TAX-FREE SAVINGS ACCOUNTS

What is a Tax-Free Savings Account?
 
Tax-free savings accounts were introduced by National Treasury to encourage individuals to save with the benefit of the account being 100% tax free. These accounts came into effect on 1 March 2015. The investment account is exempt from income tax, capital gains tax (CGT) and dividend withholding tax. Individuals are allowed to contribute R30 000 per year to a tax-free savings account and there is a lifetime maximum contribution limit of R500 000.
 
What You Need to Know

• The annual investment limit is R30 000 and there is a life-time limit of R500 000.

• If you contribute more than R30 000 per annum, the excess amount contributed will be taxed at 40%.

• Unused tax-free amounts may not be rolled over to the following year. For example, if someone contributed R20 000 in one year, they are not allowed to increase their limit to R40 000 the following year. The annual limit remains R30 000.

• Individuals can invest in a tax-free account either via a lump sum or a debit order. The monthly debit order amount should be capped at R2 500 per month to prevent exceeding the annual contribution limit.

• You can have access to the funds in the tax-free savings account at any time.  However, if you withdraw an amount, you cannot add it back to the investment. For example, if you contributed the maximum amount of R30 000 for the year and then withdraw R20 000, you have still used up your full tax-free amount for the year and you cannot add the R20 000 back into the investment. This encourages individual to save for the long term.

• Distributions such as interest and dividends do not impact your yearly investment limit. This is to encourage investors to reinvest distributions.

• Underlying investments for these accounts are not allowed to charge performance fees, therefore reducing the fees that fund managers can charge.

Why Invest in a Tax-Free Savings Account?
 
To get the full benefit of tax-free savings accounts, they should only be used for long-term investments i.e. 20 years and longer. If you contributed the maximum allowed amount every year (R30 000), it will take 16.67 years to reach your lifetime maximum contribution limit of R500 000. When you want to withdraw your money from the investment after 16.67 years, your investment amounts could have grown a considerable amount and there will be no tax levied on your investment withdrawal.
 
A tax-free savings account can also be a useful product to save for your children’s education. The parents of the minor can open the account in the name of the minor and this fund will be 100% tax free.

Invest R30 000 per annum with a life time limit of R500 000 TAX-FREE

Tax-Free Savings Accounts Scenarios:
 

 
* The above calculations does not take into account tax on dividends and interest.
 
Need Assistance in Setting up a Tax-free Savings Account?
 
As independent financial advisors, we have contracts with various companies who offer tax-free savings accounts and we are able to assist you in setting up an account. Please contact Moore Stephens if you require any assistance in setting up a tax-free savings account.