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Unpacking TAX-FREE SAVINGS Accounts (TFSAs)

Learn How To Utilize This Vehicle To Its Maximum Potential

Author

MoneyMoves
July 12, 2024

What is a TFSA?

A Tax-Free Savings Account (TFSA) is an investment vehicle offered in South Africa that allows you to grow your investment without paying any taxes on the gains. No brainer? No brainer!

Before we break it down: The full 10min TFSA episode is live on YouTube! You’ll love it, we promise. Check it out here:

Savings or Investment Account?

A TFSA is actually an investment account, meaning you can invest in many different asset classes, such as Cash and Bank Accounts (there’s the “savings account” part you were looking for😉), Bonds, Property funds, and Stocks.

Types of taxes

What taxes are you saving on?

  1. Interest Tax from interest on bank deposits and bond investments.

  2. Dividend Tax from investing in company shares.

  3. Capital Gains Tax from buying low and selling high.

Contribution rules

Contribution limits

  • R36,000 annually (or R3,000 per month) and

  • R500,000 over an investor’s lifetime.

If you max it out every year, it takes roughly 14.5 years to reach the R500,000 lifetime limit.

Unutilized contributions

Contribution limits do not roll over to the next year. For example, if you contributed only R30,000 this year (R6,000 shy of the total allowance), you may not contribute R42,000 (R36,000 + this year’s remaining R6,000) as part of next year’s allowance. The limit resets every tax year (28 Feb).

Multiple TFSAs

You may have more than one TFSA account, however, the combined total contributions are still limited to R36,000 per year. For example, invest R20,000 (Allan Gray), R10,000 (PSG) and R6,000 (Sygnia). Just stick to the magic number:

36ssssssssssssssssss 😂🍅⬇️

Over-contribution penalty

If you exceed the annual and lifetime limits, SARS actions a 40% penalty tax on the excess contributions. For example, if you invest R46,000 this year (as opposed to R36,000 which is the limit), the excess R10,000 contribution will be penalized at 40%. (R10,000 x 40% = R4,000 owed to SARS).

Growth within the TFSA part of the R36,000?

Cash flows generated within the fund do not affect the annual or lifetime limits. For example, invest R30,000 for the year and receive dividends of R2,000. The total contribution remains at R30,000 as you may thus still contribute R6,000 for the year.

Withdrawal Rules

Unlike a retirement annuity (RA) or pension fund, you may withdraw any available amount in your TFSA at any time. But, trust us, you don't actually want to! Here’s why:

Tax-free benefits are only realized if the capital is left to compound for as long as possible – we are not talking months or years, but rather decades. TFSAs are long-term investment vehicles and should never be used as savings, emergency funds, or short-medium term investments.

Crunching the numbers

If you contribute R36,000 per year (R3 000 p.m.), you will reach the R500,000 lifetime contribution limit after roughly 14.5 years.

If we work with average stock market returns, your total TFSA value:

  • After 14.5 years (growth included) = R1,050,000.

  • Leave it untouched for 10 years = R2,720,000

  • Leave it untouched for 20 years = R7,064,000

  • Leave it untouched for 30 years = R18,320,000.

Nest egg here we come!

Episodes coming your way 🎬

So, what are we covering? Well, depends on who’s asking (literally!). Our aim is simple: Ask your questions, and we’ll cover them as best we can: to inform, educate, and entertain.

Season1 Topics

1. What is a TFSA and how can I use it to my advantage?

2. Can you explain the different types of investments?

3. I hear people are making money with Arbitrage. What is it?

4. Debt: Is it good or bad?

5. Life insurance - should I get it and why?

6. How big of a deal is compound interest?

7. Where should I invest my money?

8. Should I go the DIY route or use a financial advisor?

Who are we? 😎

The Knowledge Chest

Paul holds an Honours degree in Financial Analysis from Stellenbosch University. With a career spanning investing, accounting, and education, Paul is committed to becoming the best financial planner in South Africa. Despite his many accolades, Paul insists that his greatest achievement is that he is dating a yoga teacher.

The Anchor

Ingrid holds a BA Honours in Journalism from Stellenbosch University. She is a self-diagnosed workaholic, excelling in various roles such as marketing, publicity, social media, and strategic partnerships. Ingrid's commitment to promoting wellness and balance extends beyond her professional endeavours, as she is also an avid yoga teacher.

The Magic Maker

Alwin holds a BCom in Business Management from Stellenbosch University. Alwin has a unique ability to make things happen - if you need something done, he’s your man! Alwin currently works in the alumni office at the university, connecting past and present Maties and ensuring a brighter future for the youth.

Connect with us 📲

Feel free to reach out if you want to chat about finance (or even just chat!). We’re keen to get to know the community.

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