A National Treasury regulation that came into play on 1st March 2018 now provides South Africans with more flexibility when it comes to investing their money in a tax-free savings account (TFSA).
According to an article published on Business Tech, South Africans will be able to switch as much as they want of their money in a TFSA between financial service providers at no additional cost. They can do this up to a maximum of twice per year, and this will enable investors to adjust their tax-free investments to best suit any changes in their personal circumstances.
On 1st March 2015, the government first introduced tax-free savings accounts to encourage more South Africans to start saving, as there was found to be an exceptionally poor savings rate in the country.
Tax-free investments allow you to save without incurring any tax on the growth of your investment. This means that you don’t have to pay any tax on interest, capital gains tax (CGT), or dividends. Investors can invest up to ZAR30,000 each year (or ZAR2,500 per month) tax-free, until they reach their lifetime limit of ZAR500,000. However, do be sure to stay below the annual ZAR30,000 limit, otherwise you will incur tax penalties.
If you save the maximum annual amount consistently, investors can take advantage of the long-term benefits of compound interest and should, after just less than 17 years, have saved ZAR500,000 as a tax-free investment — in addition to compounded capital growth, interest and dividends.
Tax-free savings are for anyone with a taxable income, so it’s not worth putting a tax-free savings account in a child’s name if you wish to save for their education. Furthermore, be careful not to donate more than ZAR100,000 a year to children or grandchildren as a tax-free investment, or you will be liable to pay donations tax.
Make the most of a TFSA
To really reap the benefits of a tax-free savings account, it’s advisable to try to reach the ZAR500,000 limit as soon as possible, after which point you can watch your money grow with the power of compound interest for as long as possible. While saving, it’s also not worth making any withdrawals from your tax-free accounts, as you cannot inject the amount back once it’s been withdrawn if you have already reached the annual limit.
As a holder of a TFSA, consider the following factors before you choose an investment product (be that cash at a bank; or equity-based or unit trust-based investments).
• Consider your investment goal.
• Think carefully about your return requirements and risk profile.
• Decide who will be the beneficiary if you don’t intend to make any withdrawals and would rather leave the product as a legacy.
• Reflect on whether you wish to access your money when required or if you are happy to invest it for several years.
To best grow your portfolio, it’s worth considering all the tax-free benefits for which you are eligible. And, with the extra flexibility that this recent change to TFSAs provides, it could become (if it isn’t already) a wise addition to your wealth portfolio.
Don’t hesitate to arrange a meeting to discuss all considerations so that you can select the most suitable product and asset class for your personal risk profile and your wealth portfolio.
(information was sourced from businesstech.co.za and fin24.com)