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Unpacking Tax-Free Savings Accounts (TFSAs)

April 17, 2024
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Paul Roux
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Paul Roux

All you need to know on TFSA's in South Africa.


 

1 What's a Tax-Free Savings Account (TFSA)?

A TFSA is an investment vehicle offered in SA that allows you to invest your hard-earned money without paying taxes on any interest, dividends, or capital gains.

 

2 Types of Taxes:

1. Interest Tax from interest on bank deposits and bond investments.

2. Dividend Tax from investing in company shares.

3. Capital Gains Tax from buying low and selling high.

 

3 Investment Options:

TFSAs offer various investment avenues like fixed-term bank accounts, money market funds, unit trusts, and exchange-traded funds (ETFs).

 

Common Mistake Alert:

Don't fall into the trap of choosing bank fixed deposits or money market funds for your TFSA. Opting for shares via unit trusts or ETFs can offer much higher growth potential in the long run!

 

4 Contribution Rules: (5)

1/ Contribution limits R36,000 annually (R3,000 monthly), up to a lifetime limit of R500,000.

 

2/ Unused contributions don't roll over to next year. E.g., Only invest R30,000 this year, cannot contribute R42,000 (R36,000 + this years R6,000) next year.

 

3/ May have multiple TFSA accounts but the combined contributions are still subject to contribution limits. E.g., R16,000 (Allan Gray), R12,000 (Investec) and R8,000 (Absa) = R36,000.

 

4/ Cash flows within the fund do not affect contribution limits. E.g., invest R30,000 for the year and receive dividends of R5,000. The total contribution remains at R30,000 as the R5,000 dividend income is not regarded as a contribution.

 

5/ Exceeding contribution limits leads to a 40% tax on excess contributions. E.g., investing R38,000, the excess R2,000 contribution is taxed at 40%. (R2,000 x 40% = R800 owed to SARS).

 

5 Withdrawal Rules: (2)

1/ Unlike retirement funds, you can withdraw at any time and any amount from your TFSA.

 

2/ Withdrawing doesn't impact your contribution allowance. E.g., Contributed R200K and now withdraw R50K, the remaining allowance is still R300K (R500K - R200K).

 

6 Time Horizon Matters:

 

Compound growth over decades is where the tax-free magic happens. Don't think short-term these are your long-term investment companions!

 

TFSAs should never be used as savings, emergency funds, or short-medium-term investments.

 

7 Crunching Numbers:

Assuming an average stock market return of 10% p.y:

 

Contribute R36,000 annually, will reach R500,000 limit after 14 years.

Value (growth incl.) after 14 years: R1,050,000.


Leave untouched for:

10 yrs: R2,720,000.

20 yrs: R7,064,000.

30 yrs: R18,320,000.

 

FAQs covered in Wealth Wingman Newsletter:

- Best platform to open TFSA

- Best funds to invest in for TFSA

- TFSA vs RA, which is best?

- Open TFSA for your kids?

- Inflation impact on TFSA?

- Asset class or geographical limits?

- TFSA part of your estate?


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