Taking Advantage of Tax-Free Saving

According to the Human Sciences Research Council, a culture of saving is vital for the financial wellbeing of South African citizens and to the sustained health of our national economy. It is well known that South Africa has a poor savings culture. In fact, South Africa’s household saving rate was 0.3% in the first quarter of 2022, a statistic that reiterates the country’s dismal saving culture.

In an effort to encourage South Africans to save, the National Treasury introduced tax-free savings accounts (TFSAs) in March 2015. While initially exclusive to banks, TFSAs are now offered by financial institutions too.

A tax-free savings account means that your returns are completely tax-free. The longer you invest, the more compound growth you earn, making this a tax-effective way to reach your saving goals.

There are many benefits to directing your savings to a tax-free savings account.

• Your money can grow faster in a tax-free savings account compared to a regular savings account because you don’t pay tax on the investment return.
• A tax-free savings account is an effective way to save for your goals, because any interest, dividends or capital gains from your tax-free savings account will be free of tax.
• Saving in a tax-free savings account gives you flexibility because you do not have to commit to any future contributions. You can withdraw from your investment at any time.

While the tax-free benefit may be small during the first few years, it will become more significant as the value of the investment grows. If you have invested for many years in balanced or equity portfolio and now need to withdraw the money, the capital gain payable could be substantial. This tax benefit makes the TFSA very attractive relative to other taxable products on the market. As an example, let’s say you invest R2 500 per month in a TFSA earning 10% interest per year. If you invested the same amount in a ‘normal’ taxable product earning 10% interest pear year before tax, the difference after many years of saving could result in thousands of rand more in your pocket.

The tax benefit of a tax-free savings account is therefore significant for long-term investments, particularly if they are applied to a balanced, diversified portfolio.

All tax-free savings accounts have contribution limits of R36 000 per year and R500 000 over a lifetime.

We all need to try to save, and in order to get the most out of our savings, they might as well be tax free! The sooner you open a TFSA, the sooner the power of compound returns can start working in your favour. And this is even more beneficial when those returns are tax free!

Click here to find out more about a tax-free savings.

Tax-free savings – Do’s and Don’ts

Do:

• Save and make your savings tax-free by opening a TFSA today!
• Be in for the long haul – The tax benefits from a TFSA are more significant the longer you save.
• Set up a payment system that works with your income and keep it consistent to get the best results.
• Speak to a financial adviser to make sure that you get the most from a tax-free savings account, and that it aligns to your investment goals.

Don’t:

• Withdraw funds prematurely. A tax-free savings account shouldn’t be seen as an emergency fund. Withdrawing funds may prevent you from reaching your savings goals and will use up part of your lifetime limit for tax-free savings.
• Contribute too much – Remember that your annual allowable amount within a TFSA is R36 000. Any amount above that will be taxed at a rate of 40%.