This is why you should have a tax-free savings account in your portfolio

Now that Januworry has passed, it is time to turn back to one of the most important aspects of your finances that you might have neglected a bit while spending your money on festive activities and back-to-school expenses.

Diane Behr, director at Foord Asset Management, says as we move into February 2026, it is worth revisiting some of the quieter building blocks of long-term investing – not the ideas that dominate headlines, but the ones that do the work steadily over decades, such as the tax-free savings account (TFSA).

“Despite being available for many years (1 March 2026 will mark the 11th year since TFSAs were introduced), but they remain underused or are often not used to their full potential. That is a missed opportunity, because the TFSA offers something rare in investing: growth that is never taxed.”

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Rules of a tax-free savings account are this simple

As an investor, you can contribute up to R36 000 per tax year, with a lifetime contribution limit of R500 000. On their own, these numbers do not look particularly impressive, but Behr points out that the real benefit comes from contributing consistently and allowing time and compounding to do their work.

Behr points out that all returns earned inside a TFSA, interest, dividends and capital gains, are completely tax-free. This means every rand of growth stays invested and continues compounding year after year. Over long periods, the difference between taxed and untaxed growth becomes significant.

This is how it works:

• A monthly contribution of R3 000 over roughly 13.8 years (166 months) adds up to R498 000 invested.
• At an assumed return of 10% per year, that investment could grow to approximately R1.07 million over this time.
• Around R570 000 of the final value comes purely from growth and none of it is taxed.

She says contributing monthly also provides a small additional benefit as money is invested earlier and has more time to compound than if contributions are made once a year.

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The long and the short of it

In a relatively high-tax country like South Africa, avoiding tax on investment growth can quietly but meaningfully improve long-term outcomes, Behr says. “TFSA investments are exempt from Dividend Withholding Tax, which means dividends can be fully reinvested without affecting contribution limits.

“TFSAs are also straightforward to open and manage, making them suitable for new investors as well as those with established portfolios. While there are no lock-in periods, the greatest benefit is achieved by remaining invested for the long term.

“However, one area that deserves more attention is product choice. A wide range of investments in South Africa qualify as TFSA products, from cash and income funds to balanced and equity funds. While this flexibility is useful, it also means investors need to think carefully about how they use the structure.”

Behr says because withdrawals cannot be replaced without depleting contribution limits, a TFSA is best viewed as a long-term investment, often for 15 years or more. “With such a long time horizon, the objective should generally be maximum long-term growth rather than short-term stability. Therefore, TFSAs are typically better suited to high-equity or growth-oriented portfolios.”

Although equity investments can be volatile over shorter periods, investors with time on their side are usually better positioned to tolerate this volatility in exchange for higher expected real returns. Using low-growth products, such as cash, significantly reduces the long-term benefit of the tax-free structure, Behr says.

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TFSAs make sense for most South African investors

In practice, almost all investors can benefit from a TFSA, Behr points out. “Younger investors gain the most from starting early and giving compounding time to work. Established investors can use a TFSA as a permanent tax shelter within a broader portfolio.

“Lower-income investors still benefit, particularly from tax-free dividends on equity investments. Families can also use TFSAs to help children or grandchildren save for future expenses, while introducing them to good financial habits.”

Behr says there are, however, a few rules worth remembering:

• Exceeding annual or lifetime contribution limits attracts punitive taxes, particularly if contributions are spread across many providers.
• While withdrawals are allowed at any time, amounts withdrawn cannot simply be replaced without affecting contribution limits.
• Withdrawals are also paid only into the TFSA holder’s South African bank account.

She emphasises that the tax-free savings account is not complicated or exciting and that is precisely its strength. “Used patiently and invested appropriately for growth, it can quietly and meaningfully improve long-term investment outcomes.

“It is also important to remember that TFSA contributions must be made before the end of the South African tax year on 28 February. Investors who have not yet used their annual allowance still have time to do so.”