Should You Transfer Your TFSA from a Bank to Easy Equities?
A friend recently asked for advice on transferring R400,000 from a Tax-Free Savings Account (TFSA) at a bank to an Easy Equities (EE) TFSA. The bank currently offers an 8.7% annual return. Is this a good move? Let’s dive in.
Internal Transfers Are Key
If you’re considering moving your money, the first thing to know is that it’s crucial to transfer the funds directly between the bank and EE. You cannot withdraw the money and then deposit it again into the EE TFSA. Doing so could result in losing your tax-free status for that money, which would defeat the purpose of having a TFSA.
Repo Rate Trends and Returns
The repo rate is expected to decrease over the next few months. If this happens, the 8.7% return you’re getting at the bank will likely drop. Investments in Easy Equities could offer better returns in the long term, especially if you invest in Exchange Traded Funds (ETFs).
Benefits of ETFs
Many financial experts consider ETFs a solid long-term investment. By investing in ETFs through Easy Equities, you can potentially beat the simple interest returns from a bank account. For example, a Satrix S&P500 ETF allows you to own a small part of the 500 leading companies in the U.S. market. If these companies grow, so does your investment.
Consider Currency Fluctuations
When you invest in ETFs tied to foreign markets, like the Satrix S&P500, you also benefit from currency changes. If the Rand weakens against the U.S. dollar, the value of your investment could increase when you convert it back to Rand. In contrast, bank interest rates do not consider currency fluctuations.
Inflation Hits Savings Hard
The current inflation rate in South Africa is around 5.2%. So, an 8.7% return on your bank TFSA is effectively only about 3.5% after you account for inflation. ETFs often outperform savings rates when inflation is high, making them a more attractive option for long-term growth.
“Stress-Free” Returns
If you still prefer the safety of cash, Easy Equities allows you to earn interest by holding funds in your TFSA account. At the current prime rate, you can earn around 8.25%, similar to what you’d get from a bank. This way, you can still benefit from the tax-free advantage without risking your money in the stock market.
Final Thoughts
Switching from a bank TFSA to an Easy Equities TFSA can offer better returns through ETFs and even by holding cash at competitive interest rates. It’s crucial to make the switch internally to maintain your tax-free benefits. Also, keep an eye on the repo rate and inflation, as these will impact your returns.
In summary, while the bank offers 8.7% interest, investing in ETFs through Easy Equities can potentially offer better long-term growth, especially considering current trends in inflation and repo rates. Your friend should weigh the risks and benefits but moving to Easy Equities could be a smart financial move.