What you need to know about a Tax-Free Savings as the current tax year closes
We are fast approaching the end of the tax-season and like the rest of your investment portfolio, this is an opportune time to look at your Tax–Free savings account (TFSA) portfolio and identify how you can take advantage of savings incentives created by National Treasury to encourage investing culture.
Tax-free savings accounts were introduced by National Treasury on the 1st of March 2015 and can be used to invest or save in multiple instruments. "The main aim of this investment vehicle is to encourage an investment culture among South Africans. Through a TFSA, all proceeds which include interest income, capital gains and dividends from investments are tax free and any withdrawals in a TFSA are not taxed, making this a very effective product for drawing down income in retirement.," says Samukelo Zwane, Head of Product FNB Wealth and Investments.
An investor can choose several underlying asset classes in a TFSA, which include unit trusts, bank deposits, fixed deposits, exchange traded funds, etc. National treasury is ensuring that products with high termination penalties and risky asset classes are not permitted. Having a TFSA is a great platform to get your saving and investment journey started as part of your long-term financial goal such as reinvesting tax-free returns and allowing compounding to take place over long periods of time will ensure maximum benefit.
Contributions
Zwane advises that investors and savers should keep their capital contributions limited to a maximum of R36, 000 per year, and a total lifetime contribution of R500 000. "The annual contribution threshold runs in accordance with the tax year. The R 36, 000 can be contributed as a capital lump sum at the beginning of the tax year on the 1st of March, or alternatively, monthly. The R36, 000 annual threshold, however, should never be exceeded as any contributions above the R36, 000 will be taxed at 40%," says Zwane. It is very important to note that the entire excess contribution will be taxed at 40%. Some people mistake the penalty to only apply to capital gains, interest, or dividends, but that’s not the case; it applies to the entire contribution. Therefore, avoid exceeding your annual contribution limits in a TFSA.
The R500 000 lifetime contribution does not include returns from investments and savings, but rather the contributions into the fund over the lifetime of the investment. The annual contribution limits reset at the end of the tax year 28th of February 2022. Thereafter, the limits are reset and the full R36, 000 can be contributed again from 1 March 2022.
Flexibility and withdrawals
TFSA provides flexibility with regards to an annual lump sum or monthly contributions made. Contributions can be as little as R300 per month and can be stopped and started at any time to suit the contributors' needs. "There is flexibility when it comes to withdrawing funds from a TFSA, but your lifetime capital contribution will be impacted. By withdrawing R50 000 from a TFSA, your total lifetime capital contribution for that investor or saver drops to R450 000. It is thus crucial to utilise this instrument for long term savings and investment goals, as any withdrawals impact the total capital balance that can compound tax free," adds Zwane.
Opening multiple TFSAs
There is no limit to the number of TFSAs one can have. Investors and savers can open multiple TFSA’s that meet different savings goals and risk criteria, for example, investing R18, 000 in a tax-free cash deposit for security and then investing the additional annual R18, 000 in a growth unit trust, to look at growing the funds a bit more aggressively. One can also open up TFSA’s for family members, including minors, as well as set up TFSA’s for specific purposes like paying off a child’s education.
"TFSA’s are fantastic long-term saving and investment instrument that should be utilised by all South Africans. 100% of all returns can be reinvested over the long term, thus increasing capital nest eggs. It’s a great vehicle as investors can choose different asset classes to invest in, aligning with their risk appetite and investment goals. So, take advantage of this tax savings incentive and open a TFSA today," concludes Zwane.
