Don't let valuable tax-free benefits slip away! Discover how you can maximize your TFSA contributions before the end of the tax year. Thousands are leaving money on the table—learn how to avoid being one of them.
Image: Timothy Bernard / Independent Newspapers
As the tax year draws to a close, an alarming trend is surfacing among South African savers.
New data from TaxTim revealed that while nearly half of its users have taken the commendable step of opening tax-free savings accounts (TFSAs), many are leaving significant sums untapped.
The average contribution during the tax year is just R14,171, a startling R21,829 short of the R36,000 annual allowance which expires on 28 February.
This discrepancy not only signifies a missed opportunity for individual savers, but also translates into millions of rands in lost potential tax savings across the nation.
“Many South Africans who file taxes with us show commendable saving and planning behaviour but are inadvertently leaving significant money on the table,” said Daniel Swiegers, director at TaxTim.
“These individuals have opened TFSAs, yet their contributions are considerably less than the limits set, which means they’re not securing the full tax benefits available to them,” he added.
For South African savers, understanding the long-term value of maximising TFSAs is crucial.
Unlike standard savings or investment accounts, where SARS taxes the growth, be it through interest, dividends, or capital gains, a TFSA permits tax-free growth.
This means that every rand earned remains untouched, a compelling reason to favour these accounts.
Swiegers shared an example of Thandi, who invests R500,000 at an 8% interest rate.
In a conventional account, she would pay R4,212 in tax on her R40,000 interest annually, leaving her with R35,788.
However, in a TFSA, she retains the entire R40,000, an extra R4,000 to reinvest or save each year.
Over decades, that minor annual tax saving compounds significantly.
If Thandi retains her investment for 35 years at that growth rate, her TFSA would swell to approximately R7.4 million, compared to only R5.6 million in a taxed account, demonstrating a staggering difference of R1.8 million.
While the prospect of a few thousand rands might seem trivial in the short term, over a lifetime of saving, the cumulative effect of taxes can quietly erode potential wealth.
TaxTim's findings suggested many contributing factors.
Many South Africans, understandably, face financial constraints and may not see maximising their TFSA as a priority.
Others may not realise the contribution limits reset at the end of February, rendering unused allowances void.
Additionally, some may be placing their investments in low-return cash accounts, foregoing the compounding advantages that come with growth-oriented investments.
Until individuals grasp the urgency of that R36,000 limit, they risk losing the chance for it to grow entirely tax-free over time, amounting to a possible loss of over R218,000 after ten years.
South African taxpayers will find strict regulations govern TFSAs, reflecting the substantial tax benefits they provide.
Contributors may place up to R36,000 annually into their TFSA, with an absolute lifetime cap of R500,000. Tread carefully: exceeding these limits incurs a 40% penalty from SARS on the excess amount.
Moreover, withdrawing sums like R10,000 deducts from the lifetime allowance, and once the clock strikes midnight on 28 February, any unutilised allowance is lost forever. It represents one of the rare 'use-it-or-lose-it' scenarios in the South African tax landscape.
For those keen to avoid leaving money on the table as this tax year ticks to its close, TaxTim offers an invaluable resource.
The platform not only sheds light on maximising tax-free saving opportunities but also assists users in navigating contribution limits and deadlines, as well as formulating effective tax planning strategies. Visit www.taxtim.com for clear guidance, as the deadline approaches.
PERSONAL FINANCE