How a tax-free savings account saves you tax over time

When investing in a tax-free savings account (TFSA), it’s natural to focus primarily on returns. And while returns are undeniably important, one often overlooked factor is the impact of tax on those returns. Taxes have the effect of reducing your investment growth; this is even more evident over the long term.

A tax-free savings account enables you to keep more of the returns that are generated, as it’s designed to minimise the erosion from tax, allowing your investment returns to grow without being reduced by income tax, dividends tax or capital gains tax. In this article, we will focus on tax-free savings accounts, how they work when it comes to tax savings, the importance of time with investing and the significance of asset allocation and fees when it comes to retirement outcomes.

What is a tax-free savings account?

A tax-free savings account is not a savings account in the traditional sense; it’s more of an investment account with the potential for excellent capital growth over the long-term. This long-term investment savings vehicle offers some inviting tax benefits, and was introduced in South Africa by the government as a way in which to encourage South Africans to save more.

Funds are able to grow without the need to pay any tax. You will not need to pay any capital gains tax, interest tax or dividends withholding tax. This allows for more returns to be reinvested and allowed to grow and compound over time.

You do need to remember that there are limits when it comes to the allowed contributions. You are able to contribute R36,000 per annum (R3,000 per month) or R500,000 per lifetime. Any contributions made that are over this threshold are subject to penalties of 40% levied on the portion that exceeds the limit.

A TFSA can be invested 100% offshore. This can be useful, especially for investors who are already heavily invested in the local South African market. You will need to ensure that your service provider is able to offer this. 10X offers a tax-free savings account that can be invested 100% offshore.

Have a look at the 10X TFSA calculator, which is a useful tool to help you calculate your potential savings. It is part of our suite of free online tools offered by 10X.

Why tax-free growth becomes powerful over time

The compounding effect of tax-free savings accounts

Two of the most powerful tools that you have as an investor are time and compounding growth. The more time that you have, the more opportunity that you have for your funds to grow and potentially increase in value.

Compound growth is when growth is made on both your initial investment amount as well as on all subsequent returns continuously. This process goes hand in hand with the time that you have your capital invested. The longer that they are invested, the more opportunity there is for growth.

This will be even more powerful in the case of a TFSA, as all returns are tax-free, allowing for more returns to be invested than would otherwise be the case with a traditional style investment.

Let’s look at a general example to help illustrate the immense power of compound growth over time:

Initial investment: R100,000

Fees: 1% p.a.

Inflation: 6% p.a.

Returns: 12% p.a.

After the R100,000 has been invested for 20 years, you will have approximately R265,330.

After the R100,000 has been invested for 30 years, you will have approximately R432,190.

After the R100,000 has been invested for 40 years, you will have approximately R703,990.

This example is for illustrative purposes only, and actual results may vary.

Withdrawals are also tax-free

Withdrawals from your tax-free savings account can be made at any time, and all withdrawals made from your tax-free savings account are also tax-free. There are also no penalties applied to withdrawals.

If possible, though, withdrawals should generally be avoided to take advantage of potential compound growth. Tax-free savings accounts are considered long-term savings products, so the capital should ideally be invested for the long term, allowing for returns to compound and build over time in order to potentially maximise the growth of your TFSA. Once you have withdrawn money from your tax-free savings account, this cannot be added back, as you have essentially already used up that contribution room.

Asset allocation still matters inside a TFSA

The asset allocation that you decide to use for your tax-free savings account should carefully align with both your investor profile and your long-term investment and financial goals. Your investor profile focuses on your risk profile and your investment timelines. The usual assets on offer would be: equities, real estate, bonds and cash. When investing with 10X, you’ll be able to choose from a selection of carefully designed funds, each with a different asset allocation and geared towards different investor profiles.

Equities may provide the best returns in the long run but they are also likely to be the most volatile of the asset classes. As data suggests, equities have historically produced returns above inflation by around 7% annually - over the long term (based on JSE All Share Index performance versus CPI from 1960-2020). Keep in mind, though, that past performance doesn’t guarantee future results.

Real estate can serve as a good hedge against inflation while also generating some good returns. Bonds will add stability to your portfolio as they are generally seen as a more conservative option, but this doesn’t mean that bonds will never perform well. Cash, on the other hand, is likely to produce the lowest returns of all the assets, but it comes with liquidity and stability.

Keeping a well-diversified portfolio across the asset classes may be a strategic approach, allowing you to spread your risk and also potentially balance both risk and reward.

As mentioned, TFSAs are not subject to Regulation 28 of The Pension Funds Act, meaning that you are able to invest your TFSA 100% offshore. This will allow you to potentially hedge against any volatility that may occur in the South African market, as well as any related depreciation of the Rand.

