Since the introduction of tax-free savings account (TFSA) legislation in 2015, many products have been launched by different service providers. A TSFA is a long-term investment vehicle with a significant tax advantage.
The TFSA regulations are part of a broader government policy to encourage South Africans to save and to help investors receive maximum benefit from their savings.
A TFSA allows the investor to contribute a maximum amount without being charged capital gains tax (CGT) when accessing these savings or switching funds, dividend tax when receiving dividends, or income tax on interest earned on these contribution amounts. All the proceeds are tax-free.
These maximum amounts are R30 000 per tax year or a total of R500 000 over the investor’s lifetime. This translates into a maximum recurring payment of R2 500 per month. Hefty penalties are payable to SARS should these contribution limits be breached. Withdrawals from the account will also impact the investor’s maximum annual and lifetime contributions.
If the investor intends to use the TFSA for short-term goals they could compromise the favourable taxation and miss out on tax-free capital growth. This type of savings vehicle can be a beneficial addition to investors’ long-term savings plan if it is used optimally.
Consumers looking to invest in a TFSA should have a conversation with a financial planner to discuss taxes and to determine how this product would fit into the investor’s overall financial plan, to take full advantage of its tax concessions. It is vital that investors ensure that their annual contribution total of R30 000 is made before the end of each tax year in February.
Investors should also be wary of questionable high fee structures that seem inexpensive at first. High fee costs can easily erode the tax benefit of a TFSA contribution over a normal discretionary savings contribution.
TFSA products can be highly beneficial for investors due to the significant tax advantages. However, it is vital that investors conduct proper research before investing to ensure that they invest in a fairly priced, high-calibre TFSA.
Author: Tiffany Boesch CA(SA) is group financial director of PPS
