There are endless stories making the rounds online about “tax-free savings accounts”, but even with this glut of information do you really know more about tax free investing? The guys at 1Life teamed up with us to give us some pointers on this.
You might be asking yourself what the opportunities, benefits, pitfalls and drawbacks are to tax-free saving. I was very curious so we did a little research for some much needed clarity.
Here are the four tax free investing tips you need to know minus the investment technical terms.
1. They are not only savings accounts
Thankfully, there is no one size fits all tax-free savings account. Most investment companies have launched new tax-free investment products and others are making their existing products tax-free for the first R30 000 you invest each year. This means that you have access to a multitude of investment vehicles, suited to your risk appetite, where you can invest for the long term and earn decent returns, tax-free!
2. If you withdraw your money, you’ve lost that portion of your investment total
Tax-free savings accounts should be viewed as long-term investments, do not think of withdrawing or cashing out any money from the account, because once that money is removed it can never be re-invested.
To illustrate, if you’ve reached your R30 000 annual investment limit, and you draw R10 000 to splurge on the latest gadget that you feel you’ve earned, you can’t put that R10 000 back into the account and still get your tax-free benefit.
This is because there is a R30 000 annual and a R500 000 lifetime limit on the amount of money you can invest, so if you withdraw from your tax-free savings account, you can’t re-invest in it and hope to reap the tax benefit again.
Also quite important to remember: Any money deposited over and above the annual limit will be taxed at 40%. That’s the capital that will be taxed, not just the growth, so be sure to stay in your financial lane. You also can’t beat the system by investing your annual limit twice over in two different companies’ tax-free investments, just in case you were thinking about it.
3. You can invest on behalf of your children for a greater total, but consider what it’s costing them
Since you can invest in the names of your children, a family of four could invest up to R120 000 a year, which becomes a very appealing investment option indeed. According to Stuart Kantor, an independent financial advisor at Kanan Wealth, this makes tax-free savings accounts a great vehicle for an education fund, as most education funds are endowment policies, which are taxed at 30% during the term of the investment. It’s also a good way to provide your children with a tax-free lump-sum to get them started in life when they turn 18.
However, it is important to bear in mind that while you are benefiting from the tax-free structure in your children’s names, you are eating into their R500 000 lifetime limit.
4. You probably weren’t paying that much tax anyway…
Currently, the first R23 800 of interest that you earn on savings in a normal savings account is tax-free. The first R30 000 of normal investment growth is also free from capital gains tax. This means that you will have to invest for a long time before you come close to realizing this kind of growth. For example, if we assume an investment return of 10%, it will take around six years of investing R30 000 a year before you are earning more than R23 800 in interest annually. It is only after you have passed these thresholds that you are getting the benefit from a tax-free savings account.
So where to from here?
It boils down to this: Tax-free savings accounts are a fantastic long-term investment product. Do not use them for your short term savings, do not use them for your emergency fund, do not replace your retirement annuity and do not go into debt to invest in them! However, once you are comfortable that these other aspects of your financial planning are in order, they represent a very attractive way to achieve tax-free growth on the first R30 000 that you invest annually.
Happy investing! And remember to check out 1Life for more.
This post is sponsored by 1Life Insurance to educate on you on South African tax and investments. Visit them to get reliable information on life insurance online and get a quote for Life Cover online.
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