A Fin24 reader withdrew a total of around R40 000 from his tax-free savings account. He wants to know if this affects how much he will be allowed to save in the future. He writes:
A few years ago, I opened a tax-free savings account where I saved money for a few years. As this type of account is relatively new in SA, I didn't know much about it other than that no tax is paid, provided specific requirements are met.
On more than one occasion, I withdrew money totalling about R40 000. I am sure this was not a wise thing to do. I'd like to know: does this mean, from now on, I will only be allowed to save up to R460 000, since the cap is R500 000? And if this is the case, is there perhaps a database or something where can I see how much I am still allowed to save, since I don't know the exact amount I have already withdrawn?
Andre Tuck, Senior Investment Consultant at 10X Investments, responds:
Tax-free savings accounts currently have a life-time contribution limit of R500 000. The amount you can still contribute, therefore, depends on how much you have already contributed. Withdrawals cannot be replaced. The annual contribution limit presently is R36 000. Your TFSA provider is not allowed to accept contributions above the annual limit. If you do make excess contributions in any one year, these will immediately be taxed at 40%.
The Receiver of Revenue keeps a record of how much you have contributed to ensure you don’t exceed your lifetime limit. You need to request the relevant statements from your TFSA provider to see how much you have contributed so far.
The TFSA is a tax-exempt account. You don’t pay tax on your investment returns (interest, dividends and capital gains) and your withdrawals are also not taxed. There is, however, no tax deduction on your contribution unlike, say, for a retirement annuity.
The TFSA was designed to encourage discretionary savings to help individuals avoid taking on debt in a financial emergency or, worse, still, raid their retirement savings.
To extract maximum utility, it is best to max out your lifetime contributions and then let the money grow for as many years as possible. Given the present annual tax exemptions on interest income (R23 800 pa) and on capital gains (R40 000), the TFSA offers little value if you intend to use it as a short-term savings vehicle only, and you have no other discretionary savings. You do save the 20% withholding tax on any company dividends, though.
However, if you leave your money in the TFSA for many years (ideally decades), you can build a large nest egg that you can then draw from as you choose, wholly exempt from tax or annuitisation requirements.
There are no prudential limits on your investments, as is the case with an RA. So, you can invest all your contributions in the share market (a general equity unit trust fund, for example) for maximum long-term growth. However, the regulator does not want savers to speculate (and potentially score a huge windfall that will be tax exempt), so there are some restrictions in terms of your exposure to individual securities (typically not more than 10% of your balance may be invested in a single share, for example).
A frequently asked question is whether it makes more sense to invest in a TFSA or a retirement fund vehicle, such as an RA. Both have advantages and disadvantages, and the answer depends very much on your specific circumstances and financial needs, your age, your tax bracket, and your time horizon. We would have to do a full financial needs analysis to answer that question. But, ideally, you will invest in both, because saving through a TFSA alone is unlikely to provide with sufficient funds to finance your retirement.
*Questions may be edited for brevity and clarity.
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