Discover your financial savings superpower: TFSAs vs RAs - which one suits your needs?

Whether you’re saving for retirement, a first home, or your child’s education, choosing the right investment vehicle can unlock your financial superpower. 

Two of South Africa’s most powerful savings tools – a Tax-Free Savings Account (TFSA) and a Retirement Annuity (RA) – both offer attractive tax benefits but serve different purposes.

Understanding how each one works can help you decide which aligns best with your lifestyle and financial goals.

Choose your flexibility level 

A key difference between the two lies in how easily you can access your funds.

TFSAs offer greater liquidity, allowing you to withdraw money at any time without penalties. However, once withdrawn, that portion of your lifetime contribution limit is gone for good – meaning you can’t “top it back up” later. 

RAs, on the other hand, are designed to promote long-term saving discipline. You generally can’t access the funds before the age of 55 (except for your savings component in case of emergencies). 

This structure removes the temptation to dip into retirement savings prematurely – a built-in advantage for those who might otherwise derail their long-term plans.

Know your limits and growth potential

Both TFSAs and RAs come with annual and lifetime limits, which influence how they can best be used. With a TFSA, you can currently contribute up to R36 000 per year, capped at R500 000 over your lifetime. 

While contributions aren’t tax-deductible, any growth – interest, dividends, or capital gains – is completely tax-free. Contributions in excess of these limits will be taxed at 40%.

RAs work differently. There are no contribution limits, but your annual tax deduction is limited to 27.5% of your taxable income (to a maximum of R350 000 per year). Growth within an RA is also tax-free, but you’ll pay tax on both lumpsum withdrawals at retirement and your income during retirement.

In terms of growth potential, both vehicles depend on the underlying investments you select – whether that’s equities, bonds or unit trusts. Over the long term, the disciplined contributions and tax advantages of both products can significantly enhance your total returns.

Match the product to your savings mission

Each vehicle serves a unique purpose, but you don’t necessarily have to pick one or the other. A TFSA is well-suited for medium-term goals such as saving for a deposit on a home, a child’s university fund, or even a financial safety net. Because you can withdraw funds without penalties, it provides flexibility for changing life circumstances.

An RA, in contrast, is purpose-built for retirement. It’s particularly valuable for those who don’t have access to an employer pension fund, such as freelancers or self-employed individuals. The structured contribution and tax incentives make it an essential pillar of any long-term financial plan.

Adapting to life stages and income levels 

Just as your financial journey evolves, so too should your savings strategy. In your early career, flexibility tends to matter more. A TFSA can help you start building healthy saving habits while still allowing access if life throws you a curveball. 

As your income and stability grow, an RA becomes increasingly valuable. You can take advantage of higher contribution limits and tax deductions while locking in long-term benefits. 

Ultimately, your savings superpower lies in choosing the right tool for your goals, income and life stage, but the best approach is often to use a combination of both.

Affiliates of the PSG Financial Services Group, a licensed controlling company, are authorised financial services providers. www.psg.co.za

Author: Thomas Berry, Head of Sales at PSG Wealth