How to gain the most from your tax-free investment plan
Published on 30th June, 2021 at 07:41 pm
The National Treasury first introduced tax-free savings accounts (TFSAs) in 2015 to encourage South Africans to invest. Different investments attract different taxes. Here’s how to maximise the benefits of your tax-free investment plan for long-term growth.
What is a TFSA?
A TFSA is an account that incurs no tax on interest or dividends received, and no capital gains tax (CGT) on funds withdrawn. The annual limit for individual investors in the product is currently R36 000, having increased from R33 000 last year, effective 1 March 2020. The lifetime limit per investor remains at R500 000. It’s important that investors’ contributions don’t exceed the annual individual limit of R36 000, as any contributions over and above this amount are taxed at a rate of 40%.
The National Treasury has been generous in that the TFSA exemptions on interest and capital gains have not been adjusted in recent years. The R23 800 (for individuals younger than 65) and the R34 500 (for individuals older than 65) annual interest exemption amounts have remained unchanged since 2014, and the R40 000 annual exclusion for capital gains has been in force since 2017. What has become apparent is that to maximise the tax efficiency of an investor’s discretionary investments, the TFSA should be an integral part of a financial plan.
How to maximise the benefits of your TFSA?
Tip #1: Invest the full R3 000 per month
To take full advantage of the tax-free growth, and if you already have an existing monthly recurring contribution into a TFSA, you’ll benefit from utilising the full allowance of R3 000 a month.
Tip #2: Invest at the beginning of the year
Roenica Tyson, an investment product manager at Glacier by Sanlam, says that if you prefer to invest via a lump sum, you’ll benefit by doing so at the beginning – rather than the end – of the tax year, as this will give your investment 12 months of tax-free growth.
A R36 000 lump sum investment on 1 March can grow by R3 600 over the year (assuming a balanced fund investment with CPI+4% return). Tax on interest, dividends and capital gains in such a portfolio would amount to R600*. By rather allowing this lump sum to grow in the TFSA from day one, you get to keep and further grow this R600, which will have a meaningful impact over a long investment horizon.
*Assumption: CPI at 6%; 30% marginal tax rate; portfolio return consists of 15% interest, 25% dividends and 60% capital; interest and capital exemptions are not taken into account.
Tip #3: Include sufficient growth assets (no limits apply) to maximise long-term growth
Think of your TFSA as a long-term investment. While you can access the money at any time, any amount withdrawn will be regarded as a further contribution (towards your lifetime contribution limit) when reinvested in your TFSA. Given this restriction, and that the tax benefits achieved by investing in a TFSA will become more significant over time, you should view your TFSA as more of a long-term investment and should look to other investment vehicles more suited to short-term savings or emergency funds. A TFSA also has no limits on how much may be invested in growth assets, such as equity, foreign equity, and property. This further enables you to maximise the growth, tax-free, over the long term.
Book a meeting with a qualified financial planner today to ensure your investment portfolio is in line with your values, circumstances and risk profile.
Glacier Financial Solutions (Pty) Ltd and Sanlam Life Insurance Ltd are Licensed Financial Services Providers.
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