Tax-free investments – What they are and why everyone with any savings should have one
With our 2024 tax year almost at a close, it is still not too late to make the most of the tax-free investment annual threshold available to all individuals. Over the last few days, so many clients have asked us what a tax-free investment (also known as a TFI) is and how it works so we thought it would be useful to do a quick post on this. It’s a longer read than usual, but I promise it is worth the extra few minutes of your time!
In every individual’s personal finance space, the ultimate financial goal is to maximise returns whilst minimising the associated tax implications. This is where tax-free investment accounts come in as an easily obtainable strategy available to all individuals.
So, what is the tax-free investment account all about and how does it all work? In summary, SARS allow all individuals to set aside a maximum of R36 000 each year (the current allowable amount) into a tax-free investment account. The TFI account needs to be a specially classified account which (almost!) all financial institutions offer. These accounts are so much more than just a savings account and can really go a long way to assisting individuals to save in the most tax efficient way.
Some examples of how these accounts can be structured:
- A money market based account,
- Fixed-term bank account,
- A unit trust investment,
- A JSE-listed exchange-traded fund
So, what is the benefit?
The returns (or earnings) on all amounts invested in a tax-free investment account are not subject to income tax, dividends tax or capital gains tax. You can therefore enjoy the benefit of the growth of your investment without worrying about any tax implication when submitting your income tax return each year. Earnings without tax is a win for anyone, right?!
What is the annual limit?
The annual limit for the 2024 tax year is R36 000 for the year. This is therefore the maximum you can invest in a TFI for the period 1 March 2023 to 29 February 2024. It is also important to note that investing more than the annual limit in any tax year will result in hefty penalties being imposed by SARS.
The penalty is 40% of the excess over the R36 000 limit, and this is added to your tax payable amount due to SARS for that year. As an example, if you invested R40 000 in a TFI for the 2024 tax year, you will have a penalty of 40% x R4 000 = R1 600. SARS will add R1 600 on to your income tax due for the 2024 tax year. Never invest more than your annual limit!
Is there a lifetime limit?
Yes there is. The lifetime limit is R500 000 in contributions over any person’s lifetime. It is important to note that this lifetime limit only applies to the actual contributions made each year (ie: the amounts you pay into the investment account). Any returns which are capitalised over the investment lifetime will not form part of this lifetime limit calculation so your growth in the investment (which you can leave in the investment and enjoy the compounding impact of this) is not included in the lifetime limit calculation.
Can I open a TFI for my minor child?
Yes, you absolutely can! Parents can invest on behalf of their minor children. The minor child will use his/her own annual or lifetime limits which means parents are able to start saving for their children in a tax efficient way. A great idea is to open an account for your child and to start saving from as young as possible, this way your child gets to enjoy maximum benefit on the growth of the investment over their lifetime.
Can I draw down on my TFI account?
Yes, you most certainly can! A point to note though is that where a person withdraws the return on investment and then afterwards invests that amount in the same (or another) tax-free investment account, the amount of the re-investment is considered a new contribution and impacts on both the annual and lifetime limits for the individual.
Can I make a monthly contribution or does it have to be a lump sum?
You can make a monthly contribution to a TFI, or you can make a lump sum contribution once a year. Whatever works best for your cash flow. As long as you are within your annual and lifetime limits, you can decide how you contribute based on what best suits your needs and cash flow.
So what are you waiting for?! As you can see from the above, a tax-free investment account is a wonderful tool to save and grow your money, tax free. This is a really easy to use (and very accessible tool) to harness long-term wealth accumulation. Whether you are saving for retirement, for education expenses or any long-term reason, the compounding effect of a tax-free investment account can exponentially enhance your wealth over an extended period of time.
It isn’t too late to open an account and make your investment for the 2024 tax year. Reach out to your bank, your investment broker or even to your accountant to see who they would recommend you chat to. If you are a client of ours or you would like to find out about some options which are available in the market, reach out as soon as possible and we will gladly point you in the right direction.
You are welcome to email us on info@la-fin.co.za if you aren’t a client of ours and we will send you the details of who you can contact to assist. Most financial institutions are giving their clients until 20 February 2024 to start the process to invest in a TFI for this year, so you have a few days to action this.
Yours in simplifying finance (and optimising tax!),
