Tax Free Savings Account (TFSA): 2024 Complete Guide

A Tax-Free Savings Account (TFSA) is a type of savings account typically invested in unit trusts and various other investment instruments. The income generated from these savings and investments is not subject to taxes.

A Tax Free Savings Account has the following rules:

  • Annual Contribution Limit: The maximum annual contribution allowed to a Tax-Free Investment (TFI) is R36,000 per tax year. This limit applies collectively across all your TFIs.
  • Lifetime Contribution Limit: There is a lifetime contribution cap of R500,000 per individual. This means you can contribute a maximum total of R500,000 to TFIs throughout your lifetime.
  • Unused Annual Limit: Any unused portion of the annual contribution limit in a specific tax year is forfeited and cannot be carried forward to subsequent years.
  • Penalties for Exceeding Limits: Exceeding the annual contribution limit (R36,000) incurs a penalty of 40% on the excess amount above the limit. This penalty is added to the normal tax payable as per your notice of assessment.
  • Capitalization of Returns: Returns on investments, such as interest earned within a TFI account, are not considered new contributions. Capitalized returns do not impact the annual or lifetime contribution limits. For instance, if your investment gains interest, the interest amount is not treated as a new contribution.

Tax Free Savings Account Summary

A Tax Free Savings account is a statutory investment account in which interest received on an investment is taxed at zero percent. The tax-free savings account was launched on March 1, 2015, as part of the Taxation Laws Amendment Bill of 2014, as a way to encourage South African households to save.

The yearly limit for a tax-free savings account for the 2020 assessment year is R33,000.00, and for the 2021 assessment year, it is R36,000.00.

There is no age limit for contributors to the tax-free savings account, which has a lifetime limit of R500,000.00 per person. It’s not easy to develop a savings habit. See 10 methods to deceive yourself into saving money.

How does a Tax Free Savings Account work?

A tax-free savings account helps you to save money for unexpected expenses. Your savings account can be used for a variety of objectives, including but not limited to retirement, emergency savings, and other specialized goals. It is critical to recognize that the Tax Free Savings Account (TFSA) has a lifetime limit of R500,000.00. The annual contribution maximum to the TFSA is R36,000.00. SARS will penalise you if your contributions total more than R36,000.00. SARS collaborates with banks to ensure that correct data and information on individual TFSAs are reported twice a year. 

SARS expects the following data and information about a TFSA account holders:

  • Contributions per tax year, 
  • Amounts withdrawn per tax year, 
  • Returns on investment such as interest, dividends, capital losses and gains, and
  • Amounts transferred per tax year. 

The services provider which is any company that issue TFSA to the public, issues an IT3(s) Free Investment Certificate Annually to TFSA holders. An IT3(3) Free Investment Certificate reflects the investment value of your Tax Free Investment at the end of a particular tax year. Furthermore, the certificate holds information on transactions during the tax year such as the contributions you made to it and withdrawals you took from it.

Tax-Free Savings Account Penalties 

Failure to adhere to SARS limits carries a hefty penalty. For any extra amount that you invest from the maximum yearly contributions of R36,000.00 or a lifetime maximum of R500,000.00, you will incur a penalty of 40%  which is payable to SARS. For example, if you invest R5,0000.00 in 1 year of assessment, you will incur a penalty of R5600.00. The penalty is calculated this way:

R50,000- R36000 = R14,000.00, this is the amount liable for a penalty. 

R14,000.00 *40% = R5,600.00, the penalty is payable to SARS. 

As demonstrated in the example, you don’t need to earn interest on your investment first to incur a penalty. In fact, by merely making an extra contribution to your TFSA, you will be liable for the penalty.

Investments that Qualify as a Tax Free Investment 

#Investment Type
1Retail savings bond. 
2Linked investment products
3Exchange Traded Funds that are classified as collective investment schemes. 
4Certain endowment policies issued by long term insurers
5Fixed deposits
6Unit trusts
Tax Free Savings Account investment

Not all investments qualify as a Tax-Free investment, for example, cheque accounts and ordinary savings accounts don’t qualify as Tax Free Investments. A number of investments have been listed on the SARS website that qualifies as a Tax Free Investment. 

List of All Tax Free Investment Accounts in South Africa

#Tax Free Investment Account
1Allan Gray Tax-Free Account (you can use this account to invest in any of the Allan Gray Funds)
2Old Mutual Tax-Free Savings Account. 
3Tax-Free Savings Account from First National Bank.
4Alexander Forbes Tax-Free Savings Account.
5Satrix Tax-Free
6Nedbank Savings Account
7Assupol Tax-Free Savings Policy
8Standard Bank Tax-Free Investment Account
9Capitec Tax-Free Savings Account and more
10Absa Tax Free Savings Account
11African Bank Tax Free Savings Account
12Discovery Tax Free Notice Savings Account
13Investec Tax Free Fixed Deposit Account
14RMB Tax Free Savings Account
15Sanlam Tax Free Savings and Investments
16Momentum Tax Free Savings Account
17Mercantile Tax Exempt Savings Account
18Liberty Tax Free Investment

There are a number of TFSAs in South Africa that you can use to start investing. After all, you are allowed to open more than one TFSA, however, you still need to maintain the maximum allowable investment threshold.

By making an investment in any of the above listed TFSAs, you will get to choose which fund your money will be invested in. You can choose from investing in the JSE listed companies, Fortune 500 companies, Mutual Funds, Property, etc. 

Competitive Advantages of a Tax Free Savings Account 

  • Earlier investments tend to produce higher interest. 
  • There are no penalties for immature withdrawals so you can withdraw your money at any time without incurring costs. 
  • You can shift your investment from one TFSA to another. 
  • Investment returns don’t affect your contributions limit of which investment returns may include dividends and/or interest on investment. 
  • You can access your money at any given time before reaching the retirement age of 55.
  • There is no age restriction to who can invest using a TFSA. 
  • Tax doesn’t apply to this account so any returns that your investment yields come to you in full. 

Competitive Disadvantages of a Tax Free Savings Account 

  • TFSA is for new savings, therefore, you cannot convert existing savings accounts into TFSA. 
  • Leftover contributions don’t roll over to the next year. 
  • Comes with a penalty for over investment. 
  • Withdrawals will affect your contributions limit. 
  • There is no real benefit for those earning under the tax threshold. 

Conclusion 

One of the greatest methods to start saving money for emergencies or retirement is to open a tax-free savings account. This account usually requires a minimal annual contribution of no more than R36,000.00. Whether you are wealthy or poor, you will be able to invest through a TFSA, with contributions starting at R180.00. Anyone can open a TFSA in South Africa, regardless of their age. You can even start contributing to your children’s future education now.

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