It should first be understood that a Tax Free Savings Account (TFSA) wasn’t designed specifically for retirement savings whereas a Retirement Annuity (RA) was. A Tax Free Savings Account was designed more for medium to long term savings goals such as a bond deposit, your children’s university education, etc. This was to promote savings in a savings poor South African environment.
It was also hoped that if people utilized this vehicle for savings, they would be less inclined to cash in pension or provident funds when they moved jobs, or were retrenched.
Having said that, I’ve often been asked whether you could use a TFSA to save for retirement.
I guess the short answer is that any savings towards retirement is a step in the right direction.
If you want to compare the long term benefits of each, it depends on your specific circumstances. You can go to the following links and work out for your own circumstances which may give you a slightly better long term outcome.
My suggestion though, is to blend both forms of savings. Your RA will form the basis of your post-retirement nest egg, while the TFSA will provide the top up post-retirement income.
Use the TFSA to save for your medium term goals and your RA for your retirement goals. Once you’ve reached a stage in your life where you no longer need to save for medium term goals e.g. once your kids have finished university, you’ve downsized your house, and you’re playing catch up with your retirement savings, perhaps just continue your contribution to the TFSA along with your contributions to your RA.
By being deliberate about your income withdrawals at retirement, you can reduce your monthly income tax liability but withdrawing from both. this is because withdrawals from an Annuity is taxed as taxable income, whereas withdrawals from a TFSA are tax free. You can thus withdraw the same total amount of monthly income but place yourself in a lower tax bracket.
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