Securing a Lifetime of Financial Success: Unveiling the Advantages of Tax-Free Savings

(Adapted from Business Day)

Given South Africa’s notably low savings rate on a global scale, the government introduced a tax-free savings initiative in 2015. The true value of the tax-free savings account (TFSA) becomes evident when it is held for an extended duration, allowing for capital appreciation. The tax-free interest or return earned on the investment over time can be reinvested to get you closer to your savings goal.

TFSAs introduced to get South Africans to save more

TFSAs were introduced as a means to encourage greater savings among South Africans. With savings accounting for less than 15% of GDP in 2019 and only 6% of the population projected to retire comfortably, the initiative serves as an incentive for fostering a savings habit. Importantly, all earnings from TFSAs, encompassing interest income, capital gains, and dividends, remain exempt from taxation.

Know your contribution limits

Understanding your contribution limits is crucial. While there are no constraints on the number of TFSAs one can have, managing them diligently, especially if spread across different financial institutions, is essential. Seeking expert advice becomes invaluable in such scenarios.

Parents can open a TFSA on behalf of their children, providing a separate savings avenue that does not encroach upon their own contribution limits. TFSAs present a tax-efficient method for securing a child’s financial future, benefitting from compound interest over time.

Contributions reaching the R500,000 threshold in a child’s TFSA by the age of 18 exhausts their personal lifetime limit. Although this limit may potentially increase over time, exceeding it incurs tax penalties of up to 40%. Consultation with a financial planner is advisable if additional savings exceed TFSA limits.

Beware withdrawals

You can withdraw money from TFSAs when you like, depending on the type of account, without attracting any costs from the financial institution. However, withdrawals must be considered carefully because once an amount is withdrawn, it is deducted from your lifetime contribution limit.

If you were to save R100,000 in your tax-free savings account, and you withdrew the full amount — your remaining lifetime contribution would be limited to R400,000. Similarly, if you contribute R36,000 for the tax year, and you withdraw R10,000, you will not be able to contribute again during that same tax year.

It’s critical to keep in mind the impact withdrawals can have on your ability to take full advantage of the benefits of the TFSA. It’s your money, and you can decide how you wish to use it, but the idea with the tax-free vehicle is to stay invested for the long haul.

Stay for the long haul

Staying invested for the long term is emphasized, especially given the low retirement preparedness among South Africans. The tax-free initiative aims to prompt retirement savings, though individuals may utilize it for various life milestones.

Distinguishing between a tax-free savings account and a tax-free investment lies in their structures and underlying assets. The former allows flexible withdrawals, while the latter involves a predetermined investment term. Asset class selection depends on individual needs and goals, underscoring the importance of consulting a certified financial adviser for a thorough financial needs analysis.

Don’t delay, start today

Delaying savings until one perceives having surplus funds is discouraged. Initiating savings promptly and leveraging instruments like the TFSA, is crucial.

At The Pogir Group, we’re committed to ensuring that our clients receive the very best financial advice and market-leading service. We’ve built our reputation on integrity and experience, and our goal is to grow with you, every step of the way. Through close consultation, we identify your financial needs on a short-, medium- and long-term basis; we analyse your current financial situation and existing policies and portfolios, and then recommend and create solutions designed to fulfil your aims.

In addition to personal life insurance, we also provide short-term insurance, personal and corporate healthcare solutions, employee benefit programs, life financial planning, and expert wealth management.

Figure out every tax season with peace of mind, let us help you.

To find out more, contact us today to arrange a no-obligation consultation.

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