By Linda Kleynscheldt: Head of Actuarial and Product, PSG Wealth

TFSA or RA? Fresh off the beach or an overseas trip – you could be forgiven for having acronym fatigue. But considering your retirement planning as soon as possible while our new-year good intentions are still intact will set you in good stead.

Here’s a comparison between a Tax Free Savings Account (TFSA) and Retirement Annuity (RA) to help you decide if either (or indeed both) of these products might be right for your needs.

Who can invest in these products?

Both TFSAs and RAs are open to all individuals.  For TFSAs there are no age restrictions for making contributions and on RAs contributions may be made up to the maximum retirement age stipulated by the product provider.

Tax implications and contribution limits

Both TFSAs and RAs offer tax-free growth while your money remains invested. This means there is no tax on the interest, dividends or capital gains in either of these investment vehicles.

When contributing to a TFSA, the funds you invest will have already been subject to income tax. However, contributions to RAs effectively lower your taxable income as SARS will deduct RA contributions up to a maximum of 27.50% of your taxable income (capped at R350 000) each tax year when you submit your tax return, which means that you can actually save on your tax liability by contributing to an RA!

Contributions to TFSAs are limited to R36 000 per tax year and R500 000 in your lifetime. In contrast, there are no annual or lifetime contribution limits on contributions to RAs, and excess contributions can be rolled over to future years.

Access to funds

Before the introduction of the two-pot retirement system on 1 September 2024, members of retirement annuities could only access their retirement savings funds at the age of retirement (currently 55), with a few exceptions (like when they emigrated or became permanently disabled). The introduction of this legislation has brought about changes that give members greater access to their retirement savings before retirement.

Members can now make one withdrawal per tax year from the part of their retirement fund known as the ‘savings pot’ – subject to a minimum withdrawal amount of R2 000. However, they should also be aware that they could be liable for additional taxes if they withdraw funds from this pot, as these will be taxed at their marginal tax rate. Members can also make one lump-sum withdrawal from their vested pot in their lifetime, which will be taxed according to the withdrawal tax tables. Members cannot make withdrawals from the ‘retirement pot’ portion of their RA prior to retirement.

Click here for more information on the two-pot retirement system.

In contrast to RAs, TFSAs allow investors to access their funds at any time, tax free, making these products a flexible choice for both emergency needs and long-term investment goals. However, withdrawals from TFSAs cannot be added back to your annual or lifetime limits. Withdrawals from these products will thus reduce the capital amount available to compound over time, resulting in lower returns over the long term.

Estate planning and protection from creditors

In a TFSA, the funds become part of your estate if you pass away, which could incur estate duty and executor fees. RAs don’t form part of your estate however, so the proceeds of these investment vehicles are transferred to beneficiaries without executor fees being incurred. RAs also provide creditor protection, meaning your retirement savings are safe from potential claims if you face debt issues. TFSAs, on the other hand, do not offer this protection.

Asset class choices

Both products offer access to a wide range of asset classes to suit different risk levels, but RAs are subject to Regulation 28, which limits exposure to high-risk asset classes to ensure safe retirement savings. TFSAs aren’t bound by these limits, giving you more freedom in investment choices.

Each product has different benefits and drawbacks

In general, a TFSA offers flexible, tax-free growth and easy access to funds, which could be ideal for medium- to long-term goals. RAs provide upfront tax benefits, estate planning advantages and creditor protection, making them a strong choice for longer-term retirement savings.

It is always important to consider your goals, tax situation and retirement plans when deciding which product to invest in. Speaking with a trusted financial adviser can help you build a savings strategy tailored to your specific needs.