We have all complained over the past few years about corruption, high taxes, e-tolls, the list goes on. Surprise surprise that our government have actually done some (good) work recently though by creating something every South African must take advantage of and that is…
The Tax-free savings account!
You might have heard of it on the radio and seen flyers and newsletters from your bank about it, but you haven’t really taken proper notice. Well I’m going to tell you that you NEED to get onto this today. Why? Because you are throwing away FREE MONEY!
Free money Jason? How is that even possible living in South Africa paying tax on every direction we turn here?
It’s pretty simple. The government knows South African’s don’t save enough. The problem is there is no incentive for us to save because the day we do withdraw that money from our investments, the tax-man puts his hand into our money bag to take his portion for Nkandla’s fire pool. They have realised that when everyone starts retiring and stops paying taxes, there will be a massive number of retired elderly folk that will want hand-outs from government and that is a big no-no as there won’t be any money to then top-up that fire pool.
That’s where your tax-free savings account comes in handy. It really is tax-free! No income tax, no capital gains tax, no dividend withholdings tax, no nothing tax!
If you stick to the following 2 rules of the tax-free savings account, you’ll have the pleasure of sticking a big middle-finger to government when withdrawing your hard-earned savings.
So what are the 2 rules?
Rule 1: You can only invest R30 000 a year into your tax-free savings account
Rule 2: Your overall life-time investment into the tax-free savings account is R500 000.
What happens if I break one of these rules?
Mr. tax-man will take a 41% cut of anything you invest over those amounts. Eina! (The tax-free savings accounts will make sure you don’t break these rules, so there isn’t anything to worry about really.)
Here is an example of what you could save using a tax-free savings account.
James invests R2500 a month for 16 years and 8 months. (That’s R30k a year and R500 000 in lifetime savings). If his investment earned 25% per annum for those 16 years, and he cashes in during year 17, he would receive a fat cheque for R5 736 108! He also saves R828 765 in tax that normally would have gone to Nkandla’s fire pool, but not with a tax-free savings account.
Over R800k in free money people!
- James saved R500k of his hard-earned cash
- James would receive R5 736 108 (assuming 25% growth p.a.) after 17 years
- James would NOT be paying a tax bill of R828 765 (That would have been more than his initial investment!)
Ok, you have my attention and I want in! Where do I sign up?
All the banks and “authorised financial services providers” have tax-free savings account options. Another thing that is really great about these tax-free savings accounts is you can also invest in ETFs (Exchange Traded Funds – think Satrix, Top 40 JSE listed companies etc. JSE.co.za has a great breakdown of all the ETFs you can invest in with a tax-free savings account) which, over the long-term, will outperform any of the bank’s “savings” accounts.
My suggestion is do a little research and stay away from the big banks. No one has ever become rich by saving their money in a bank.
Personally, I’ve opened an account with Emperor Asset Management but take a look at Satrix, Stanlib, Momentum or Sygnia for alternative options to the money grabbing banks.
Another tip is if you have less than R30k currently invested in an ETF that is covered by the tax-free savings plan, cancel that investment and get that money back into the fund using the tax-free savings account. I opened an account with Satrix for my 1 year old daughter and have just recently cancelled it to move the money into a tax-free savings account and back into the very same ETF. She can thank me later. :)
Opening a tax-free savings account is a no-brainer for your kids as well as anyone looking to save over the long-term – 10+ years.
“The best time to plant a tree was 20 years ago. The second best time is now.” – Chinese Proverb
Disclaimer: I’m not a financial advisor, so please get advice from someone that is, before investing your hard-earned money.