A Tax-Free Savings Account (TFSA) is a tax-efficient savings initiative in South Africa, introduced in 2015 to encourage individuals to save and invest without being taxed on their returns. Unlike traditional savings or investment products, all interest, dividends, and capital gains earned within a TFSA are exempt from tax.
Here’s a breakdown of how TFSAs work and why they can be an excellent addition to your financial strategy.
- Tax-Free Returns: The primary benefit of a TFSA is the tax exemption on any interest, dividends, or capital gains earned within the account. This means that your savings and investments can grow faster than in a regular taxable savings account.
- Contribution Limits: The South African government allows contributions of up to R36,000 per year, with a lifetime limit of R500,000. Exceeding these limits will result in a 40% penalty from SARS on the excess amount, so it’s essential to keep track of your contributions. To ensure that you monitor your TFSA account to be within the limits cited above and avoid penalties, It is a good idea to keep your TFSA in one bank
- Flexible Withdrawals: You can withdraw money from your TFSA at any time without penalties, but any withdrawn amounts cannot be re-contributed. For example, if you contribute the full R36,000 in one year and withdraw R10,000, you cannot add that R10,000 back in the same year.
- Range of Investment Options: TFSAs allow for a variety of investment choices such as cash savings, exchange-traded funds (ETFs), and individual shares. These flexible investment options enable you to create a portfolio tailored to your financial goals and risk tolerance.
- Long-Term Growth Potential: The combination of tax-free returns and compounding over time makes a TFSA particularly valuable for long-term goals like retirement savings or education funds. The longer your investments remain in the account, the more significant the potential for growth.
- Portfolio Diversification: A TFSA can complement your other investment vehicles like retirement annuities, offering tax-free diversification in your portfolio. You can use a TFSA for medium- to long-term goals while retaining flexibility to access your funds if needed.
- Self-Managed Investments: For individuals who prefer to manage their own portfolio*, TFSAs allow you to take control of your investments, offering the freedom to buy and sell shares, ETFs, and other securities within the account.
*You can learn to manage this yourself through companies like Easy Equities whose user-friendly interface makes it easy for beginners and seasoned investors alike to manage their portfolios. They have fees, no minimum investment, fractional share investing, and access to both South African and international markets. Another option is SatrixNOW (local JSE market) which also has no minimum investment, low fees, and a focus on ETFs, which are ideal for long-term, tax-free growth.
In conclusion, the main advantages of TFSAs are that your capital and interest are guaranteed, interest earned is generally higher than on a regular savings account and of course, the tax-exempt element (within the limits), where any returns earned are not subjected to tax.
You can contact a financial advisor or speak to your bank. LifeAssist is not an accredited financial advisor (and cannot suggest investment portfolios), however, you are welcome to contact our financial coaches who can explain the terminology and options to you so that you gain knowledge and an understanding to enable you to start your saving portfolio now. Give LifeAssist a call, at no cost to you.
*Note: LifeAssist does not offer loans