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SA's No 1 Insurance Blog

We’ve never seen this happen…but that doesn’t mean it doesn’t ever. And even if it does happen, it’s not the end of the world.

Why is that, you may ask.
Well, let’s take a peek at the tax deductions surrounding retirement funds.

Basically, you’re allowed to invest 27,5% of your taxable income/remuneration into a combination of pension, provident, and retirement annuity funds. The maximum amount you may invest in any one year is R350,000 across all three funds – that’s R29,167 a month!

That kicks most South Africans out of the equation, but for the fortunate few who earn R1,272,727 or more in any one year, keep reading.

Is it a mistake investing too much in your RA?
Not really because you’ll get your tax deduction eventually. Here are your options:

• You can carry over any non-deductible contribution to the next tax year
• You can claim back the non-deductible contribution from the taxable portion of your RA lumpsum withdrawal at retirement
• You can claim back the non-deductible contribution from any tax payable on your living annuity income
• Your beneficiaries can claim back the non-deductible amount upon your death from any tax payable on your retirement fund or living annuity

Do you see what we mean? It’s not the end of the world!

In this article let’s take a look at the first two options.

Option one – Carry over to the next year

If you’ve contributed too much in the current tax year which, if you don’t know, starts on the 1st of March and ends on the last day of February every year, then you can carry the excess contribution over to the following tax year. This carry over can continue year after year until you retire.
In other words, the excess contribution from the previous year is added onto your current year’s contribution and is subject to that 27,5% deduction mentioned above. If the amount exceeds the 27,5% (or the R350,000 per annum maximum amount) then that amount carries over into year three.

Option two – Claim it from your retirement lumpsum at retirement

Let’s say you decide to take a portion of your retirement fund in cash at retirement.
So, with a pension fund or retirement annuity you’re entitled to take one-third in cash while with a provident fund you can take everything in cash. The problem is that only a portion of that cash may be taken tax-free.
Working out the tax payable gets complicated, so for the purposes of our example we’re assuming you have the full R500, 000 deduction available to you at retirement.

So, here’s our example:

• R700,000 is available as your one-third in cash from your retirement annuity
• R200,000 is your excess contribution
• Deduct the R200,000 from the R700,000 you’re planning to withdraw in cash
• This leaves you with R500,000 which falls into the 0% tax bracket
• R500,000 x 0% equals R0 tax
What would happen without the R200,000 excess contribution?
• R700,000 is available as your one-third in cash from your retirement annuity
• This means you fall into the 18% tax bracket
• R700,000 minus R500,000 (The tax-free amount allowed at retirement) equals R200,000
• R200,000 x 18% equals R36,000 tax

Conclusion

The bottom line is that you’re not wasting your money by over contributing to your retirement annuity.
If you’re owed a tax deduction – you’ll get it – sooner or later.

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