Tax Tuesday: TFSA 101

De Wet De VilliersLatest, Tax Tuesday

Tax-free savings accounts (TFSAs) were introduced in March 2015 as an incentive to encourage South African households to save for retirement. TFSAs allow you to invest in various investment products, most notably ETFs. The tax savings on these accounts will drastically increase the amount you have available at the end of your investment period, which is why they should form the cornerstone of any South African’s investment strategy.

Who can provide a TFSA?

TFSAs may only be provided by a licensed bank, long-term insurers, a manager of registered collective schemes (with certain exceptions), the national government, a mutual bank and a co-operative bank. Although it’s not a requirement that investors in TFSAs—individuals and deceased or insolvent estates of such individuals—are South African tax residents, the mandated FICA requirements may exclude certain individuals. This is an important consideration to keep in mind when you want to open a TFSA for yourself, somebody else or if you want to move abroad, but keep your TFSA open. As an investor, you must be able to meet the FICA requirements.

How much can I contribute to my TFSA?

For the first two years, the annual limit of TFSAs was capped at R30,000. In March 2017 the limit was increased to R33,000. The lifetime limit is currently set at R500,000. Returns on your investments will not count towards your annual or lifetime contribution limits. Any portion of your unused annual limit for the year is forfeited and is not carried over to the following year. This just means it will take longer than the current 15 years to max out your lifetime limit. You can register TFSAs with different providers, but the contribution limit across your TFSAs remains the same.

What happens if I exceed the limit?

TFSA regulations issued by SARS indicate that no product provider may accept any amount contributed in excess of the annual and/or lifetime limits. Product providers provide SARS twice a year with information pertaining to TFSAs (total contributions, withdrawals, transfers and returns on investment per tax year). Should you invest more than the annual or lifetime limit, a penalty of 40% of the excess amount is added to your normal tax payable.

What if I don’t like my current product provider or fund?

Since March 2018, investors have been allowed to transfer their TFSAs between providers or funds. It’s important to do a transfer as opposed to withdraw from the one provider/fund and reinvest in another. If you withdraw and reinvest it will count as part of your annual and lifetime limit.

What is the best use of a TFSA?

TFSAs are best suited for long-term investments due to the significant tax benefits on growth and the relatively low annual contribution cap. Nothing can be said at this stage about the lifetime limit as this will only be reached in approximately 2030 and might increase over the years. TFSAs can’t be used as transactional accounts, and debit or stop orders and ATM transactions aren’t possible from these accounts. Furthermore, only new accounts will qualify as TFSAs and therefore existing accounts may not be converted without incurring a tax liability.

Can I invest on behalf of my children?

Yes. The contributions will count toward the child’s annual or lifetime limits. There have been various discussions on the Fat Wallet Show around whether or not this is a good idea given different scenarios. Should you wish to understand a bit more, listen to shows 128 and 140. (Bear in mind that investing on behalf of your child may give rise to adverse donations tax consequences if you exceed your annual donations tax exemption of R100 000).

So, what are the tax benefits of a TFSA?

You don’t pay any income tax (on REIT investments or when you trade your TFSA), dividends tax or capital gains tax on the returns from your TFSA investments.

If you are interested in seeing the impact a TFSA can have on your post-retirement income after tax, have a look at RetireLab. RetireLab is an intelligent retirement planning tool that helps you decide how to split your retirement savings between different retirement savings instruments such as TFSAs, RAs, and normal ETF-type investments to maximise your post-retirement income after tax.

Being tax efficient is an important part of great financial management. In this blog, a group of South African tax experts share their tips and explanations on tax issues. Learn everything you need to know about tax, from deductions you never knew about to retirement savings and capital gains. The first Tuesday of every month is Tax Tuesday. Don’t miss it!

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