Tax-Free Savings Plans
Watch our short video on Tax-Free Savings Plans & the reasons you should be considering investing in one!
Everything you need to know about Tax-Free Savings Plans
We don’t have a great savings culture in South Africa. Perhaps it’s because we are battling to keep our proverbial heads above water, or maybe most of us simply have a “live for today” philosophy which is tough to shake. Either way government recognizes our “lack of savings” as a problem and doesn’t want us as a future burden on the State (let’s just say they have enough problems to solve right now). To encourage all of us to dig deep and start saving more Tax-Free Saving’s Accounts (TFSAs) were introduced on the 01-03-2015. In this blog post we’re going to take a closer look at the product and answer the questions you might have.
How much can I invest in a Tax-Free Saving’s account?
As a South African you can contribute up to R33,000 per year towards a Tax-Free Saving’s Account. It can either be a lump sum payment or a maximum of R2,750 per month. Any investment gains will be completely tax free. The cool thing is that you aren’t limited to one Tax-Free Saving’s Account (you can have as many as you like), but the total of all your contributions can’t exceed the R33,000 threshold per year. Oh, and over your lifetime you can’t contribute more than R500,000 towards Tax-Free Saving’s Accounts.
Should you be considering a Tax-Free Savings Plan?
The answer is yes. If you are older than 18 and looking to save, it makes sense to pop the first R33,000 a year into an investment that doesn’t attract any tax (that would be income tax, dividends tax or Capital Gains Tax).
Who can I approach to take out a Tax-Free Saving’s Account?
All major South African banks and insurance companies will offer a Tax-Free Saving’s Account so you have some choice from a provider stand-point. Most of them will have contributions starting from as little as R200 per month. Just because the annual threshold is R33,000 a year, doesn’t mean that you need to make the full contribution. You can start with what you can afford on a monthly basis.
Which investment products qualify as Tax-Free Savings Accounts?
- Fixed deposits (these are bank accounts)
- Unit trusts (collective investment schemes)
- Retail savings bonds
- Certain endowment policies issued by long-term insurance companies
- Linked investment products
- Exchange traded funds (ETFs) that are classified as collective investment scheme
Can I pull my money from my Tax-Free Saving’s account whenever I like?
Yes you can pull your money out whenever you like without attracting any tax.
What happens if I contribute more than the R33,000 per year limit?
You are going to attract tax of 40% on any contributions in excess of the R33,000. Example: Taxpayer X invests R35 000 – exceeding the annual limit by R2,000, 40% of R2,000 = R800 must be paid to SARS. This penalty is added to the normal tax payable on assessment. The idea is to make sure that you don’t contribute more than the R33,000 you are allowed in a year.
Can I transfer my Tax-Free Saving’s account?
Yes, you can transfer your Tax-Free Saving’s account from one provider to the next. It’s worth checking what type of fees will be levied against your investment if you do move, though.
Can I take out a Tax-Free Saving’s account for a minor?
Yes you can take out a Tax-Free Saving’s Account in the name of a minor which is a great way for a parent to save for their children’s future education costs. The only downside is that the R500,000 lifetime cap could be an issue the way it stands right now. Without even knowing it, a parent saving for their child’s future via a Tax-Free Saving’s Account could exhaust the lifetime allowance in 15 years.
Can I use my Tax-Free Saving’s account like a transactional account?
The answers is No. You can’t use your Tax-Free Savings Account like a transactional bank account. You don’t get issued an ATM card, but if you want a withdrawal, it generally takes about 7 working days to process.
That’s it. If you are looking to save money, make sure you start with a Tax-Free Saving’s Account and avoid paying any tax on your 1st R33,000 a year.
Below is a nice brief video we’ve done on Tax Free Savings Plan – be sure to give it a watch!