The Fat Wallet Show with Kristia van Heerden

Podcast: How to use your tax-free account

In Latest, The Fat Wallet by Kristia van Heerden

Save Squack’s life!

While the term “tax-free savings account” makes it seem like it’s a savings product, you shouldn’t think of them as savings accounts at all. There’s nothing to be done about the confusing name, but this week we explain why we shouldn’t use them to save cash.

If you are under 65, the first R23,800 you earn in interest every year is exempt from tax. This is one of those little SARS gifts we really love. If your bank or savings vehicle offers you 6.75% in interest every year, you need R352,592 in cash before you start paying tax on your interest.

Since you’re limited to a R33,000 tax-free contribution every year, it will take 10 years’ worth of contributions before you become liable for tax on the interest.

In the case of share investments, you are liable for tax from the very first day. If you buy an ETF today and sell it tomorrow, you’ll have to pay tax on any profit you make right away – either in the form of income tax or capital gains. You also pay dividend withholding tax of 20% right from the first dividend.

In your lifetime your share investments will cost a lot more in tax than cash savings.


Clean swearing bleeped out show is below.


Richard

I’m 24 and maxing out my tax free savings account with FNB for the past two years.

I’m earning 6.75% interest

After listening to the podcast it seems like you guys favour tax free investment into an ETF where dividends are reinvested tax free.

What are the main advantages of tax free investing vs saving and would you recommend moving my current account into an investing platform?

I currently have an EasyEquities account, where I have my taxable investments.


Win of the week is Adam the actuary.

I’ve been listening since the start of the Fat Wallet Show when I was just a second year at university and now I am graduating from my actuarial sciences honours degree. This is in part to you guys.

  1. Thank you for helping me get my degree. Your simple explanations of financial concepts have helped me in a couple of courses and tests (why can’t you guys write textbooks??)
  2. Thank you for educating me. With your help, I have managed to support myself through university while building an emergency fund that has saved my ass in a couple of occasions!  
  3. Thank you for giving me confidence to stand up to my family to tell them that I am not going to be buying an apartment and that I am not getting myself into debt right out of university to buy a new car (I’m going to be driving my current one until I have to push it).
  4. Thank you for giving me a conscience. Your weekly chats about financial literacy and companies scamming their clients with unnecessary jargon and excessive fees have made me want to change the way insurance products are structured and made (Down with fees and nonsense).

You have provided me the knowledge to wrestle control over my finances; knowledge that I never got from my parents. You have created a money conscious 22 year old that is ready to go into the working world and use your teachings.

P.S. not all actuaries are boring


Stefan

I have a TFSA, a till death do us part ETF account, Till death do us part Share account, a share trading account and a derivative trading account.

The company I work for does not offer any company benefits with regards to retirement investing.

I was always under the impression that the only way you got a tax benefit for these is if it was part of your employment package and deducted from your income.

From recent shows it sounds like If I got a retirement annuity on my own I would still get a tax break.

Should I get something like this or just keep adding to the DIY account mentioned at the start of this mail?

How do I get the tax break if there is one and which products do you recommend?

Tax is the one area in my life that I am failing miserably in  and am pretty sure I am giving away a lot of free money due to my lack of knowledge.

Herman wrote an algorithm to work out the tipping point where the tax you pay in retirement would be more than the tax you save contributing towards your retirement. He will write an article on his findings for justonelap.com in the next few months.


Jan-Johan

I’m considering making some of my monthly contributions into global property.

I already have exposure in the local property market through the Proptrax 10 and Stanlib SA Property ETFs. My main reason for investing into property ETFs is the attractive yields.

If Bloomberg is to be believed each global ETFs offer the following gross yields: Coreshares – 4.02%; Sygnia – 1.19%; Stanlib – 6.09%. Based on this, and after reviewing the costs of each ETF, I’m more inclined toward the Stanlib ETF.

If I recall correctly you are invested in the Coreshares S&P Global property, is there anything specific than influenced your decision? I would really appreciate your input on my considerations.


Gert made Kay a tax calculator.

