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Everything you need to know about tax-free savings

The South African government introduced tax-free savings back in 2015 to encourage household savings. As the name suggests, all of the proceeds from tax-free savings accounts (TFSAs), including interest, capital gains and dividends are exempt from tax. This makes these types of investments extremely attractive for South African taxpayers.


How tax-free savings work

Tax-free savings are an investment vehicle created to help South Africans reduce their tax liability while putting non-retirement savings aside. Individuals can make contributions to a fixed-term bank account, money market, unit trust investment, JSE-listed trade fund and other types of investment accounts.

The National Treasury has placed restrictions on who may offer these investment accounts to taxpayers. According to the Regulations for Tax Free Savings and Investment Accounts (the regulations), only the following institutions may provide TFSAs:

  • Licensed banks, mutual and cooperative banks
  • Long-term insurers
  • Managers of registered collective schemes
  • National government
  • The South African Postbank
  • Administrative financial service providers
  • Persons authorised by a licensed exchange to perform securities services


How much tax-free savings can I have?

In addition to who can provide these accounts, the regulations also limit how much you are able to contribute to your tax-free savings.

Annual contributions are capped at R36,000, while the lifetime value of your investment may not exceed R500,000. If you are paying the maximum amount into your TFSA each year, your investment horizon will be 13.8 years or 13 years and 10 months.

Provided that you stay below the R36,000 limit, you are free to make contributions whenever it suits you best. For instance, you could put away R3,000 each month or you could make a once-off deposit each year.

If you go over the annual or lifetime threshold, the amount by which you’ve exceeded the limit will be taxed at 40%. In other words, if you put R40,000 into your account in one year, R36,000 will be tax free and SARS will levy a hefty penalty of  R1,600 (40%) tax on the additional R4,000.

Keep in mind that the South African Revenue Service’s (SARS) tax year runs from 1 March to 28 February each year, so it’s best to ensure that you don’t invest more than R36,000 during this period to avid penalties.


Why use a tax-free savings account?

The goal with any investment is to make the greatest possible gains on your capital. Tax-free savings accounts are designed to help you do this more efficiently than other types of investment.

While you’re busy saving towards your goals, your investment will earn interest or you may be paid dividends. With other investment vehicles, you need to report and pay tax on these earnings. However, the interest and dividends you earn from your tax-free savings will not be taxed.

Then, when your tax-free savings mature, you’re able to withdraw your funds without having to pay tax on the capital amount provided you haven’t exceeded the annual or lifetime contribution limits.

Another benefit to a TFSA is the flexibility that it gives you. You’re able to contribute as little or as much as you like – within the annual and lifetime limits – at your own pace. You can also withdraw from your investment at any time, but there are a variety of considerations that you’ll need to make when doing so, which we’ll discuss a little later.


When should I start using a tax-free savings account?

As with any other investment, the sooner you start, the better. That said, TFSAs are designed to be long-term investment vehicles, so it’s important to consider your stage of life as well as your investment goals.


How much money should I put into a tax-free savings account?

How much you invest into your tax-free savings will depend on your financial situation and goals. A single, debt-free individual who earns R45,000 per month will likely be able to invest more than someone who earns the same but has a family and bond repayment to think of.

When deciding how much you plan to invest, take a good look at your finances and decide what would work best for you. Consider what you’re able to save, what other investments you have as well as what you intend to use your tax-free savings for when the investment matures.

Keep in mind that some providers may have minimum contribution limits in place, so it’s a good idea to find out whether this applies to your chosen account.


What is the best time of year to pay into my tax-free savings account?

However much you decide to invest into your TFSA each year, it’s best to try and make your annual contribution for a particular tax year by mid- February (check in advance the cut-off date with your financial institution). The 28 February is the end of the SARS tax year, so it makes the most sense to have your savings in your account by this time.

You can stay ahead of the game by evaluating your tax-free investment strategy in March each year. This will allow you to plan effectively and ensure that you don’t exceed the R36,000 limit in a given tax year. Then, when the following February rolls around, you can reassess your position to figure out whether you can make additional contributions.


Can I withdraw from my tax-free savings account?

You are allowed to withdraw from your tax-free savings whenever you like, depending on the rules put in place by your provider. Investments that don’t have fixed maturity dates can be accessed at any time. Fixed-term investments, on the other hand, can only be withdrawn from once the initial investment period has passed.

Although you can withdraw from your TFSA, it’s preferable not to do so. The lifetime-contribution limit means that you can’t top up your account after withdrawing from it. For example, if you’ve already invested R50,000 into your tax-free savings and you withdraw the full amount, your remaining lifetime contribution is still limited to R450,000.


How long should I have a tax-free savings account for?

The intended investment horizon for a TFSA is about 14 years and this is the ideal investment period. This makes these vehicles great for saving towards long-term goals like buying a house, paying for your children’s education or to complement your retirement savings once you’ve stopped working.

Liquidity is important here. If you don’t already have other savings or investments, you may want to consider other short-term investment products before a TFSA because of the rules around withdrawing from these accounts.



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