So, is a Tax-Free Savings Account something you could use?

My simple and straight answer is – If you pay Tax.. Definitely YES !!

There has been a lot of commentary and discussion around Tax-Free Savings and lots of adverts on the radio, but what is a Tax Free Savings Account and what is in it for you.

The Benefits.

Well, to be honest, the immediate benefits are pretty small, but if you are diligent and stick to accumulating the maximum allowable to your Tax-Free Savings each year (R33,000.00 per annum currently), taking into account the benefits of return and compounding, you will slowly start to see the benefits as your “investment pot” grows and becomes more significant.The current maximum contribution over time is currently still R500,000.00. 

Although there are currently annual interest rebates (currently R23,000) and CGT annual rebates (currently R40,000), these may change or reduce in the future. Building up your Tax Free Savings Account balance will then become more significant from a tax savings perspective.

Patience for the longer term.

​The way that the Tax-Free Savings legislation has been put in place is intentionally more aligned to longer term savings. In a way similar to a Retirement Annuity, but without the restrictions of no withdrawals and no restrictions on how those withdrawals are made and when.

Tax Free Savings should be used by all who pay tax. ​They should however be used for longer term savings, preferably towards retirement savings in my view. I say this because once you have made a withdrawal from your Tax Free savings account, you are NOT able to “top up (replace what you have withdrawn)” that amount back into your Tax Free Savings account. In other words, once you have made a withdrawal from your Tax Free Savings account, you may never replace that amount again… ever, under current legislation.

So, what are the can’s and cant’s of Tax Free Savings Accounts?

​Some common questions you may have..

Is there any tax due at all when I save in a Tax Free savings Account?

  • There is ABSOLUTELY NO form of tax due within a Tax Free Savings Account. No Income Tax, No Capital Gains Tax, No Dividend tax, absolutely no tax at all.

Are there any Limitations I should be aware of?

​Yes, there are certainly limitations you need to be aware of. They are as follows:

  • You can at the time of writing this post, add a Maximum of R33,000.00 to your Tax Free Savings Account, each financial year (Per tax year).
  • If you add more than the R33,000.00 to Tax Free Savings Accounts in any one year (tax year), you will be taxed on the amount added above the R33,000.00, at a tax rate of 40%.
  • You can add funds to your Tax Free Savings Account at ANY time during the financial year. Just DON’T go over the R33,000.00 limit per financial year.
  • You can invest those funds into a variety of different investments within your Tax Free Savings Account.
  • You can at this stage, contribute a lifetime limit of R500,000.00 towards your Tax Free Savings Account.

Accessing my Tax Free Savings Account funds.

  • There is no minimum investment term/period, therefore no restrictions or limitations on access to your funds apply at all.
  • There is also no limit to the amount an investor can withdraw from their Tax Free Savings Account and ALL withdrawals are completely tax free.
  • If you do make a withdrawal and then put those funds back into your Tax Free Account, that amount that is put back into the Account will count towards the R33,000.00 annual contribution.
  • As mentioned, any amounts added to your Tax Free Account, above the Annual limit or Lifetime limit, will be taxed at 40%. It is therefore very important that you monitor your contributions carefully.

What happens to my Tax Free Savings Account, should I die?

​Your Tax Free Savings Account will be dealt with according to your Will or depending on the way the Tax Free Savings Account is structured, it may be dealt with/distributed based on who you have nominated as your beneficiary/s. You will need to clarify this depending on the administrator you use. Ultimately, it will be handled according to your wishes.

Is my Tax Free Savings Account transferable or can it be ceded?

As of 01st March 2018, you are now able to transfer your Tax Free investment between product providers as either cash or as unit transfers. 

NB - Important to remember if doing a transfer:

  • Clients should not accept money into their bank accounts during the process, since doing so will be considered a withdrawal and the subsequent reinvestment into a tax-free savings account will impact on the annual and lifetime limits.
  • The process may take up to 10 working days to complete if all the conditions are met. Therefore, we are not allowed to initiate transfers between tax-free savings products 10 business days before the tax year-end as it will impact clients’ IT3(s) reporting.
  • Generally, partial transfers are not allowed.

The long and the short of Tax Free Savings Accounts.

As I have mentioned, if you diligently add to your Tax Free savings Account every year, it will take you just under 15 years to accumulate towards your (current) lifetime maximum contribution allowance of R500,000.00.

If you look at it this way, although the benefits are small in the beginning, as time passes and the benefits of compounding start to work and the very likely increase in the annual maximum contribution amount (currently R33,000.00) as well as the Lifetime maximum of R500,000 increases, you could find that the benefits become quite significant as your overall investment grows.

You could therefore be VERY HAPPY your started early and diligently accumulated towards your Tax Free Savings Account over the years.

​If what you have read above makes sense to you and you would like to set up a Tax Free Investment Account, please give us a call or pop us an email and we will get back to you shortly.

About the Author Dave

I am a self-confessed financial planning fanatic. When I am not building new courses for my clients or guiding clients through how best to Plan Financially for their lives I enjoy spending time with my kids on the beach or on our boat. Travelling and spending time with people, to understand better what makes and constitutes success and reveals life's purpose to us all, fascinates me.