You undoubtedly know the worth of saving for a rainy day and investing in and for your future self, your family, and your children. It’s crucial that you have funds accessible for any occasion or unexpected event. As a South African citizen, you can choose a tax-free savings account with great rewards. The first tax-free savings accounts were launched in the first quarter of 2015 when an amendment to the Income Tax Act creating these new mediums came into effect.
What you should know about a tax-free savings account.
Your contributions are limited to R30 000 a year. Once the total amounts you have invested reach the sum of R500 000, you can’t make any more contributions. Though, there’s no concern about how much growth you earn on your annual contributions, given that the amounts you deposit don’t add up to more than the annual or the lifetime limit.
If you’ve made the calculation by now, you’ve probably knitted your brow thinking: “If I contribute R30 000 a year, it will take me more than 16 years to contribute the maximum amount!”. Hold your fire, it’s likely that the annual and lifetime limits will be adjusted for inflation in future years, which means that the goalposts may shift before you reach the current limits.
What are the benefits?
Thanks to an intense focus on fees and charges in the financial services industry, the benefits are straightforward. You pay no tax on any interest or dividends earned by the investment regardless of how long you stay invested, and you do not pay any capital gains tax (CGT) when you withdraw your investment. You can also enjoy flexible access to your funds. What’s more, these tax-free accounts are not allowed to have performance fees or high penalties for early withdrawals thanks to the Income Tax Act. If the investment has no maturity date, you must be able to access your money within seven days of requesting it. Also, according to the regulations under the Income Tax Act, the fees you’ll be charged must be reasonable, and thus many product providers seem to be pricing their tax-free savings accounts attractively.
Any drawbacks to a tax-free savings account?
The aren’t many. Only, if you exceed the annual or lifetime limits, you’ll pay a penalty tax of 40% as the Income Tax Act provides for a hefty penalty on any amount exceeding the limit. Also, there’s one tax you will pay, although you won’t know about it – when you die, your investments in a tax-free savings account will be added to your estate and be subject to estate duties. Neither you nor your estate can transfer investments in a tax-free savings account to someone else. Your heir can inherit the savings and transfer them to his or her own tax-free savings account, but the amount transferred will be regarded as a contribution by the beneficiary to his or her account and count towards his or her annual and lifetime limits.
The verdict.
Tax-free savings accounts are designed to help you save more. Some might think that the R30 000 annual and R500 000 lifetime limits are too low to make the tax-free savings accounts worthwhile. However, the growth in these accounts can be significant over time as there can be a huge saving thanks to zero capital gains tax when the investment is realised. If you’re interested, feel free to read more on Tax-free savings accounts.
Warren Buffett: “Don’t save what is left after spending, spend what is left after saving”.