Open up a Tax Free Savings Account

This is a type of savings account offered by financial institutions that invests your money in a combination of financial products such as unit trusts, bank savings accounts, fixed deposits, bonds, etc.

The difference between this and other savings or investment accounts is that all returns, i.e. the interest, dividends and capital gains earned, will be tax-free in your hands. This means that you’re not liable to pay tax on the growth of your investment, nor if you decide to withdraw from your account.

Annual and lifetime contribution amounts

There’s an annual contribution limit of R33,000 per tax year, as well as a lifetime limit of R500,000. Once you have reached your lifetime contribution limit of R500,000 no further investment in tax free savings account will be allowed.

No limit of number of accounts

The annual limitation can be spread across as many savings accounts as you wish, provided you don’t invest more than R33,000 in total for the tax year (1 March to end February). So if, for example, you’ve already contributed R10,000 to one tax free savings account for the period, you’ll only be able to invest a maximum of R23,000 to any others.

No carry over of annual contribution limit

The annual limitation can’t be carried over to the next tax year, you simply forfeit any unused amount and are given a new annual limit of R33,000 to invest in a tax free savings account. For example, if you’ve invested R27,000 for the tax year, you can’t carry the R6,000 over to the next year.

Contribution to a tax-free savings account for a minor

As a parent, you’re able to open a tax-free savings account for your minor child(ren), but you need to be aware that any contributions you make to this account on their behalf counts towards their annual and lifetime contribution limit.

Benefits of a Tax Free Savings Account

Tax free growth, even if you reinvest

The critical advantage of a tax free savings account is that your growth or earnings on the initial investment are exempt from tax on withdrawal. You’re able to reinvest (or capitalise) your returns and they don’t count towards your annual or lifetime contribution limit.

For example:

If you invest R33,000 for the year and receive a return of investment of R5,000 that you re-invest, the total amount in the account will be R38,000, yet you’ll still be able to invest your full R33,000 the following year as the R5,000 reinvestment doesn’t count towards the annual or lifetime limit.

Unlimited withdrawals, with conditions

You’re free to withdraw from your tax savings account at any time you wish, however any replacement investment amount is treated as a new contribution and will therefore count towards your annual and lifetime limits.