Financial Planning & Wealth Management

Should I set up a TFSA for my children?

Tax-Free Savings Accounts (TFSA) were introduced in South Africa in 2015 as a tax-free savings and investment option designed to encourage long-term savings. Under current rules, you can contribute up to R36,000 per year with a lifetime limit of R500,000. This means it would take almost 14 years of maximum annual contributions to reach that limit, assuming no adjustments for inflation.

 

What’s the Right Way to Use a TFSA?

 

The appeal of TFSAs is clear: all interest and gains are tax-free. But with a R36,000 annual cap, it’s important to think strategically about how to maximize this account. I’ve seen people use TFSAs for mid-term goals like holidays or once off purchases. This is a big mistake as it undermines the long-term potential of this product.

 

TFSAs: Best for Long-Term Growth

 

TFSAs work best as long-term, growth-oriented portfolios that allow compounding to really have an impact. Recently, I spoke with a client interested in starting a TFSA for their child. While this is a nice idea, it uses up the child’s lifetime contribution limit, which can take away the child’s freedom to make their own choice on how to use the product.

 

There has been some debate in this area on whether you should use up your children’s limit or just build them a discretionary portfolio instead for that first car purchase or home deposit, and leave the decision on how to use the TFSA to them when they start earning their own income. After all, your contributions are taking up their lifetime limit.

 

My view is to absolutely make use of their TFSA but with a specific long-term goal in mind. If your child only begins this investment at age 25, they’ve missed out on 25 years of compounding. 

 

To illustrate the power of compounding a TFSA for children, let’s look at two scenarios:

 

Scenario 1: Early Access at Age 22

 

Suppose you start a TFSA for your child at birth, contributing R36,000 annually until the R500,000 limit is reached at age 14. Assuming a 12% annualised return, the portfolio would grow to R2.887 million by age 22. 

 

Adjusted for 5% inflation, that’s around R987,024 in today’s terms—enough to help with a car or home deposit. 

 

But if the funds are used here, you miss out on the far greater benefits of long-term compounding.

 

Scenario 2: Letting it Grow Until Retirement

 

Now, imagine holding off and letting that TFSA compound until age 65.    That would be 65 years of compounding (!)

 

With the same 12% growth assumption, the balance would be R377 million when your child turned age 65. Adjusting for 5% inflation, that’s equivalent to R15.8 million in today’s terms.

 

Using the 5% income rule, that portfolio could fund a tax-free monthly income of R65 970 for life. In contrast, a taxed discretionary portfolio or annuity portfolio the same size would yield closer to R49,408 per month after tax.

 

That’s a 25% boost in income purely from the TFSA’s tax-free structure.

 

Let compounding do its thing

 

Unfortunately, many people use TFSAs as short-term savings vehicles or emergency funds, which undermines their potential. By tapping into these accounts early, they miss the full power of compounding that makes TFSAs truly transformative for long-term financial security. These are incredibly powerful long-term tools if used correctly.

 

As Charlie Munger once said – “The first rule of compounding: Never interrupt it unnecessarily,”

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About

 MattFin is a blog that focuses on wealth management, investments, financial markets and investor psychology. I build financial plans and portfolios for families and individuals

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