Tax Free Savings Accounts

Back to Money advice
28 May 2019
They say the best things in life are free and thanks to National Treasury we can add another thing to that “freebee” list. As part of their goal to improve the poor savings culture in South Africa, National Treasury introduced a special savings product that is free from paying tax, known as a Tax-Free Savings Account (TFSA).

In a TFSA you don’t have to pay income tax, dividends tax or capital gains tax on the returns from these investments. 

Putting money in a TFSA is a great way to save for a goal, because your returns and any investment growth aren’t reduced by tax.

Important Things to Know

Before investing in a TFSA there are a few important things to consider:

  • You cannot add more than R33 000 in a tax year to a TFSA. A tax year runs from 1 March to 28/29 February every year.
  • Over your lifetime you are not allowed to contribute more than R500 000 to a TFSA. You can therefore contribute R33 000 per year for about 15 years before you reach your R500 000 lifetime limit.
  • Once you have reached your lifetime limit, you do not have to withdraw the money and you can leave the money in the account to grow even further. You just can’t add any more money.
  • You can make withdrawals as often as you like as there are no withdrawal limits, although this is not recommended. If you withdraw money from the TFSA you can never replace what you have withdrawn. If you contribute R33 000 and withdraw R10 000 in a tax year you cannot put the R10 000 back to top up to R33 000 again. This also applies to your lifetime limit. If you withdraw R10 000 in a year for example, effectively your lifetime limit is decreased by R10 000, from R500 000 to R490 000.
  • These limits apply across all TFSA investments that you might have, even with other providers.    If a person exceeds the contribution limits, there is a penalty of 40% of the excess amount that you will need to pay to the South African Revenue Services (SARS). Investors should therefore be careful when they have more than one TFSA.
  • Although the TFSA is called a “savings” account, it is not a savings account in the traditional sense of the word, like a bank account. You can also invest tax-free in investment funds such as unit trusts and exchange traded funds.
  • You can’t (yet) transfer between tax-free savings accounts. Therefore, you cannot take your tax-free account from one provider and transfer it to another, although treasury is working on making that possible.
Some additional things to consider when investing in a TFSA:
  • We don’t think it is a good idea to use a TFSA as an emergency fund. Emergencies by their very nature are unforeseen and you could potentially squander the tax advantage and life time limit of your TFSA through unplanned emergency withdrawals.  
  • If you are investing in a fixed deposit, money market fund or short-term deposit it would probably be best not to do so in a TFSA, especially if you don’t have any other large investments in bank accounts or money market funds. Investing in cash and money market funds already have some tax advantages of their own which you might forfeit by using a TFSA.
  • You can open a TFSA on behalf of your minor child. However, you cannot donate more than a R100 000 in a tax year or else you become liable to pay donations tax. So, if you have three children you could open three separate TFSA’s and deposit the maximum yearly amount in each without being liable to pay donations tax as your contributions are under the R100 000 limit (R33 000 x 3 = R99 000).It is also important to note that your child has the same lifetime limit of R500 000.  It is therefore important to refrain from unnecessary withdrawals as any withdrawals will have an effect on your child’s lifetime limit.
Professional Advice

Making investment decisions are not easy and the value of proper financial advice should not be underestimated, especially when it comes to making an informed decision before investing in a TFSA.

At OUTvest we understand the importance of the rules applicable to investing in a TFSA and, so we built a one-of-a-kind online TFSA indicator.

Our indicator considers your individual scenario and helps you decide whether investing in a TFSA is the best option based on your unique savings goals, shared with us, through our online digital advice system.

Make an informed decision before you invest in a TFSA. Saving is simple and even better now that you can do so tax free.  

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