Tax-free savings and investing
5 things you need to know about tax-free savings:
Tax-free savings accounts (TFSA) were introduced by treasury on the 1st of March 2015 and although a simple structure on its own, (TFSA) can be used to invest or save in multiple instruments. Some of the possibilities around TFSA might not be known to investors and savers within South Africa and should be unpacked so that maximum advantage can be taken of this unique tax savings vehicle. Below are the 5 things you need to know, to maximise your tax-free earnings:
1) What is a TFSA?
The TFSA was introduced by treasury to create a savings and investment habit among South Africans. All proceeds, which include interest income, capital gains and dividends from investments and savings through the TFSA, are tax free. Investors and savers can utilise a TFSA to invest and save through ETF’s, unit trusts as well as cash deposits. One thing that must be kept in mind, is that tax free savings is for long term investments and should not be used to fund short term emergency expenses.
2) What are the capital thresholds?
Investors and savers utilising a TFSA need to keep in mind that their capital contributions are limited to a maximum of R36 000 per year, and a total lifetime contribution of R500 000. The R36 000 can be contributed as a capital lump sum at the beginning of the tax year on the 1st of March or alternatively contributed to monthly. The R36 000 annual threshold however should never be exceeded as any contributions above the R36 000 will be taxed at 40%.
The R500 000 lifetime contribution does not include returns from investments and savings, but rather the outside capital brought into the fund over the lifetime of the contributor. Investors and savers will not be allowed to roll forward any annual contributions from prior years, the annual contribution is forfeited and R36 000 will always be the annual limit.
Tax free savings must be used as a long-term vehicle as reinvesting tax-free returns and allowing compounding to take place over long periods of time will ensure maximum benefit. The annual contribution threshold runs in accordance with the tax year. Therefore, investors have a ne tax year, and the full threshold available to them.
3) Are contributions flexible?
TFSA provide flexibility with regards to an annual lump sum or monthly contributions made. Contributions can also be stopped and started at any time suiting the contributors need. Contribution can be as little as R300 per month.
4) Can I withdraw from my TFSA?
When it comes to withdrawing funds from a TFSA, again there is flexibility in being able to do so, however the lifetime capital contribution will be impacted. When withdrawing R50 000 from a TFSA, it means that total lifetime capital contribution for that investor or saver drops to R450 000. It is thus crucial to utilise this instrument for long term savings and investment goals and rather utilise emergency savings to fund short term expenses.
5) What can I invest in through a TFSA?
Tax free cash deposit: Like a savings account, a tax-free cash deposit offers interest on funds invested, once more the FNB tax-free cash deposit offers 100% capital guarantee. Including a cash element in your portfolio is one way to ensure returns in the form of regular interest payments. With capital being guaranteed, this addition also adds an element of wealth preservation to a portfolio and when capital and interest is left to compound tax free over the long term, returns can be substantial. Cash instruments can be viewed as an asset class used to achieve shorter term goals however, when saving through a TFSA, the savings term must always be long term, to effectively utilise the tax-free savings benefit and keep your lifetime capital contribution limit at the maximum.
Tax free ETF's: A collective investment scheme that is passively managed and tracks a basket of shares or an index. Investors looking for equity exposure gain access to an investment in the Top 100 companies on the JSE through the Ashburton Top40 and Ashburton MidCap ETFs. This allows exposure to 100 shares with a single investment, and all returns free of tax, meaning more capital to reinvest. Investing in equities gives an investor the opportunity for higher potential returns, but capital is not guaranteed like a cash free cash deposit.
Tax free Unit trusts: Offering investors access to a balanced fund that suits both their risk parameters as well as long term goals. The FNB Horizon Series Unit Trusts are a range of five expertly modelled funds that target the appropriate return over different time horizons. Investors can select which fund is suited to their investment goal and risk profile. Investing in a tax-free unit trust allows a professional fund manager to compile a selection of assets for an investor to choose from and can be utilised by the beginner investor looking to gain exposure to the market in a diversified way, or the expert investor looking to further spread risk through a balanced fund. Again, all returns from the fund are tax free, increasing capital balances over the long term.
Conclusion:
TFSA's are a fantastic long-term saving and investment instrument that should be utilised by all South Africans. 100% of all returns can be reinvested over the long term, increasing capital nest eggs. Investors can choose which asset classes to utilise through the TFSA vehicle, aligning their TFSA selections to their long-term saving and investment goals. Take advantage of tax-free returns today through a TFSA.
