Stop throwing away free money and get yourself a tax-free savings account!

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. 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 SatrixStanlib, 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.

8 thoughts on “Stop throwing away free money and get yourself a tax-free savings account!”

  1. A 25% return?? Is that really what the ROI for an account like this is, year-on-year? I really doubt that, though I haven’t looked into this myself so I’m just spouting here.

    If it really is 25 then this account will outperform most good stock indices by more than double.

  2. Even 15% is a bit ambitious imho, would love to know which funds you believe will easily achieve that? (not being sarcastic, would love to get a hint as to where to put my R30k/yr for that return).

  3. You might not get 25%, Byron – although you might if you you’d invested with the DB USA Index X-Tracker, which over the last 3 years (annualized) delivered 31.74% return. Similarly, the Satrix FINI ETF delivered a 31.5% return over the last 1 year. Of course, over the long term, things are not quite as rosy. Usually, over 10 years, you’re looking at about 15-18%. Nevertheless, none of that really matters – Jason wasn’t trying to predict a figure of return – the point is that if it’s in the Tax-free Savings Account, you’re making whatever you would be if it weren’t, only you’re not paying the tax :)

  4. Just added threaded comments as well as the ability to subscribe to comments. I can see a small conversation going on here. :)

    And regarding the returns – what Andy said!

  5. If I remember correctly you can’t replace any funds you withdraw from the account so that is something to keep in mind.

    This type of account should only be used for long term savings.

    Also note you’ll be taxed on the money before you put it into the account.

    A Retirement Annuity will allow you to put away up to 15% of your annual income tax free so if you really want to save taxes an RA is a good option.(at least initially)

    For example:

    Salary of 100k per year
    Tax Free RA threshold 15% of 100k = 15k
    Taxable income after putting money in RA = 85k

    You then only end up paying income tax on the 85k(of course subject to other normal deductions like medical, travel, communication costs etc, all depending on your tax type, whether you’re a provisional payer, have a tax directive etc.)

    I think this should be your first step, maximise the amount you put in your RA to save upfront taxes. Remember earning on your RA will be taxed on maturity but at that age you benefit from a reduced income tax rate.

    Once you’ve hit your max limit for RA investment(annually) then consider the following.

    You should have short term savings for emergency liquidity.(if you get fired or your employer goes bankrupt)
    Medium term savings for if the shit hits the fan and you run out of your short term savings.
    Long term savings for capital growth and high interest, this is the save and forget about it money.

    Also always bear in mind that the higher your balance(and longer the term) the higher your interest rate so try not to split you cash, especially not your “children’s” money. You’ll be doing yourself and your child a disservice by putting money in separate accounts.

    Rather put all of your savings in one account and keep note of money allocated to each child(if you have more than one) in a spreadsheet. This way you’ll hit higher interest rate thresholds sooner and in the gander scheme of things compound interest will be epic.

    I’ve written a post about my take on this a while back:

    Please note this is my opinion. I highly recommend you chat to a tax accountant and/or a financial planner. An accountant might actually be better at this as most financial planners just want to sell you more products that earn them money.

    1. Thanks for the comment Nathan! Definitely some very valid points to consider.

      I think the most important thing for the majority out there is to not get caught up in too much of the details and start saving! There really are a bunch of options, which can lead to analysis paralysis.

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