If you’ve ever innocently asked an online finance forum whether a tax-free savings account (TFSA) is a good option to save for your child’s tertiary education, you will likely have seen how divisive this topic can be. For every argument against using it, there’ll almost certainly be someone sharing their personal experience of how well it worked for them. But that doesn’t mean it will work for you. Read on to see why it’s not necessarily the best solution.
What is a tax-free savings account?
First, a quick recap: a TFSA is an investment account where you pay no tax on growth. With most investment products, you would pay tax when you withdraw money from the investment. With a TFSA, that’s not the case. There’s no capital gains tax and no tax on the interest you earn within the product.
You can contribute up to R46 000 a year, with a lifetime contribution limit of R500 000, as of March 2026
You may have more than one TFSA, but the annual and lifetime contribution limits still apply on the aggregate of all your TFSA’s.
If you max out your TFSA contributions every year, it will take you roughly a decade to use the full lifetime allowance. Once you’ve done that, you can leave the money invested and allow it to continue growing without tax.
Read more: How to pay less tax in South Africa without landing in jail
That timeframe may sound convenient if you’re saving for your child’s education. You could fully fund the TFSA over about 10 years and have the money ready just as your child is approaching university age. The timelines overlap nicely. On paper, it seems to fit perfectly, so it’s easy to see why some people would argue in favour of it.
The case for funding a child’s education with a TFSA
On the surface, the case for using a TFSA to save for a child’s education may look fairly convincing. Three benefits stand out in particular:
Tax treatment: If you invest aggressively in growth assets like equities, you can aim to generate as much capital as possible without paying tax on it.
Affordable: If you choose a good product provider with reasonable fees, a TFSA can be relatively inexpensive. That means most of the investment’s growth will go towards your child’s education.
Estate planning: If you open a TFSA in your child’s name and contribute the money to it, those funds sit outside of your estate. That reduces the value of your estate and mitigates some of the potential estate duty implications for you.
There’s no disputing that those benefits are nice to have. The problem lies in what you give up to obtain them.
Why a TFSA is not a good way to fund your child’s tertiary education
There are two reasons why a TFSA may not be the best choice for funding your child’s tertiary education and they’re both significant.
Depriving your child of their own TFSA
The TFSA’s lifetime contribution allowance (currently capped at R500 000) refers to how much the account holder can put into their TFSA during their lifetime, not how much is in the account at any given time.
In other words, if you contribute your lifetime allowance of R500 000 to your TFSA and you withdraw R100 000, you will only have R400 000 left for your lifetime. You can’t top it up.
So, if you take out a TFSA in your child’s name, you’re using their lifetime TFSA allowance.
Assuming the government doesn’t increase the limits on contributions, the R500 000 you contributed to their TFSA to pay for their education will deprive them of the opportunity to further contribute to their own TFSA later.
A TFSA is a powerful long-term investment. Its real strength comes to the fore when you max out annual contributions and then leave it to grow for as long as possible. At Freedom, we tend to think of it as your final retirement annuity – the last investment you touch in retirement, perhaps when you’re 75 and your teeth are falling out.
Your child may become a financially savvy and disciplined adult. They might get their first job, start contributing to a TFSA immediately and leave that money invested until retirement. After 40 years of compounding, it could eventually grow into millions of tax-free retirement income
But if their lifetime allowance gets withdrawn when they started university, that long-term opportunity will be taken away from them. It’s almost like eating the seed before it is allowed to grow into a tree.
Handing over control
Under South African law, a person is considered an adult when they turn 18. That means they can contract and interact with financial services companies themselves.
If you opened a TFSA in your child’s name, the money legally belongs to them and when they turn 18, they can legally transact with it. You may have earmarked that money for their tertiary education, but on their 18th birthday, your child will legally be able to withdraw the money for whatever purpose they choose.
Watch: How a 1% fee could cost you millions
By then, the account could hold a substantial amount of money. If you contributed R500 000 over 10 years and the investment delivered strong annual growth, your child could discover that they have R1 million or more available to them.
Perhaps your child will be responsible and use it all towards their education. Or perhaps they will be as reckless with money as many of us were at 18, 19 or 20 and blow it on something a lot less responsible. That’s a risk you take when the investment belongs to the child rather than to you.
At first glance, a TFSA may seem like the obvious choice for funding your child’s education. It offers tax-free growth, can be inexpensive and it fits neatly into a 10- to 15-year timeline. But withdrawing the money for university prevents you from taking full advantage of its greatest benefit. What’s more, you use up your child’s lifetime allowance and then hand them control of the investment at 18. The timelines may align, but the purpose of the investment doesn’t.
So, what’s a better option? In our podcast The Enough Club, we lay out your options. Click here to watch.
This article is for educational purposes only and does not constitute financial advice.
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