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Tax Free Savings Accounts

Published by Terence Tobin on

Tax Free Savings Accounts

Growing your wealth tax free through a tax free savings account (TFSA) can be a reality for many South African’s who make use of a TFSA. These wonderful savings and investment accounts, allow for tax free interest, dividend and capital growth, from South African sources. Growing your wealth and paying zero tax is a reality.

How did they come about?

Back in 2015, National Treasury, launched Tax Free Savings Accounts after consultation with the public and professional bodies.  They amended sections of the Income Tax Act of 1962, to allow for these wonderful products. If you are really keen to read more, check out Section 12T.

How do they work?

All South African investors, not companies or trusts, can invest R36 000 per year into a tax free account.  This is per person, not per tax free account – be careful.

There is a further limit of R500 000 in your lifetime.  Factoring in previous years, if you started in 2015, it will take you about 13-15 years to reach this limit.  

Let me provide some clarity on the limits and my personal thoughts.

The R500 000 limit puts many people off using these great products, don’t be!  This limit will be increased in time but as no one is even remotely close, it has not been adjusted now. 

Let’s chat in about 2027/8, you will see it will be increased.  Back in 2015, the annual limit was R30 000 and now it is R36 000, you can see that increases do happen.

Now for the best part of this offering:

  • Interest is tax free
  • Dividends are tax free
  • Capital Gains are tax free

(only if from within South Africa – if your TFSA invests offshore, tax would is deducted in that country)

Yes you can have one for you, one for your spouse and one for each child. It is possible to have many TFSA’s per person, as long as you don’t exceed R36 000 per year in total.

There is one tax that applies to TFSA’s and that is at death.  Estate duty and executors fees could apply, as this investment will be part of your estate. TFSA’s are still great products.

You are not locked into your TFSA, you can move between providers.  Do not withdraw your money. Rather tell your new investment company to speak to your old investment company. They will handle a tax free transfer.  This will not affect your limits either.

Penalties do apply - don't be naughty.

Lastly, if you over contribute, exceeding the limits – SARS will levy significant taxes. This means if you put in more then the R36 000 currently allowed, any amount over that is taxed at FOURTY PERCENT (40%).

See below, from SARS website which explains this very nicely.

SARS Penalty Tax for TFSA Overcontributions

Where is your money invested?

A TFSA does not give you any return, it is what we call in the profession “A Wrapper”. 

You need to select from cash, bonds, shares and property.  You can allocate some or all of your money into one or more of these asset classes, both in South Africa and almost anywhere in the world.

Depending on your investment goals, risk appetite, how well you want to sleep at night and your investment knowledge – will determine what mix of assets to allocate your funds to.  I would recommend lots of research and speaking to a financial planner.

Cash and bonds will pay you interest, shares and property will pay you dividends and REITS.  Capital growth comes from your share and property holdings. You will see at various times during the year, either monthly or quarterly, that you get your interest, dividends and REITS allocated to your TFSA.  Best practice is to buy more units and keep growing your assets.  

Remember it is not a problem if your growth takes you over the annual or lifetime limit – that is what is supposed to happen.  The limits are only for money from your bank account into the TFSA.

Last year, I recorded a podcast which explains this a bit more.  Listen to it here (it is only 10 minutes).

SARS Note on Tax Free Investments

Should you have one? Terence's Thoughts and questions I have been asked.

Some investors I chat with say they don’t want to use a TFSA, either because they cannot invest R36 000 per year or R36 000 per year is too insignificant. Others are worried about SA and our economic outlook.

You can invest R5 000 per year if that is what you can afford.  The beauty is it will take you longer to reach the lifetime limit but that is not a bad thing.

For those who say R36 000 per year is not worth the hassle, I would argue that saving tax whilst enjoying access to your capital and having the entire world as your investment supermarket should not be laughed at.

If you are worried about SA’s economic outlook, as am I, consider more offshore assets in your TFSA (consult with your financial planner).  If you have a pension fund, provident fund, preservation fund or retirement annuity you are bound by something called Regulation 28 (whereby 70% of your funds must be invested in SA and 30% can leave SA.  

This limitation does not apply to TFSA’s, meaning you can invest wherever you like and within the limits of your TFSA.

By holding your TFSA with a bank, generally you can only use money market or fixed deposits (I don’t like this), by having your TFSA with an investment company, you can invest globally and have access to thousands of companies throughout the world (I like this a lot more).

Once you have 3-6 months emergency fund sorted out, adding a TFSA to your portfolio is not a terrible idea.  I want you to think of your TFSA as something you invest in for a minimum of 20 years.  

Aim to hit the lifetime limit BEFORE you consider ever taking money out.  As soon as you withdraw funds (they leave the TFSA and hit your bank account), your lifetime is reduced by that amount and you can NEVER replace that.

In closing, always DYOR, understand what you are buying or investing in, ask LOTS of questions and ensure that your fees are below 2% per annum (ask for an EAC from your service provider).

Sources and Extra Reading

All content on my website including this blog are subject to my disclaimer.


4 Comments

Dakshesh Naik · 01/02/2021 at 12:39

Regarding the following notes:

“tax free interest, dividend and capital growth, FROM SA SOURCES” and
“(only if from within South Africa – if your TFSA invests offshore, tax would is deducted in that country)”

Would you factor this heavily in your weighting of local vs offshore? As you say, TFSAs are not restricted by Reg.28, but can you have too much (70% offshore) and not take full advantage of the Tax-Freeness of this vehicle? What would you feel the offshore amount must not go beyond to still take advantage of the Tax-Freeness but also hedge against local risk sentiments? 50-50?

    Terence Tobin · 01/02/2021 at 15:53

    The split and allocation is very much dependent on the investors risk appetite and risk tolerance. We all want great returns but the volatility can be unsettling. So I cannot say if it should be 50/50 or 70/30. This will be specific to each investor.

John Kesi · 21/03/2021 at 14:04

Opened a easy equity account and need assistance from the how to go about transferring funds and how, where to start investing. Are there any guidelines that you can be used as reference?

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