If you are investing for the long term, or if you are already paying income or capital gains tax on your existing investments, you can invest in unit trusts via our tax-free investment account and benefit from tax savings on your investment return. It is also a useful product for estate planning purposes. The maximum amount you can put into your account per tax year is currently R 36 000, with a lifetime maximum of R 500 000.
Why is a TFSA so popular?
1. Tax benefits
The interest, capital gains and dividends you earn are completely tax free.
2. Estate planning
Your investment can be paid to your beneficiaries immediately and there are no executor fees.
3. You only need R500 a month
To benefit from our investment expertise, you need a minimum of R500 a month. If you don’t want to invest monthly, you can start with a single lump sum of R20 000.
But is it for me?
Reasons a tax-free investment may not be suitable for you
- If you are not already paying tax on your investments, or you are not investing for the long term, the tax-free investment account may not provide significant tax benefits.
- You will pay a tax penalty of 40% of any amount you invest above the maximum of R 36 000 per tax year and R 500 000 over your lifetime. This includes any tax-free investments you may have at different companies. It is your responsibility to ensure that you do not invest more than this maximum, across all product providers.
Suitable for you if
- You are looking for steady, long-term capital growth
- You are ideally investing for at least three years
- You are comfortable with taking on some risk of market fluctuation and potential capital loss
Frequently asked questions about tax free savings accounts.
What is a Tax-Free Investment Account?
Tax-Free Investment Account allows you to earn a return from the unit trusts of your choice without being taxed on the income or capital gain. You can invest up to R36 000 per year and R500 000 over your lifetime.
What are the tax savings and how do these affect my return?
In a basic unit trust investment (i.e. not a tax-free investment account), different types of tax may apply, depending on the underlying investments:
Dividend withholding tax (DWT)
- 20% of any dividends is usually deducted within the unit trust directly from the dividend amount and immediately decreases the return the unit trust earns.
- No DWT is deducted in a tax-free investment account.
Income and capital gains tax
- Any interest income and capital gains must be declared to SARS and if they are above the tax thresholds (the first R23 800 of interest income and R40 000 of capital gains tax for people under 65) you will be liable for tax on your return calculated according to your marginal income tax rate.
- The return you earn from your unit trust would be indirectly lowered through your increased tax liability.
- Although there will be no immediate effect on your return, if you are already paying tax on your investment return (i.e. it is above the thresholds), you will benefit from income and capital gains tax savings in a tax-free investment account when you are assessed.
How do I make sure that I don’t go over the maximum investment limit?
It is your responsibility to make sure that you don’t go over the limits of R36 000 per tax year and R500 000 over your lifetime. These limits apply to the total of all your tax-free investments across different companies. Keep in mind that having more than one tax-free investment account makes it harder to keep track of your investments.
You can check your total contributions to your Tax-Free Investment per year, or since the start of your investment, whenever you need to via your secure online account. You could also consider keeping a record of your contributions so that you can check how much you have contributed before you make any additional investments.
What will happen if I go over the maximum investment limit?
You will pay a penalty to SARS of 40% of any amount you invest above the maximum. For example, if you invest R38 000, which exceeds the annual limit by R2 000, you will need to pay R800 (40% of the R2 000 excess) to SARS when you complete your tax assessment.
Can I withdraw from my investment if I need to?
Yes. You can make a withdrawal from your investment at any time, via your secure online account which you will receive when you start your investment. There are no penalties for withdrawing and it takes five to six business days for the money to reflect in your bank account. However, withdrawals do not affect how much you are allowed to contribute – you can’t replace any amount you withdraw.
Will I pay penalties if I want to change or cancel my investment?
No. There are no penalties for withdrawing from your investment and you can change, stop and restart your debit order whenever you need to, at no extra cost.
Are there any other investments that offer similar tax savings?
A retirement annuity (RA) is also tax free, and in addition, any investments you make into an RA are tax deductible (within certain limits), which means that they reduce your taxable income for the year. However, when you invest in an RA you cannot access your money until you leave the fund any time after you reach 55 years of age.
If you are taxed at more than 30%, an endowment offers tax savings, as the income tax rate in an endowment is fixed at 30%. However, there are restrictions on both your investments into an endowment and the withdrawals you may make.
Can I open this investment for my child?
Yes. You can open this investment in your name, or in your child’s name. If the investment is in your own name, it belongs to you for its duration and you will need to declare contributions, withdrawals, transfers, net returns, dividends and capital gain/loss on your tax return.
You can invest on behalf of your children (the amount donated above R100 000 will be subject to donations tax in your hands), but the investment must not be completed in your tax return; it needs to be completed in your child’s tax return, but only if they earn other income in their own right, or have deductions to claim, that makes it necessary for them to submit a tax return. Your child takes control of the investment at the age of 18.