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Why a tax-free savings account is the right way to invest

This story is sponsored

For many South Africans saving and investing seems impossible because of the current socioeconomic pressures we are all facing. Uncertainty over whether you will still have a job or if your business will be able to survive the current economic shutdown are among our biggest concerns. 

However, if there is one lesson the current economic environment has highlighted it is the need for long-term financial planning. South Africans do not have a strong savings culture, especially when it comes to retirement, which is why tax-free savings (TFS) were launched in 2015 as part of the government’s initiative to encourage South Africans to save more.

Tax-free savings provide taxpayers with a unique vehicle to save and grow tax-free earnings.  As the new tax year has commenced, now is the time to consider whether you have made the maximum allowable contribution to your tax-free investment. If you don’t yet hold a tax-free investment, but are sitting on additional money to save, you can open one now and earn tax-free returns for the duration of your investment. 

Tax-free accounts allow for individuals to contribute up to a certain limit, in this case R33 000, and earn returns on the money invested, as the name suggests, tax-free. Any contribution made to the TFS is exempt from tax on interest, dividends and capital gains. 

It is important to note however that there are limits on how much you can contribute per year and throughout your lifetime. Limits that have been set by government on tax-free savings accounts, which currently sit at R33 000 per annum (up from R30 000 pa in 2017) with a R500 000 lifetime limit. It is hoped that over time, the limits will be adjusted to support those who are looking to invest for the long term. 

You can also open a tax-free savings account in the name of a minor, and many parents or grandparents use them as an investment for their children or grandchildren without having to exceed their own investment threshold. 

It’s important to remember that if you invest in a tax-free savings account in your child’s name and contributions reach the R500 000 threshold (as per current legislation) when they are 18, they would have made use of their personal lifetime limit and will not be able to continue their contributions or invest in a new TFS. It is however probable that the lifetime limit may be increased over time.

Some ways to use your TFS could be to subsidise your retirement savings in a tax-efficient manner or to save for your child’s education. If you have contributed more than the deductible limits to your Retirement Annuity, for example, you can invest the extra funds into a TFS to avoid being taxed on the additional contributions to your RA.  

If you are using a TFS to save for your child’s education, and it is in their name, it is advisable to remain cognisant of exhausting their R500 000 lifetime limit by the time they come of age. While some may view this as a flaw in the system, it allows for your next of kin to invest a lump sum amount into another investment vehicle.  

Where do I start?

The start of the tax year is the perfect time to revisit your investment plan. It allows you the opportunity to ensure that you maximise on the benefits afforded by the tax deductions.

Standard Bank offers a tax-free call account where you can start saving from R250, allowing you to get all the money you have invested returned to you without incurring any tax deductions when withdrawing, leaving you to enjoy every cent you have saved up the way you deserve.

If you need any assistance or financial advice, it would be advisable to reach out to your professional financial adviser who can help you make the most appropriate investment decision.

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