Tax free savings explained

Johannesburg - It is important to note that performance fees and savings products that can be used as transactional accounts are not allowed for tax free savings accounts (TFSA), cautions Gerald Mwandiambira, a strategist of the South African Savings Institute (Sasi).

Treasury is not allowing the conversion of an existing savings account into a TFSA, it needs to be a new account.

The new tax free savings accounts (TFSA) introduced by the government in 2015 are part of non-retirement savings and help to maximise tax relief, explains Mwandiambira.

He offers insights on this new savings vehicle, introduced as an initiative to encourage a savings culture.

All proceeds, which include interest income, capital gains and dividends from these accounts, are tax free. Individuals are allowed to open two tax exempt savings accounts per year. These accounts can invest in equities, fixed income accounts or both.

Tax free savings will significantly increase the returns for individuals, according to Mwandiambira.

There is a cap on the amount in that the total contribution that will qualify for tax exemption is R30 000 per annum, up to a maximum of R500 000 per lifetime.

The account balance, including interest, can, however, exceed R500 000 in a lifetime.

"I would recommend that savers invest the maximum amount permissible every year for at least sixteen and a half years. Allow compounding to happen and watch your money grow," says Mwandiambira.

TFSAs can be issued by banks, long-term insurers, managers responsible for collective investment schemes, government, mutual banks and cooperative banks.
 
"It is important to select a TFSA with the lowest possible fee charges. Banks add charges that eat into your savings, so make sure to shop around for the best possible option, he said.
 
"TFSAs make excellent savings vehicles for education and I would advise parents to open an account in the name of a child as soon as possible after birth. A family of four can in effect save up to R120 000 a year in tax-free savings."
 
Young people starting to save may also find such accounts useful for long term savings, in his view.

For example, if a 25-year-old invested R30 000 each year in an interest-bearing bank account, by the age of 65 they would have just more than R1.5m after tax. In comparison, a tax-free savings account with the same interest rate would be worth R2.7milion, because no tax is payable.

"Although these accounts will certainly assist savers who have a habit of saving already, they cannot however change attitudes toward saving. It is important to make a decision to save for yourself, save for your children and save for the future," says Mwandiambira.

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