Should You Get a Tax Free Savings Account?

An investment or savings account that you don’t pay tax sounds too good to be true. But what if it was true? What if you could invest, make profits and not worry about the taxes? Is there a way to do this in South Africa?

The Tax Free Savings Account is a scheme started by parliament that allows South Africans to invest a specific amount of money Tax Free in funds with certain requirements. This means any dividends, capital gains, interest and income taxes earned within the tax free account is not taxable. Over time, this can add up to a huge saving!

But how do these accounts work and what are the limits?

What are the restrictions on a Tax Free Savings Account?

As with all tax benefits/ reliefs, there are always restrictions that do put some limits on what you can and can’t do in these schemes. These limits are often set to ensure the systems are not taken advantage of.

Here are a few things to take note of in a Tax Free Account:

  • Your Maximum Yearly Contribution is R36 000 – This is the maximum amount of money you can contribute every year.
  • Your Maximum Lifetime Contribution is R500 000 – This is the maximum you can contribute over a lifetime, obviously limited to R36 000 a year.
  • If you Take Money Out you Can’t Add it Back – when you take money out of a tax-free account, it’s out. When you add it back in it counts towards your yearly and lifetime contribution.
  • You Can’t Invest Directly in Companies – TFSA’s limit you to only investing in ETFs, Unit trusts and savings accounts that pass specific criteria. Your financial advisor and investment provider will be able to assist and advice you.

5 Ways to Maximize the Benefits from your Tax Free Investment

Now that you know what a Tax Free Investment is, how do you maximize your TFSA over the long term? This is the questions many people are asking. While everyone’s situation is different, here are a few things to keep in mind:

  1. Set Goals – As with all investments, it is a good idea to sit down and plan out your goals for the investment. Why are you investing, until when, and what level of risk? These are all questions to ask yourself.
  2. Think Long Term – Because of the limitations and tax benefits, a TFSA makes sense long term. So look at your Tax Free Investment as a long term investment.
  3. Don’t Withdraw Too Early – Because of the limits you have withdrawing and contributing, you need to be careful when you withdraw from the fund.
  4. Setup Automated Payments – As with all investments, setting up automated payments into your Tax Free Savings Account can make it easier and more consistent for you.
  5. Choose Your Provider Carefully – Because of the limitations on withdrawing and contributing, you can’t just move providers as easily. This means that you must consider your provider carefully to see that they are the best place to save/invest for your needs.

A Tax Free Savings Account or Tax Free Investment is a great way to save money on taxes over the long term. The scheme is a great way to save and invest for many South Africans. Do some research or speak to your financial advisor about the best Tax Free Savings Account for you!

Read our blog about Easy Equities and their TFSA!