Considering a tax free savings account?Date posted: 25.03.2015 | Author: Harry Bovensmann
Many people would like to know where they should invest their money to benefit from the TSA and are wondering if they should sell existing investments so that they can transfer their money into a TSA.
As a reminder, tax-free savings accounts are savings products on which no income tax, capital gains tax or dividend withholdings tax will be charged. Most unit trusts, exchange traded funds (ETF), savings accounts, fixed deposits and RSA Retail Savings Bonds meet the requirements to be classified as a TSA. In other words these are not new investment products, rather the way that the South African Revenue Service (Sars) will treat them is new and so product providers need to keep record of these to ensure that they remain separate from your other investments.
You are allowed to invest R30 000 per year into a TSA subject to a maximum lifetime limit of R500 000. Sars will charge a 40% tax on contributions above these thresholds so please don’t add more. If you withdraw money from the TSA, you will lose the value of that withdrawal from your lifetime limit; that means you should only use the TSA for long-term investments i.e. 20 years and longer. You are not forced to keep your money in a TSA, you can withdraw at any time with no penalties or tax.
When should you use a TSA?
If you were to prioritise your long-term savings,
- Pay off your short-term debts (credit cards, personal loans, expensive vehicle debt etc.)
- Build up an emergency fund (not in a TSA) equal to three months’ worth of your expenses
- Make full use of your retirement fund contribution allowance (15% of taxable income)
- Put R30 000 per year into the TSA
- Normal discretionary savings i.e. shares, unit trusts, ETFs etc.
Some people have asked whether you should sell existing investments so that you can use the TSA. If you do not have new cashflows to invest and you plan to invest for the long term then it might make sense but you should consider the impact of potential CGT before making this decision.