TAX FREE SAVINGS ACCOUNTS: FACTS


Investing & Money
piece written on the 8th April 2015 by  

Just over a month ago I published an article on the tax free savings accounts, which painted an initial picture of what they are about. From my research and having spent some time asking around I can tell that people are still not making use of these accounts and most of the reasons are due to a lack of understanding.

tax-free

Here are 5 facts about the tax free savings accounts:

  • You can invest up to R30,000 per year and up to R500,000 in total. This works out to roughly R2,500 per month for 16 years and 8 months.
  • As a tax free account, you will not be taxed on: interest earned, dividends paid or capital gains.
  • You are allowed to withdraw money whenever you like, but this may not be replaced. The idea is: what you put in, you keep in – thus being a long-term investment.
  • Company’s and trusts may not make use of tax free savings accounts, this is for individuals only.
  • You may open more than one account, but you cannot exceed the amounts stated in the first point above. If you exceed these amounts you’ll pay penalty tax of 40% on the amount that exceeds the limits.

I received a newsletter the other day from a colleague and in the newsletter the author proposed a scenario to show how valuable these accounts are. Instead of making up a scenario myself I’ve decided to share his example:

If we assume a personal marginal tax rate of 41%, the maximum contribution of R 2 500 per month, and an assumed return of 10% annually, the results are quite significant.

The investment return earned over the full period (16 years and 8 months) (net of tax) would be approximately R 1 495 000, compared to R 2 046 000 if a tax free savings account was used.

This amounts to a massive tax saving of R 551 000, with this difference growing the longer the investment in the tax free savings account is retained.

I’ve shared this example because I find that seeing the numbers often explains the point better. That’s a R551,000 difference between the two accounts.. R551,000! Moneyweb has published an article that dives into the numbers and provides even further insight into the financial benefits of these accounts versus discretionary investments.

Don’t forget to play around with the IFIII calculator to see how various funds are performing before committing to a fund.

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