I was listening to your FWS #124 – Should we care about the bear?

Kay asked the question about what percentage should be put aside for personal income tax. I’m hoping she will find the graph below useful:

There seems to be a misconception that SARS’ income tax brackets are like treads on a stair and that R1.00 above a certain threshold would put you in a different tax “bracket” altogether to be taxed at a much higher rate. I’m no tax expert (yes, I’m a civil engineer), but if we use these tax tables published by SARS:

… and calculate the tax liability as a percentage, the graph would look like this:

The two lines are for persons under and over 65 years of age.

It’s not 100% accurate, I know, but it’s good enough for Kay to estimate her tax.

  1. The idea is to find your yearly taxable income (gross income, less allowable expenses) on the vertical (Y) axis. Assume you earn a taxable income of R 25,000.00 per month x 12 = R 300,000.00 per year, like you said in the show
  2. Find R 300,000.00 on the vertical axis and follow the line horizontally until you meet the curve for persons under 65 (black line)
  3. From that intersect, follow the vertical line down to find your effective tax rate. You might need a ruler for this.
  4. Your effective tax rate would be 16%.

Using the formula would give you an answer of R 62,332.00, or 16,09%. Close enough for a solution not requiring a calculator.

  1. You can see the difference in tax between those in retirement (over 65) and those still to retire. Now you can put a value to the phrase “lower tax bracket in retirement”. From the example above, a person over 65 would be taxed at a marginal rate of 13.52% as opposed to 16.09%. For the same income, a person over 65 would be paying ± R 7,700.00 (or ±16%) per year less than a person under 65.
  2. There is a third category, those over 75, but the graph becomes too complicated, so I left it out.
  3. There is not really a different tax “bracket” or table for the each of the age groups. SARS allows you a “primary”, “secondary” and “tertiary” rebate, depending on your age (<65, 65-75 and 75+), which is deducted from the tax liability after applying the formula
  4. I was surprised to learn that a person earning R 100,000.00 per year would pay R 3,933.00 in tax, or 3.93%, even though the tax table reads 18% of income up to ±R 200,000.00. This is because the primary rebate allowed by SARS is R 14,067.00. The calc would be R 100,000.00 x 18% = R 18,000.00. Less the primary rebate of R 14,067.00 = R 3,933.00.
  5. This is why people earning less than R 78,150.00 (the Tax Threshold) pay no tax. R 78,150.00 x 18% = R 14,067.00. Less the primary rebate of R 14,067.00 = no tax. Of course, if the formula results in a negative answer, SARS does not give you anything back.
  6. The secondary rebate for those 65-75 is R 21,780.00. The tertiary rebate (>75) is R 24,354.00
  7. It’s evident from the graph that our personal income tax is not really divided into “brackets” like “steps”, but a smooth curve with a gradually increasing slope. There is a “kink” in the graph at the R 195,850.00 mark where the 26% tier kicks in, but it is not nearly as pronounced as I thought it would be.
  8. It’s also a misconception that those earning over R 1,500,000.00 pays tax at a rate of 45%. True, the formula reads 45%, BUT the 45% only applies to the income EXCEEDING R 1,500,000.00. Do the calc and you’ll see a person earning R 1,800,00.00 after deductions, pays an effective rate of 36% or so.

Or you could just write a “black box” Excel formula or use an online calculator to spit out an answer: SA income tax calculator


Brian

What should one do when newer and better ETF products become available, particularly within the TFSA space? This is assuming that one’s investing methodology hasn’t changed.

Surely one would have to keep up to date with new products as they become available? Even a 0.1% reduction can make a difference over time.  

For example, when I started listening to your podcast, I started splitting my monthly allowance between Satrix40, Satrix World, and Satrix Emerging Markets. Now that the Ashburton 1200 ETF has arrived which seems to bundle the World and EM into one, what do you suggest?

Do I:

  • Stop contributing to the others and start to the Ashburton?
  • Sell the Satrix EM and World and put into Ashburton?
  • Continue my allocations as before?

