Tax Free Savings Accounts

Tax Free Savings Accounts or Investments

Tax Free Savings Accounts or Investments were started as an incentive to encourage people to save money. Since March 2015, South Africans have been able to invest R30 000 a year, or R2 500 a month, in a tax-free investment. This amount increased from R30 000 to R33 000 from 1 March 2017, but there is a lifetime limit of R500 000 per person (pretty much 15 years). What this means is you don’t have to pay income tax, dividends tax or capital gains tax on the returns from these investments. You can withdraw your funds from your account but note that these funds cannot be replaced, and will be deemed as part of your annual contribution.

Potential Compounded Tax Saving

If you are not currently paying tax on your investments, then it might be better to focus on other investment options first. To explain, in terms of the current tax legislation a portion of the returns you earn on a basic investment is not taxed. If you are under 65 years, the first R23 800 of interest income and R40 000 of capital growth annually are not subject to tax. This means that an investor in South Africa can keep approximately R300 000 in a fixed income fund before paying any tax on the interest earned. Thus, it would make better sense to first contribute towards a retirement fund, because the potential compounded tax saving would be larger than the potential saving from a Tax Free Savings Account. Especially if started at a young age.

Tax Saved on the Growth of the Investment

The other very important factor to consider when looking into a Tax Free Savings Account, is the duration of your potential investment. Tax Free Investments are a great initiative from the government to encourage savings in South Africa, however, it is important to set them up correctly. You will benefit from them most as a long-term investment, because Tax is saved on the growth of the investment. However, there are still costs in the form of fees and transaction costs, and that is why investment options need to be carefully scrutinised before investment.

Which Accounts Qualify as Tax Free Investments?

  • Fixed deposits
  • Unit trusts (collective investment schemes)
  • Retail savings bonds
  • Certain endowment policies issued by long-term insurers
  • Linked investment products
  • Exchange traded funds (ETFs) that are classified as collective investment schemes.

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