Investing tax-free

Kristia van Heerden Latest, OUTstanding

You don’t have any investments. Maybe you haven’t even done a tax return. Why do we insist on talking about tax when all you want to know is how to invest your money?

The thing is, investments have an impact on your taxes (and vice versa) from the very first day. Even if you’re not regularly doing your tax returns, taxes are going to affect how much money you make in a very big way. Like, millions big.

Last week we explained that investment income is liable for either capital gains tax, dividend withholding tax or income tax. You might be among those who aren’t quite keen on paying 20% of your income to the government. Welcome! You are among friends.

You’ll be happy to learn there are tax-free investment havens called tax-free savings accounts (also called tax-free investment accounts, tax-free accounts or TFSAs) where you don’t have to.

Tax-free, like how?

These accounts all start with “tax-free” because they are literally free of tax. You pay no dividends tax, no income tax and no capital gains on your investments*. If you manage to stay invested for a 25-year period, the tax saving amounts to more than R2 million. Yes, million.

Is it like a savings account?

While you can open a tax-free savings account to save cash, that’s like using a butcher’s knife to slice a carrot. It can be done, but why would you? Cash savings can only earn interest. You need to have a lot of cash (over R300,000, to be exact) before you pay tax on the interest. As we explained in this article, cash savings are very lazy. Over time, they don’t work as hard for you as investments do.

The tax benefits really kick in when you start investing in the stock market. You can buy collections of shares in the form of ETFs and unit trusts. By investing in a tax-free account, you get the money from share prices rising and dividend income just like you would normally. However, from day one you would earn 20% more dividends in your tax-free account than in your normal share investing account. Over a lifetime, that adds up to a lot of money.

That’s not even the best part. As we explained last week, selling shares at a profit can easily push you into a higher tax bracket. You don’t only have to pay tax on the profits you made, you have to pay more tax on everything. However, the profits you make in a tax-free account all go straight into your pocket. No tax on the profit, no increased income tax rate, just sweet, sweet cash.

Where do I get one?

Most banks and stockbrokers offer tax-free savings accounts. When you select one, make sure you get one that allows you to buy shares, not just invest cash. Also be careful of paying high fees. Over time, the wrong type of fee can undo all the hard tax savings you’ve done in that account.

What do I buy?

This is where it gets tricky. If you’re new to the investment world, the idea of an ETF or unit trust is probably still somewhat overwhelming. The OUTvest robo service is designed to help you identify which investment is best for you within a tax-free account.  In the video below Simon explains exactly how these accounts work, which ETFs you can buy and which ETFs he likes best for this type of account.


*You do, however, pay VAT. Guess we can’t win ‘em all.

OUTstanding Money blog

Being outstanding with your money doesn’t have to be hard. This series of articles will give you all the tools you need to get your house in order to start investing.

This series of articles was sponsored by OUTvest, and written by Just One Lap in 2018.  It’s timeless wisdom that needs to be out there – in public spaces where it can feed into ongoing discussions about long term financial wellness. We are republishing this series to make Fridays outstanding (but you’re welcome to read ahead).