How to open a TFSA
While some TFSAs (e.g. the ones from most banks) offer a simple savings account with a fixed return we think that's like putting rocket fuel into an old sedan.
To really take advantage of the TFSA structure we recommend you put your money into a more flexible account that allows you to invest your money with fewer restrictions.
Which TFSA to open
TL;DR: Get a TFSA from EasyEquities for the lowest total costs and lots of options for how you invest your money.
There is some excellent research online into TFSAs and our recommendation (as always) is simply to go where you’ll pay the lowest fees. On this basis we suggest getting a TFSA from EasyEquities.
Transaction fees vs annual fees
EasyEquities doesn’t charge an ongoing platform fee for their TFSA product which will save you big time in the long run. Instead you pay a transaction fee (currently 0.25%) on the funds you invest, when you invest them. Within about 3 years the total fees you’re paying on your TFSA will be much lower through EasyEquities than if you were paying an annual fee that’s calculated based on the total you have invested (the norm for most other TFSAs) even if that annual fee is a little lower (e.g. Sygnia has the lowest annual fee we could find at 0.2%).
Compare all the fees together
You will still pay annual management (and related) fees on whatever underlying products you choose to invest your money in through the EasyEquities TFSA but even after adding those fees we can’t find any TFSA products that are comparatively cheaper.
The 10x TFSA is advertised as having no fee (and 10x are famous for having fantastically low fees), so at first glance this seems like the best TFSA. But if you invest in the 10x MSCI World Index Feeder Fund (a long term passive investment we really like) you will pay 0.61% in fund fees.
In contrast, if you invest in a very similar fund like the Satrix MSCI World ETF through EasyEquities you’ll pay the once off broker fee to invest (0.25%) and then annual fees of only 0.35% on an ongoing basis.
The two funds track the same index, so will have roughly the same performance but clearly the combined costs are lower through EasyEquities.
Getting an EasyEquities TFSA
TL;DR: EasyEquities has online guides to get you started here.
Opening a TFSA at EasyEquities is pretty easy.
As with any financial service provider they’ll need you to provide some personal information to pass their “Know Your Customer” (KYC) checks, which they’re obliged to do, but as soon as that’s complete you’ll be able to fund your TFSA and start investing.
Start now
Rip the band-aid off and get the account open. It's a little bit of work but it's all do-able online and once its done, its done. Making your contributions every month or year after that is easy once the account is open.
Once you have your account enabled, make sure to select your TFSA account on the account selector, and follow the instructions to deposit funds into your TFSA via an EFT from your bank.
Look for the link that says “Fund this account”.
Don’t fund the account through a debit or credit card, the fees are very high and you are better off simply waiting the extra day or two for an EFT to clear. It normally clears the same day anyway.
Stay within your limits
Never put more than R36 000 into your TFSA in a tax year. That includes the sum of all TFSAs you might have (if you have opened more than one). SARS will hit you with a 40% tax on anything you invest over that limit. EasyEquities can help you track your total invested via their platform or you can use Fynbos to track your TFSA contributions across all accounts.
Where to invest your TFSA funds
TL;DR: Do some research to find ETFs that give you lots of offshore exposure, majority equities but most importantly low fees.
Once you have funds available to invest (look for the balance labeled “Funds to Invest” under the TFSA account selector) you’re ready to invest your money.
Click “Invest Now” and find the ETFs, unit trusts or other investments that you want to put your money into. Every person’s investment strategy will be different but here’s a few things to consider when choosing your investment.
Invest for the long term
If you’re a young professional, funding your TFSA, then we assume that you are putting this money away for the long term (a few decades, not years). If that’s not true then you shouldn't be wasting your TFSA contribution allowance.
If you’re saving for a holiday, a deposit on a house, or a car, don’t use your TFSA.
The TFSA is for long term wealth accumulation and growth where the benefit of not paying taxes on the income generated grows exponentially with time. If you max out your TFSA but withdraw a lot of it to fund short-term goals you’re destroying the long term value of those tax free gains.
Historically the best long term returns have come from equities so for anyone with long investment horizons you should ensure that the majority of your portfolio is "in the market".
Some bonds (20% or less) are a good way to set up your portfolio to weather any dips in the market.
Go offshore
The second thing to consider is that if you’re planning to be living the good life in 20 years time then expect the majority of your expenses to be driven by the cost of the US dollar and other foreign currencies. Said differently, you should be trying to grow your wealth in assets that are not only bought and sold in South African Rands because the value of the Rand relative to global currencies will have a huge impact on the value of your assets in the future.
There are plenty of funds that invest entirely in foreign equities and these are an excellent way to build your portfolio. Consider funds that track equity indexes such as the S&P 500 or MSCI World
Minimize the fees you pay
Finally, and most importantly, minimize your fees. Every basis point counts when you're investing for the long term because costs compound just like gains.
Since you're using EasyEquities for the TFSA account the next thing to consider is which funds have the lowest Total Expense Ratio (TER) (basically the cost to have your money in that fund) and also meet your other investment criteria.
Fees are evil
To illustrate the huge impact even a small reduction in fees can have, consider that if you earn a real return (after inflation) of 5%, over 30 years, you will end up with 12% less money if you pay 1% in fees instead of 0.5%.
To find the lowest cost funds, look for passive funds that track an index instead of being actively managed by a fund manager. While there are some great fund managers out there, history has shown that over a long period of time very few beat the market (less than 15% in South Africa) so its hard to justify the high fees they charge.
Some Examples
An example of a great fund that meets all these criteria is the Satrix MSCI World ETF. It is tracking an index of large- and mid-cap companies across 23 developed markets globally and its Total Expense Ratio (TER), which is a standardized way to represent fees, is only 0.35%.
Another good example is the Sygnia S&P 500 ETF. It is tracking the S&P 500 which is widely regarded as the best single gauge of large-cap U.S. equities and has a TER of only 0.19%.
Commit and walk away
Do some research on which funds to choose, or consult with a financial advisor that is open to taking a fixed fee in exchange for some fund recommendations that match your investor profile, then invest your money and leave it alone.
Don’t panic if your investment loses some value in the short term, this is normal for higher risk equity heavy investments. They will be much more volatile than safer bets such as bonds but in the long term have proven to deliver much better returns.
The critical factor is not trying to time the market, it is time in the market.
By reducing the fees and taxes you pay you’re already taking critical steps to maximize your long term wealth through an optimized TFSA. Now keep contributing and investing until you max out for the year and then start again next March.