Contributing to a TFSA

A TFSA is a powerful long term investment but it also has strict limits on how much you can invest each year, and during your lifetime. For that reason it's important to start contributing to a TFSA as soon as possible but also only withdraw from the TFSA as a last resort.

Once money is in your TFSA you can move it around between different underlying investments.

You can even transfer your funds from one TFSA to another TFSA as long as you are careful to follow the correct transfer procedure. Never withdraw your funds from one TFSA to invest in another.

What are the contribution limits?

The amount you can contribute to a TFSA is limited to 36000 per year which means it will take at least 14 years to reach your lifetime contribution limit of 500000.

If you contribute more than these limits then you will immediately be taxed 40% on the excess contribution.

How do you know how much you've contributed?

All TFSA providers will track this for you as they have to report it to SARS through issuing an IT3s tax certificate.

But, you do need to make sure you keep track of all of your TFSA accounts if you have more than one. Your TFSA providers don't share this information with each other.

How do you maximise your TFSA benefit?

The reason to invest in a TFSA is for the tax benefits but until your investments have earned a decent return this is not worth much. On the flip side, after a decade or two, the majority of your investment will be taxable and therefore, having them in a TFSA is worth a whole lot. So start as early as you can to maximise the effect of compounding over time.

But, remember that withdrawals do not reset your contribution limits so if you withdraw funds from your TFSA you will never be able to replace that capital and it will no longer earn any returns.

Try to use your full contribution limit each year until you hit your lifetime limit but don't stretch yourself too far or you'll risk withdrawing from your TFSA.

How do you decide where to invest your TFSA?

If you put your money into a good TFSA platform then you can invest in any collective investment scheme (CIS) such as ETFs and unit trusts. For very long term investments it is hard to beat the global equities markets. These will go up and down periodically but on average have always performed well.

If you invest in an Easy Equities TFSA (the cheapest we could find) then you'll have access to ETFs such as the MSCI World Index tracking ETF which is a low-fee investment that tracks global equities.