Understanding Tax Free Investment Accounts
What is the difference between tax-free investing and regular investment accounts?
If you’re looking for rapid growth on your investment, a TFSI is a better option than a regular savings account. The money invested into a tax-free savings account is not subject to tax on any interest, dividends, capital gains and withdrawals, unlike a regular savings account.
Frequently Asked Questions
Tax-Free Investment Account (TFIAs) have become a popular way for South Africans to grow their savings while enjoying significant tax benefits. However, with any financial product, there are often questions about how it works, its limits, and the advantages it offers. In this article, we’ll address some of the most frequently asked questions about TFIAs, from contribution limits and tax implications to withdrawal rules and investment options, helping you make the most of your tax-free savings journey.
A tax-free investment account (TFIA) can be a money market or fixed-term bank account, a unit trust investment, a JSE-listed exchange-traded fund and more. It guarantees your capital investment and is an effective way to save for your goals because any interest, dividends or capital gains will be free of tax. It also gives you flexibility as you do not have to commit to making future contributions.
You can withdraw funds anytime you choose, but it’s not advisable to do so as this may prevent you from achieving your goals. In addition, making withdrawals will have an impact on your lifetime tax-free savings limit.
There are limits on the amount you can save in a tax-free investment account. The total annual contribution in a tax year may not exceed R36 000, while the total lifetime contribution may not exceed R500 000. It does not matter how much growth you earn on your annual contributions, as long as the amounts you put in do not add up to more than the annual or the lifetime limit.
You will need to pay a penalty tax of 40% for contributions to your tax-free account that exceeds the limits.
For example: If, in one tax year, you invest R16 000 in an account with one provider and R30 000 in an account with another provider, you will have contributed R10 000 more than the annual limit. You will have to pay 40% tax on the excess R10 000 you have invested, and SARS will expect you to pay the tax.
It’s important to monitor your TFIAs across all approved accounts regularly to avoid exceeding the limit.
You can withdraw money from TFIAs as and when you like, depending on the type of account. If the investment has no maturity date, you can access your money without giving notice. If the investment is a one-year fixed deposit, it will be payable to you within 32 days of your request to withdraw.
Penalties for early withdrawals vary from provider to provider but may not exceed R500. Withdrawals must be considered carefully because once an amount is withdrawn, that amount is deducted from your lifetime contribution limit.
For example, if you were to save R100 000 in your tax-free investment account, and you withdrew the full amount, your total remaining lifetime contribution is limited to R400 000.
Tax-free investment account were created to encourage saving and not as a retirement product, although you may use them to supplement your retirement savings. Bear in mind that the lifetime contribution limit of R500 000 may not be sufficient to cover your expenses upon retirement.
A tax-free investment account is an investment fund traded on the stock exchange, where assets such as shares, commodities, or bonds are held. A tax-free investment account’s attractiveness lies in its low costs, tax efficiency, and share-like features.
With this type of account, you have the choice of either making monthly contribution or a once-off lump sum. A tax-free investment account enables you to add monthly or occasional contributions of up to R36 000 per year.
You can invest whenever you like, and even choose a once-a-year lump sum if you prefer. This means you can reinvest your tax rebate or annual bonus if you’d like. Some providers may put a minimum limit on your investment for administrative purposes.
Yes, you can open a TFIA account in the name of your children. Money withdrawn can only be paid out into a bank account in their name. You will also need to be aware of donations tax, if applicable.
Yes, but transfers can only be carried out between service providers. You will not be able to switch to another financial institution by withdrawing your funds from your TFIA and putting them into a TFIA with a different provider – that would be classified as a new contribution. The Regulations define the following minimum requirements for a transfer between product providers to be deemed valid:
- A transfer certificate
- The number of days within which a transfer must be effected
- The type of information that must be passed on to the new product provider
Yes. There is no limit to the number of tax-free investment accounts you can have, but you must ensure the sum of your annual payments across all TFIAs doesn’t exceed the annual contribution limit, or you will have to pay a penalty tax.
