To RA or not (# 229)

Although they’ve fallen out of fashion, we like retirement products. In addition to a generous tax break, retirement funds prevent us from cheating our future selves out of money to do luxurious things like live indoors and eat food. 

That said, if you’re prioritising investments, retirement products might not be the best place to start, as Dylan points out this week. At the beginning of your career, your tax bracket is quite low. Much as we like tax breaks, it might not be the best use of your investment money.

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Win of the week: Stella

Thanks so much for your absolutely fantastic show – I have learned SO much from you and Simon. I think of it as The Gospel According to Bubbles and Chuckles. I’m learning slowly and not there yet, but doing oh so much better with my money.

My mother is 89 and has just sold the life rights to her cottage in a retirement village she was living in (she moved to another establishment where she pays a very low monthly rent of R5,900 – can you believe that?? We were so lucky to get this – it’s a fabulous place in a small town and working out well).

She will receive R451,000 from the sale and I am wondering what she should do with this money to avoid taxes and fees.

She really doesn’t have much money and her income is very low, between her pension and an annuity she gets just under R10,000/month, so my brother and I supplement her expenses – we split her rent in 3, covering various expenses.

Her medical bills are a nightmare – her medical aid and gap cover sets her back R4100/month, and she has just been prescribed heart medication which costs R2,200/month, that the medical aid won’t cover. That’s R6,300/month on medical shit.

Anyhow – she will need to draw on this money to cover said expenses, but it would be great to identify an investment option that allows the money to earn interest, but not have it tied up for years.

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Dylan

If I am responsible enough to not use it for living costs it seems like a good place for my money: 

It is saving me on a guaranteed interest rate which (even at this stage where the repo rate is so low) is higher than inflation

My understanding is that I will never have any tax implications on these savings since it is not actually interest that I am "earning".

The only negative I can see is the whole "don't have all your eggs in one basket" saying, which also seems like it is not exactly applicable in this case. Even if something bad happens to my house or the property market, I would still be liable for the amount owed to the bank. So whether I have big savings in my home loan or in other investments, the loss would be the same.

Since I am at the early stage of my career, I benefit the least in terms of tax. I only expect my salary to grow from here on, so later in my career I would benefit much more. So should I not be prioritizing TFSAs? My very basic understanding would explain that RAs let you reap the reward now and pay tax later, where TFSA let you pay now and reap the reward later. 

My current idea is to contribute the max of R6k per month between myself and my wife to TFSA. After that we can consider RAs and other investments. Then this ties up with my first question: would it not be a good idea to then take what's left after TFSA and contribute that to my home loan? This way, I could really quickly pay off my home loan and only after that start contributing to an RA again. At that point, I would need a new place for my emergency fund, but cash investments should be fine?

If I stop contributing to a RA and rather contribute to a TFSA and my home loan (or any other investment), do I need to tell my employer that? Currently they pay me my salary and I contribute to my RA, but they do specify my RA contribution on my PAYE. Can I leave them and just save the tax I should pay and give the money to SARS at the end of the tax year or is that not legal?

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Herman

I have been contributing to my TFSA the max amount for 5years now. 

This has been my only savings after my emergency fund. My student debt was low and I managed to pay it off in 3years.

I have recently been approached to work in New Zealand, and now have too many options to consider - please help:

• What happens to my TSFA monies if i only work overseas, but plan to return to SA some point in the future? Am i still eligible for a TSFA, and can i continue to make my yearly contribution?
• Is there any advantage for me to file for tax emigration?
• Relating to above - I understand NZ and SA have a double tax agreement - Does this mean no SA tax? or just SA tax where the NZ tax 'stops'? (So the difference between my SA tax% and NZ% would still be payable in SA?)

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Tsebang

I was invited to a presentation about Bitcoin Mining, the company that is mining the Bitcoin is Mining City I'm not sure if it is a scam or not. Could you please check and advise? I have a bad feeling about this. They are promising huge returns after 3 years. Candice 

What I can tell you is that they are not a platform, so there is no option of selecting external funds when you are not happy with performance. They offer only tracker funds which in general are 0.95% and they only have one actively managed unit trust fund. So the potential EAC would be 0.95 for AMF and if there is an advisor you can add a further 0 – 1.15% so potentially they would be very cheap. So it is extremely important to understand what your selected fund is tracking, currently the 1 yr return on their medium equity fund is 0.2% and they do not have any funds that offer guarantees.

