South Africans get one last window before February 28 to squeeze value out of their Sars-approved tax-free and tax-efficient investments.
Image: File photo.
A Tax-Free Savings Account (TFSA) is a powerful long-term wealth-creation tool. With a TFSA, there is no tax on your savings or investment returns, no matter how much your investment has grown. This means that you can receive dividends, your account can receive interest, or you can sell a portion of the funds in your account at a capital gain, without having to pay any tax.
But TFSAs come with rules, which make this time of year especially important. The last few days before the end of the tax year are the last chance to get the full tax-free value – and to make some last-minute corrections to common mistakes.
Here are four things every South African investor should do before midnight on February 28 to get the most out of their TFSA.
1. Maximise your annual contribution
You’re allowed to contribute up to R36 000 per tax year to your TFSA, with an overall lifetime limit of R500 000. The tax year runs from March 1 to the end of February, so those contributions must be made before February 28 (or the cut-off date of the relevant investment provider) to count for this tax year. If you haven’t hit the annual limit yet, this is the single most valuable move you can make. Remember, every rand you add before February 28 compounds tax-free over the long term.
There is no “rollover” amount from one tax year into the next, so if you only contribute R20 000 this year, you won’t have an extra R16 000 to add in next year. You will not be penalised if you do not reach the annual maximum every year, but just starting and building up contributions over the years is a smart move.
2. Don’t exceed the annual limit
That R36 000 limit is a goal, but it’s also a hard cap. If you accidentally go over R36 000 in any particular tax year, Sars will charge you a 40% penalty on the amount over R36 000. Once you hit R36 000 for the year, stop contributing to your TFSA(s). The R36 000 limit applies across all TFSAs if you have more than one. In other words, you have R36 000 that you can invest each year into TFSA investment accounts, and no more than that.
Don’t make the mistake of withdrawing money from your TFSA. If you’re tempted to pull money out before year’s end, don’t. It’s one of the most expensive mistakes you can make, because any withdrawal permanently reduces your lifetime limit of R500 000. It also undoes a lot of the good that can be achieved by letting compound interest work in your favour.
A TFSA isn’t a bank account, and you should not make deposits and withdrawals, thinking that you can put the money back later. It works best when you leave it alone for decades. Rather, ensure that you have an emergency fund in place to cover those urgent withdrawals.
3. Review your underlying investments
TFSAs are designed for long-term growth, and your investment choices should reflect that 20- to 30-year time horizon. A TFSA should generally be invested in to grow your money over the medium to long term. Because of its long-term horizon, a TFSA investment is wasted on low-yield cash and low-growth funds. If your TFSA is sitting in low-growth, conservative funds, consider adjusting that now so that your future growth is maximised.
4. Consolidate your TFSAs
South African investors may hold more than one TFSA, provided their combined contributions remain within the annual and lifetime limits. Just because you’re allowed to have more than one TFSA doesn’t mean you should. It increases the risk of overcontributing, it makes it harder to track performance, and it often leads to scattered, suboptimal investments. Most people are better off with one well-chosen TFSA.
TFSAs are designed for long-term benefits. Don’t expect your TFSA to reduce your tax bill today. It’s there to reduce your tax burden over the long haul – and it will, and grow your money at the same time, if you make the right moves now.
* Mxenge is the head of business and market development at Satrix.
PERSONAL FINANCE