Tax-Free Savings Accounts - Make Them Work Harder for You
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Tax-Free Savings Accounts - Make Them Work Harder for You

Tax-free savings accounts (TFSAs) were introduced in 2015 to encourage more South Africans to start investing. As mentioned in this article on retirement funds, very few South Africans retire with enough money to live off comfortably, hence this was another way the government could incentivize better investment behavior.

TFSAs are for loooong term investing

TFSAs in itself were a great initiative and have great benefit if used properly. One thing I don’t think the government got right though was the name! Saving is something that you do with the ultimate aim of consumption - putting money away for a holiday, your emergency fund, a pair of shoes etc. You are setting aside money you know you will spend at some stage. However, a TFSA IS NOT MEANT FOR SAVING! Sorry for shouting at you there but the point had to be very strongly made.

TFSAs are meant to be vehicles for extremely long term investing and are best suited to equity investments which are volatile in the short term but have historically shown 13-15% annualised growth over the long term. This may sound strange but this is where you should be putting money away that you are fairly certain you will not need to touch for a very long time, if ever. This gives your investment the opportunity to compound over time and for you to really reap the benefits of not paying tax. This is why there is a disincentive to withdraw, which we will touch on soon.

Franc does not offer TFSAs at the moment. It may be something we introduce in future but the product is sometimes misunderstood and misused, something we would want to correct before introducing it.

What are the rules?

Firstly you need to invest in a product that is designated as a TFSA, you can’t randomly open an investment account and think that this will be your TFSA. Once you have found a product provider that offers this type of product you need to be aware of certain rules.

Secondly, you cannot contribute more than R36,000 every tax year (1 March to end of February) into your TFSAs. This is known as your Annual Contribution Limit. If you do, any excess will be taxed at 40% by SARS! It is worth noting that this limit was initially R30,000 then increased to R33,000 before being increased again to its current amount. You are able to contribute monthly as well and your total investment in a tax year can be lower than the limit.

Over your lifetime you cannot contribute more than R500,000 into TFSAs (Lifetime Contribution Limit). Again the same penalty will apply if you do go over. This limit however has yet to be increased and time will tell whether it does change as some people start nearing their limits in the coming years.

You can withdraw from TFSAs at any time, however any withdrawal does not increase either of the limits described above. So let’s say you made a R36,000 investment into a TFSA on 1 March 2021 and then withdrew R10,000 on the 15th March 2021. This doesn’t mean you can reinvest R10,000 later in the tax year - once you hit your annual limit, that’s it.

You can also have multiple TFSAs if you really want to but the Annual and Lifetime Contribution Limits apply to you as an individual and not per account. So if you have more than one TFSA you need to ensure you keep within the limits.

You can also transfer TFSAs from one provider to another but just make sure it is done properly and not a “sale” as then you will run into problems.

How am I saving tax?

So there are 3 main types of tax that you will/could pay if you are invested in a normal investment account.

1. Income tax - this will be tax payable on interest earned in your investment account. Anyone under 65 years of age can earn up to R23,800 of interest a year without paying tax on interest earned - effectively at current interest rates you need to have around R500,000 invested in a money market account before you start paying tax.

2. Capital gains tax (CGT) - this tax is only payable when you sell an asset. For example if you sell an asset for a higher price than what you paid, you could be liable for CGT. As an individual you have an annual exclusion of R40,000 per tax year. So the first R40,000 of any capital gains you make are not taxed.

3. Dividends tax - if you own shares or unit trusts or ETFs that are invested in shares - the underlying companies that you are invested in often pay out dividends from their cash resources. This dividend then gets taxed before it gets to you as an individual. Dividend withholdings tax (DWT) is 20% - this means you ultimately only receive 80% of the dividend paid. Unfortunately, there is no exclusion for DWT so you always bear this cost unless you are invested in a TFSA.

So, if you are invested in a TFSA, you avoid income tax, capital gains tax and dividends tax. As indicated, unless you have a reasonably large amount invested or are making large capital gains when selling an asset, you may be able to avoid the first 2 types of tax so the only definite gain is on dividends tax. If you do remain invested for a very long period of time in a TFSA (as is its purpose!) and the ultimate value is substantial,  when you do sell your investment there will be no CGT payable which could be a huge saving!

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Sebastian Patel

Sebastian is an investment actuary with more than 15 years of financial services experience. Outside of Franc he likes sports, traveling and trying out new wines (as long as they're Shiraz!).

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