If you are looking for a similar product from Old Mutual it would be our OM Funds only option through wealth which also does not have an admin fee and our tracker funds come in slightly cheaper than 10x at between 0.55 and 0.9 and with a far superior actively managed fund range including offshore.

When you are looking at the optimal plan, you are not buying it because it is cheap, you are buying for possibly the underlying guarantee that your fund may have and then for the future bonuses from year five until maturity.

I would think very carefully before considering moving retirement funds to 10X for the reasons given above…in view of NO GUARANTEESand NO BONUSES paid going forward.Shane

Thank you for a great show and for making me laugh at least N+1 times during each podcast. 

Please share your thoughts on trading with a Tax-free account.  I've dumped R15k in mine a few weeks ago and opened several ETFs, (S&P500, NASDAQ 100, etc.), and split it evenly.  I am a daily trader using equities. I’m wondering if the same can be done with Tax-free ETFs, while staying below the annual contribution limit but maximizing profits?  What implications are there that you are aware of?

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Tim

I’m 43 and my wife and I are debt free since the beginning of this year. House access bond is basically paid off, R10k left to keep the facility open, but it also is my emergency fund.

I maxed my TFIA at Standard Bank with a couple of ETFs,

I moved my 20 year old RA’s from Sanlam and Old Mutual to Outvest – boy did I get shafted in 20 years!

I still have a Policy with Sanlam. I want to cash it in, but want to use it to my maximum long term benefit. Should I put it as a lump sum in my RA or rather buy ETFs with it?Ross 

I realize it's a massive double up and need to streamline the portfolio, I just can't decide what to hold onto and what to sell. 

I have also been quite interested in the SYG4IR. I just can't help but think this is the way of the future: clean tech, autonomous vehicles, drones, solar, space the list goes on. If I put a bit of money into it now and let that grow for 30 years who knows what the value of it might be by then, which brings me to my questions:

1. Is there a way of telling if an index is a value buy? I know that indices trade at "fair value" but is that really the case? Take the S&P 500 right now as an example. There are four or five Tec stocks that are keeping the whole thing afloat, and making new highs, while the Russell 2000 has bearly even touched the March highs. I know your advice is always "time in the market beats trying to time the market" but I'm sitting on my money at the moment and haven't been buying as I just can't help but think the market is way overvalued at the moment? 
2. How have all these massive stimulus packages by governments worldwide affected the markets? Particularly the major indices. Are we now just in a massive debt euphoria pretending that everything is awesome and another crash is inevitable? Could there possibly be a better buying opportunity not far down the road? I'm just a country peasant but even I can see that there's much more to this than meets the eye.Jaco

I only recently discovered that I am completely undercooked in terms of retirement. I had some investments, a bad RA, and some unit trusts for my kids with Allan Gray. (expensive AF)

But was never aware of TFSA's and ETFs, etc...

So I discovered Easy Equities, discovered your podcasts, through advice from my brother in law.

Since then I have devised an aggressive plan to get back on track. Paid off my huge credit card debt and now only left with 2 vehicles.

So, a couple of questions / thoughts.

Priority 1: Max out TFSA for myself and my wife each year.

Priority 2: Invest long term for my kids (2) - TFSA and other

Priority 3: Save for deposit on my first home

Thereafter invest what I can into the market.

What would be a highly aggressive 1 year investment to save for a deposit?

And what would the TAX implications be on that investment?

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Prineshen

I am 26 and a budding young investor who started around 3 years ago. My strategy is mainly focused on ETFs in my TFSA  with the rest into individual stocks picks and bitcoin for a bit of fun/speculation.

I understand the importance of diversification in a portfolio. However given South Africa's history of fraud scandals such as Steinhoff etc, I have tried to implement a further layer of diversification across brokers and therefore tried to diversify my investments across Easy Equites, Satrix and Sygnia, although I know Easy and Satrix are owned by the Purple Group. 

What are the chances of one day waking up and seeing all our accounts at 0?