Richard Bray, 8 August 2018
Retirement annuity (RAs) have been around for many years and most investors are familiar with this product, but tax-free savings accounts (TFSAs) were only introduced in 2015, and is fast gaining popularity among retail investors – for obvious reasons.
All the proceeds – dividends, interest and capital gains - are tax-free. After several years of investing in a balanced or equity portfolio, the capital gain payable when ultimately withdrawing the money could be substantial. This tax benefit makes the TFSA very attractive relative to discretionary, taxable products.
Your overall TFSA contributions will be limited to R33 000 per tax year. Any contributions exceeding the annual cap will be taxed at 40% and therefore need to be monitored carefully to remain within the annual limit. You cannot roll over this year’s unused allowance to next year, so if you don’t contribute before the end of February, you’ve missed the boat for the 2017/2018 tax year. A lifetime contribution limit of R500 000 also applies.
The benefit may be small during the first few years, but as the value of the investment grows, it becomes significant. The difference between investing R2 750 per month (R33 000 per year) in a balanced portfolio TFSA earning 10% p.a. and investing the same amount in a ‘normal’ taxable product earning 10% p.a. before tax over a period of 15-16 years could result in several hundred thousand rand more in your pocket. If you’re in the 39% tax bracket, you’ll save more than R100 000 in today’s terms. But the longer you invest in this balanced fund TFSA and the higher your marginal tax rate, the more tax you’ll save.
The three-year anniversary of the first tax-free unit trusts launched in 2015 has come and gone, and you’ll be pleasantly surprised at the superior three-year returns compared to their standard, taxable counterparts, particularly for pure equity and high equity funds. Not paying any dividends tax now and no capital gains tax in future will make a dramatic difference to your pocket. So, make sure to not miss another tax year for planting the seeds for a tax-free harvest in future.