In honour of the end of the tax year, we’re making the best of the tax benefits linked to retirement savings. Let’s take a look at the following two tax events within the retirement journey:
- Tax pre-retirement
- Tax post-retirement
As the last month of the tax year, February is your last chance to top up your retirement annuity (RA) before the new tax year kicks off in March. This allows you to make the best of the tax relief granted by SARS, which essentially enables you to lower your income tax bracket by doing something you should be doing anyway: saving for retirement.
The same goes for your tax-free savings account (TFSA). If you’re using your TFSA as your primary retirement savings vehicle, and you haven’t yet reached your cap of R33,000 for this tax year, try and invest as much as possible before 29 February 2020.
This is especially important if you’re aware of any big ships that might be coming in during the 2020 – 2021 tax year, because if you exceed the maximum allowable TFSA contribution allocation, 40% of the excess amount will be taxed. This rule doesn’t apply to your RA – should you exceed the 27.5% of your taxable income limit, the excess contribution will just roll over to the following tax year.
If you invest in more than one RA and TFSA, the contribution caps apply to your entire RA and entire TFSA portfolio during the tax year. In other words, to make the most of the tax benefits granted by SARS, the sum total of your RA contributions shouldn’t exceed 27.5% of your taxable income (capped at R350,000), and the sum total of your TFSA contribution shouldn’t exceed R33,000.
If you opted to receive a cash lump sum upon retirement, the first R500,000 of the lump sum remains tax-free. It’s critical to remember that SARS takes all previous taxable withdrawals and retirement lump sums into account when issuing a tax directive*. This includes severance benefits received. Should you have received previous lump sum payouts, these payouts will form part of the R500,000 tax-free benefit. Please keep this in mind when requesting a lump sum payout from your fund manager, as this instruction cannot be reversed.
Your retirement income
If your retirement income is less than the amounts specified below, you are exempted from paying tax:
- If you are younger than 65: R78,150 per annum
- If you are between 65 – 75: R121,000 per annum
- If you are 75 or older: R135,300 per annum
It’s a good idea to use your TFSA to supplement your retirement income. This will help you stay below the taxable limits.
*A tax directive is an instruction issued by SARS, stipulating that the fund manager needs to apply a different tax rate to a payout.
Saving for retirement is the biggest investment most of us will ever make. Sadly, it can also be very complicated. In this monthly blog, we try to answer some of the retirement questions we hear most often, ranging from which products are best suited to different circumstances to efficient tax treatments. Words by Carina Jooste.