On the back of the global pandemic, any savings available should be taken advantage of. Tax-free savings accounts (TFSA) were introduced by treasury on the 1st of March 2015 to incentivise saving and investing within South Africa. 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 SA and should be unpacked so that maximum advantage can be taken of this unique tax savings vehicle.
What is a TFSA?
The new (TFSA) are part of non-retirement savings and help to maximize tax relief. 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 in equities, unit trusts, ETFs, and cash. 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.
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. Lastly 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.
Flexibility and withdrawals
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. 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, that is why it is best to utilise this vehicle for long term only, as withdrawals impact the savings and return ability of the TFSA. TFSAs should be used to achieve long term investment goals.
Opening multiple TFSAs
There is no limit to the number of TFSAs one can have. Investors and savers can open multiple TFSAs that meet different goal and risk criteria, for example investing R18 000 in a tax free cash deposit for security and then investing the additional annual R18 000 in a growth unit trust, to look at growing the funds a bit more aggressively. One can also open up TFSAs for family members including minors, as well as to set up TFSAs for specific purposes like paying off a child's education.
What can be invested 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. Interest rates differ with regard to the amount of capital invested and the Repo rate. This provides an ideal product for the risk averse investor looking for capital security. Once more all interest received on the capital will be tax free provided annual thresholds are complied to.
Tax free shares: Access to the JSE top 100 shares. Investors and savers can either choose which shares to invest in themselves or have them chosen for them in a diversified manner. All Capital gains and dividends received on the investments will be tax free and can be reinvested to allow compounding to take place and maximise tax-free saving.
Tax free ETFs: A collective investment scheme that is passively managed and tracks a basket of shares or an index. This allows exposure to many shares that make up an index. Investing in ETFs offer flexibility with regards to buying and selling of the asset as well as provides a good long-term investment with exposure to multiple assets. ETFs can be acquired through a TFSA just like a share would be.
Tax free Unit trusts: Offering investors access to a balanced fund that suits both their risk parameters as well as long term goals. Investing in a tax-free unit trust allows a professional fund manager to compile a selection of assets for an investor to choose from. Different funds have different goals and the funds mandate and fact sheet can be used to decide which fund is best suited for that investor. Again, all returns from the fund will be tax free.
Conclusion
TFSAs offer great value to both investors and savers. Its an instrument that when used correctly can yield fantastic long term returns and benefits. Amounts that would have been paid to SARS are instead re invested and allowed to compound over years make a huge difference when looking to achieve long term goals. From the 1st of July, FNB will be waiving all monthly fees for TFSAs further increasing the appeal of this instrument. For investors and savers that do not have a TFSA, its time to seriously consider opening one and take advantage of treasury's incentive to create a savings and investment culture within South Africa.
