We don’t get anything for free these days and a savings account is no different, because the interest earned on savings accounts is taxable income.
Wouldn’t it be great to secure some interest on your savings without getting taxed for it?
Thankfully, with a tax-free savings account (TFSA), you can! Let’s take a look to find out what a tax-free savings account (TFSA) is.
What is a tax-free savings account (TFSA)?
Tax-free savings accounts allow you to save your money without paying taxes on the growth of your investments. TFSAs allow you to contribute a maximum of R36 000 per tax year, with a lifetime limit of R500 000. Legislation sets these limits as part of the tax-free savings account rules, which can be changed from time to time.
We help thousands of South Africans reduce monthly debt costs, protect their assets, and stay out of court—find out what we can do for you.
Who can invest in a tax-free savings account?
Any individual may open a tax-free savings account, but legal entities such as trusts companies may not.
According to SARS, anyone (including a minor) can have more than one tax-free investment; the annual contribution limitation is based on an aggregation of investments over time in the case of multiple investments (more on that below).
Can the investment value of a tax-free savings account exceed the contribution limit?
You can have as many tax-free savings accounts as you want. However, you must make sure your annual payments across all TFSAs don’t exceed the annual contribution limit, or you will have to pay a penalty.
The drawback is that the National Treasury has put limits on the amount you can save in a tax-free savings account. The total annual contribution in a tax year may not exceed the annual contribution limit, which is currently set at R36 000 per tax year (this amount is adjusted over time.).
Can account holders withdraw funds from TFSA investments?
Withdrawals can be made at any time from your TFSA. For maximum tax benefits, it is best to keep your capital invested in your TFSA as long as possible.
Your annual or lifetime allowances are not restored by withdrawals. When you contribute R36 000 in June and withdraw it all in January, you will not be able to contribute any more for that tax year, and your lifetime contribution limit will be reduced by R36 000. In the following year, you can only make contributions to your TFSAs.
Pro tip: Try not to withdraw from your tax-free savings account. Since the interest that you earn isn’t taxed, it is best to keep the maximum contribution amount invested and let it earn interest and grow for as long as possible.
Remember to balance your long-term and short-term financial goals effectively.
We help thousands of South Africans reduce monthly debt costs, protect their assets, and stay out of court—find out what we can do for you.
What is a tax-free investment?
Tax Free Investments (TFI) were introduced in South Africa by SARS, in 2015, to encourage household saving.
Here are few examples of accounts that qualify as tax-free investments (TFIs):
- Fixed deposits
- Unit trusts (collective investment schemes)
- Certain endowment policies issued by long-term insurers
- Linked investment products
- Exchange traded funds (ETFs) that are classified as collective investment schemes.
A tax-free investment instrument may only be created by a licensed bank, a long-term insurer, a manager of a registered collective scheme (with certain exceptions), the National Government, a mutual bank, a cooperative bank, the South African Postbank, or an administrative financial service provider. The exchange rules require authorised persons to provide securities services.
Investing in a tax-free savings account allows you to earn investment growth without paying taxes. You can contribute a maximum of R36 000 per tax year to all your TFSAs, with a lifetime maximum of R500 000.
Legislation sets the limits, which can change over time.
Now that you know what a tax-free investment and a tax-free savings account is, let’s review a few of the advantages that this type of investment offers.
Benefits of tax-free savings accounts
If the merits of having a tax-free account aren’t even enough, here are a few more reasons to consider getting one:
Tax-free savings account benefits:
- You get more at the end of the day
- You will have global exposure
- Diversified funds
- Cost saving
You get more at the end of the day
You pay no taxes, which means your returns compound massively over time, a great advantage for long-term investors.
You will have global exposure
Investors can gain international exposure and add global brands to their portfolio by investing in ETFs that track global indices.
Diversified funds
You can only invest in a collective investment scheme like a unit trust and certain ETFs in your TFSA, this means that your risk is spread and your portfolio diversified.
Cost saving
On average, you could save 1% per year compared to alternative investment vehicles. Over a long period, the sum of that is quite a lot.
Leveraging these benefits will boost how effectively you invest — make investing in a tax-free savings account a habit that helps you build wealth.
Final Thoughts
It’s always a good idea to maximise your savings, and getting a tax-free account is just one of the ways to do that.
We have more valuable content, such as tax-free savings account rules in South Africa, what are the best tax-free savings accounts in South Africa? And how does a tax-free savings account work in detail? – find it all on our blog page.
If you want to clear any lingering debt before investing in a savings account, you know who to call.