Ideally, you would choose funds within the TFSA “wrapper” that match your risk profile and investment timelines. At 10X, we offer some strategically selected funds that provide access to a variety of asset classes as well as exposure to both local and offshore assets.

How fees can reduce the tax advantage

While fees are often overlooked, it’s important to understand that high fees may impact your capital amount. This is particularly evident when high fees are compounded over time. If you have less capital, this means that there are fewer funds available to potentially compound and grow this capital over the long term. Lower fees, on the other hand, mean that you may have more returns to reinvest, allowing this capital amount to compound and grow over time.

Let’s look at an example which helps to highlight the effect of fees on the growth of your tax-free savings account over time:

Let’s look at an example of 1% in fees vs 3% in fees. We will assume the following information:

Monthly contribution: R3,000

TFSA lifetime limit: R500,000

Investment term: 30 years

Annual return: 12%

Annual inflation: 6%

The contributions will stop after reaching the limit, in order to avoid any penalties, but the money stays invested for the full 30 years. The returns are compounded monthly and adjusted for inflation to determine the final investment values.

Example 1 (1% in fees): After 30 years, the final investment value is approximately R1,438,627

Example 2 (3% in fees): After 30 years, the final investment value is approximately R901,248

As this example highlights, a difference of only 2% in fees can have a significant impact on your final investment value. This example is for illustrative purposes only, and actual results may vary. You can learn more about the impact of fees here.

10X understands the importance of low fees. We offer a transparent and low-cost fee structure with no hidden costs. We are able to keep our fees on the lower end of the spectrum due to our index-tracking investment strategy, alongside a more active approach to asset allocation. As there are fewer activities involved with this strategy, it means lower overall costs and lower fees passed onto you, as the investor. Please explore our products for the most up-to-date product-specific information. Fee information is correct as of the 5th of February 2026.

There are a few fees which you may see charged on your TFSA; these are as follows:

Administration fees: You can expect administration fees to be charged for tasks related to admin, such as compliance, reporting and tax.

Advisor fees: An advisor will provide advice and other services. They will charge fees for this, and you may be charged both an initial and an ongoing fee.

Management fees: These are the fees charged for the management of the fund.

The Effective Annual Cost (EAC) is a useful metric for you to use in order to determine the total fees and costs associated with owning a product over a one-year period of time. All factors being equal, a higher EAC would mean that less of your investment returns can be reinvested and potentially grow and compound over time, while a lower EAC may mean that more of your returns may be reinvested and potentially grow over the long term.

The EAC of an investment is just one factor to consider when comparing service providers. You should be able to see your EAC on your investment schedule, or you can request this information from your service provider. At 10X, we offer a useful EAC calculator which allows you to analyse and compare your EAC with the EAC offered by 10X. This gives you the information needed to make an informed decision regarding your service provider.

Tax-free savings accounts vs retirement annuities

Let’s take a quick look at the difference between these two financial products:

TFSA: An investment product which allows for tax-free advantages and tax-free withdrawals. Returns are also not subject to tax. The capital can be accessed at any time without any penalties being charged.

Retirement Annuity: A long-term savings product that offers tax-deductible contributions up to certain limits. You are able to contribute a maximum of 27.5% (up to a maximum of R350, 000) of your taxable income. Growth within the retirement annuity is tax-exempt during the accumulation phase. The capital is invested until retirement (at least age 55), from which time it may be used to fund an annuity, which will provide an income for the retirement years.

A TFSA can work well as a complement to your retirement savings. The flexibility and easy access in times of emergency can be a helpful and attractive feature compared to a product, such as a retirement annuity, where the capital must remain invested until age 55.

The 10X TFSA is a low-cost and transparent vehicle which aims for superior returns for clients over time.

Common mistakes that reduce the tax benefit

Some common mistakes that investors may make when it comes to their TFSA are as follows:

1. Making unnecessary or regular withdrawals from your TFSA. This can reduce your capital and affect the growth potential of your capital.
2. Being too conservative with your asset allocation. It’s important to include growth assets such as equities in your portfolio. If you are too conservative with your asset allocation, this may also affect the growth potential of your TFSA.
3. Not reviewing your fees. Fees can play an important role in the growth of your TFSA. Ignoring fees can impact the long-term growth of your TFSA, so these should be reviewed annually. Your EAC should also be considered.

Final thoughts on tax-free savings accounts

Saving on tax allows for more returns to be reinvested, which adds to your capital amount. Over the long term, there is more capital available to grow and compound. Including a strategic asset allocation which aligns with your investor profile and long-term financial goals is vital, along with ensuring that fees are minimised. A disciplined and consistent approach to investing is the best approach to help ensure that you meet your savings goals.

10X offers skilled, experienced and helpful investment consultants who are just a phone call away. They are able to answer all your queries related to your TFSA and set you on the path to investing success! Get in touch today!