Quinton

When you get closer to retirement I presume one moves the funds out of the investments and into something less aggressive.

Even if my Ahsburton 1200 had an annualised return of 15%, but the day before retirement the ZAR strengthens from R14 to the USD to say R7 to the USD, my portfolio takes a 50% knock.

My investment portfolio could be worth less than the investments I have been making.

I’ve done everything right, the portfolio has done excellent, its diversified, but the conversion rate has screwed me on 99 or am I missing something here?

How long before you retire do you evaluate the market and decide to move it to a safer investment?


Ryan

I have group death and disability insurance with my employer.

The disability benefit pays out 75% of your pensionable salary.

The only debt I have is my bond.

I worked hard in the last year to pay everything else off and I’m currently paying 80% more than the required amount into the bond.

I have no kids or other dependents, and no plans to have any.  

My wife brings in 22% of the household income and works from home, so she should be fine in the event of my death if she uses the life insurance payout of my employer to settle the bond and invests the rest in her TFSA account or RA.

Seeing that I am not going to leave my employer in the foreseeable future, am I wasting money by paying for Life, disability, income continuation (almost a quarter of what I currently earn) and severe illness cover from Discovery.

I hate how complicated they make their policies, and I am looking to cancel or move to a simpler product.  Any savings resulting from this change going into the bond.


Ian

I have a TFSA with Old Mutual & I want to move it now of course, obvious reasons.

I registered with EasyEquities and now I have to choose an ETF. I am a very passive investor. I want to choose an ETF & never change from option again. I just want to make my contributions & 15 years later want to see my millions……lol.

Can you please assist me in choosing a TFSA ETF that gives me good exposure to all markets & maximum returns in the long run, also paying dividends (will re-invest) & no surprise headaches. My wife also wants to open an account & wants to invest in same ETF that I choose.

Here are the things you should consider:

  • Asset class – equity vs property vs bonds/cash
  • Regional exposure
  • Sectors
  • Companies
  • Methodology – smart beta vs market cap weighted

Carl

I am considering moving my “young” portfolio from Old Mutual to EasyEquities due to cost.

I am looking through the cost profile of EasyEquities and saw that they charge a 1% additional transaction fee for recurring investments through debit orders.

If this is the case, is it not better to manually buy the share or ETF manually each month?

I had a look at the cost structure on the EE platform and the only debit order fee I could find was R0. http://resources.easyequities.co.za/EasyEquities_CostProfile.pdf


Dario

The idea is to have 50% weighting in property ETFs and 50% in “growth” ETF’s.

I’ll sell the growth ETFs when i’m close to retirement and have 100% in property ETFs for the dividend payouts.

I have a pension so I see my TFSA as an investing side hustle.

I want my property ETFs to be local because paying tax on foreign dividends seems to be counter intuitive for a tax free account. I want my growth ETFs to be well-diversified and to not pay dividends…

my thinking is that if the payout is dripped backed into the ETF then we save on some tax?

My “growth” stocks are:

– CoreShares Global DivTrax ETF

– SYGNIA ITRIX MSCI US (because ‘MERICA!)

I believe in my strategy…but not quite sold on the ETFs I’ve selected.

I don’t want to reshuffle my TFSA but luckily I’m still in the infancy of my investing career so if there were a time…it would be now.


Colin

I am looking at an S&P 500 fund to my TFSA, however, I am unsure which manager I should go with.

I know he deciding factor should be based on costs, however, I just need clarity if the TER is what your decision should be based on

If they quote a management fee under the TER, must this cost also be factored in?

Also, should factors like distribution frequency be considered (Satrix does not distribute, Coreshare & Sygnia distribute semi-annually),  different weightings in the various sectors and ETF size be taken into account when selecting the fund?


The Fat Wallet Show with Kristia van HeerdenThe Fat Wallet Show is a no-nonsense personal finance and investment podcast hosted by Kristia van Heerden and Simon Brown. Every week we answer questions by a growing audience of finance enthusiasts. Submit your pressing money and investment questions to ask@justonelap.com.

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