Intergenerational wealth (#236)

Time is such an odd ingredient in the realm of wealth creation. When treated with respect, a good amount of time can be your greatest ally. When ignored, however, time can be your biggest risk.

In a country with so much historical inequality, the idea of intergenerational wealth seems entirely mythical. However, a small amount of money sprinkled with a great deal of time makes building a nest egg for the next generation seem downright simple. By the same token, sleeping at the wheel creates an opportunity for inflation to eat away at real returns. 

In this week’s episode, we explore intergenerational wealth building strategies using two real world examples. Is this our cutest episode yet? You tell us.

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Mark 

I have twin girls who just turned five.

I have contributed to their own respective RAs since they were eight months old. I started at R1k a month each and this contribution has increased by 10% a year. I will keep up with the annual increases for as long as possible, but I realise the contributions will become pretty large over time. 

My girls have Capitec bank accounts and are registered with SARS and file tax returns. They are building up tax credits from the RA contributions in their name with SARS given they have little or no taxable income. 

I realise this might not be the most tax-efficient or tax-effective option for saving for your kids and DeWet and others might disagree with it. I have outlined below why I went with this strategy over TFSA or unit trusts in their name or the plethora of additional options and combinations. 

1. RA is with Sygnia, so it is a low-cost product, and their capital can compound tax-free over a long period 50+ years. 
2. They can't touch it when they turn 18. I acknowledge this lack of access can be a double-edged sword given they might like it for a car, a deposit for a property, starting a business, etc.
3. The tax credits they are building up with SARS should see them receive some decent tax refunds when they first start working which they can use for the uses as mentioned earlier or to plough into their own TFSA or back into the RA for even more tax credits. I acknowledge I am giving SARS an interest-free loan and the effect of inflation on the tax credits is a downside here. I also recognise I am losing out on the tax credit myself. 
4. They can keep contributing to the RA's when they start working as it is already set up for them. 
5. Having the RA, Bank A/C, EasyEquities account, and a SARS efiling profile provides an excellent financial education base when they are older. 
6. TFSA and/or unit trust they can access when they are eighteen, and they could withdraw everything and blow it all so this strategy guards against this. Some may see this as excessive control or control from beyond the grave, and I take their point.