything over that is taxed at 40%.
 
supersunbird said:
How much the bet? :D
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It will have to be a friendly wager, my gambling days are over.

My conviction level for this prediction is about 60:40.
I am however 95% certain that the 10 year returns will be disappointing considering the risk.
I predict that there will be a lot of pain at some point resulting in weaker hands selling out at the bottom incurring a painful permanent loss.
I am not a proponent of market timing, but every now and then the market gets it wrong, and I am sure with Reits this is one of those times.
I am happy to sit on some cash in the meantime, ready to jump into this asset class when there is blood running in the streets.
The cue for me would be when net rental yields on Reits exceed yields on long term gov. bonds again, which is how it should be.
At the moment Reit yields are in the region of 6% and the R186 at 8%.
If this spread narrows by just 1% and long term rates increase by just 1%, you can expect Reit share prices to drop 25%.
Imagine the agony if the spread returns to it long term normal (a 3 % increase v long bonds) with world interest rates normalising at the same time.
 
MikyMouse said:
I'm with you but is the 40% taxed on your contributions?
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Yes, you out in R40 000, they will tax the extra R10 000 at 40% thus in the end you will have R36 000.

The growth (however it occurs) on the R36 000 in future will be tax free. I

It would be a stupid idea to over contribute, since you are already using after tax money to invest in these TFSAs. Even if one is under the income tax level, its better to put the money elsewhere, you will get taxed at a lower rate (or even not pay any) than the guaranteed 40%.
 
supersunbird said:
You can over contribute in a TFSA, over contributions will be taxed at 40%.

You can contribute more than 15% to RAs, but then its (the more than 15%) is just not something you can claim back on in your yearly tax return, no extra tax, the growth and income inside the RA is still untaxed. If you "over contribute" to the RA, the extra you put and the tax you could have claimed, gets deferred to the next tax year or till you retire and added to your tax free lump sum - if I understand what I have read up on it correctly.

I contribute 20%. 15% to work retirement fund and 5% to RA, I will probably up to 10% with the RA at some stage.

Saving 15% of your salary probably isn’t enough:
http://www.moneyweb.co.za/investing/saving-15-of-your-salary-probably-isnt-enough/
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I would not recommend contributing more than the amount allowed as a tax deduction to pensions/RAs in a tax year.
It is useful to build up a discretionary investment, TFSA is perfect for this. Also, an offshore discretionary investment is a good idea to counter political risk.
 
supersunbird said:
Saving 15% of your salary probably isn’t enough:
http://www.moneyweb.co.za/investing/saving-15-of-your-salary-probably-isnt-enough/
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I disagree with that article. Saving 15% of gross for 40 years using a low cost balanced strategy while keeping one eye on valuations, should work out just fine 95% of the time. The 5% failure rate can not be remedied by saving more, as it is caused by other factors beyond our control.

It is however advisable to save a lot more than 15% before marriage and kids, it is a struggle to keep up the 15% savings rate during the middle phase of accumulation.
 
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Verde said:
I would not recommend contributing more than the amount allowed as a tax deduction to pensions/RAs in a tax year.
It is useful to build up a discretionary investment, TFSA is perfect for this. Also, an offshore discretionary investment is a good idea to counter political risk.
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Well, tax deduction will soon be raised to 27.5% instead of 15%, would your recommendation change then?

That's when I'll increase my RA contribution.

Agree on the discretionary investment, and of course I will go into TFSA in the near future.
 
supersunbird said:
Well, tax deduction will soon be raised to 27.5% instead of 15%, would your recommendation change then?

That's when I'll increase my RA contribution.

Agree on the discretionary investment, and of course I will go into TFSA in the near future.
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If I lived in a more politically stable part of the world, I would have no qualms maxing out every tax incentive. I think SA investors should try to invest 25-40% of their net worth out of this govmt's reach - just a bit of insurance against the unthinkable, which unfortunately became a reality for our northern neighbour.

The increase to 27.5% will be very useful for those who start saving later in life, and need to catch up.
 
For those who can afford to max out there RA and then TFSA brilliant.

If not, max out your RA first then use the tax refund from the RA and medical aid credits to max out TFSA.
 
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