Your Tax-Free Savings Account ( TFSA)
Tax Free Savings was introduced in South Africa to motivate people to save more. You get to benefit if you invest over a longer period, and not withdraw your funds every chance you get.
The benefit in this investment is that you will not pay any interest, dividends, or capital gains so therefore you get a bigger growth.
There are conditions that must be met though, as if you miss these conditions, you might be subjected to 40% penalty.
- Know the Limit
You can only invest R36 000 per tax year. The limit is for you as an individual and not per fund. That means you can have as many TFSA as you want , but your total combined contributions cannot be more than R36 000.
You are allowed to open one Tax Free Savings Account for each member of your family.
Your limit of R36 000 is standard. Even if you withdraw any amount, you are not allowed to replace it or try to catch up. So you cannot invest R36 000 in June, withdraw R20 000 in October and in December re-invest the same amount you withdrew .
The lifetime limit is R500 000 for everyone.
Both the R36 000 and R500 000 limits must not be exceeded as this will lead to a penalty of 40%.
- Decide on the payment system that you are happy with
With Limits of R36 000 per Tax Year and R500 000 per lifetime, you get to decide if you want to contribute monthly or put up a lump sum. Different institutions would differ on their preferred minimums but try to start with at least R500 p/m. This is for you to at least see the difference in terms of growth.
You can combine these two kinds of payment system but always try not to exceed the R36 000 mark .
For example you could:
Deposit R10 000 as a lump sum.
Pay monthly amount of R2 166
But be wary of the time of the year because if you are left with 6 months of the year the situation will be as follows:
Deposit R10 000 as a lump sum
Pay monthly amount of R4 333
The problem with the situation is that you will have to change the contributions because you could easily exceed the limit in the new year . If for example you continue investing R4 333 in the next tax year, you would have contributed R51 996 which is way more than the limit of R36 000 .
- Don’t withdraw prematurely
With these investments, you get to benefit more if you keep them for long. That is the case if you chose the right institutions …i.e. banks vs insurance companies. Insurance companies provide high returns than banks but time is of essence .
These investments are issued by banks and insurance companies, but you are better off with insurance companies if you want long-term investing and better growth. You do stand a chance of earning returns of between 10 – 12 % per annum. This is due to compound growth, and asset allocation of fund/s.
Asset allocation have the following major assets – Cash, Property, Bonds and Equity. Interest bearing assets such as Cash are used mostly by banks. This is because banks offer short term investments or emergency funds. The banks investments /savings provides lower returns.
So keeping your investment into TFSA for long will benefit you because of compound growth.
If for example:
You want R1 .1 in 15 years.
You would have to invest R2 750 p/m over 15 at an average growth of 10 p/a
You would have invested R495 000 of your own money with a growth of
R605 000.
- Be Smart
When TFSA were introduced, the annual limit was R33 000 …it has then been increased to R36 000. That means Legislation do change, so it is important that you beware of the changing legislation.
The annual limit applies in a tax year. Tax year applies from March to February of the following year.
It is very easy to reach the lifetime limit of R500 000. If you invest R36 000 per year, you will reach your limit in 13.39 years.
The funds that you can invest into in the TFSA are both local and foreign. It is important that you have a discussion with your advisor so that the assets of the funds are discussed. Funds selection is based on your risk appetite, and term of your investment.
An Advisor ought to know about the terminology and ways to benefit out of your TFSA
