All you need to know about TFSA’s

The end of the tax season is fast approaching and this is an opportune time to look at your tax–free savings account (TFSA) portfolio to identify how you can take advantage of savings incentives created by the National Treasury to encourage investing culture.

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Tax-free savings accounts were introduced by National Treasury in March 2015 and can be used to invest or save in multiple instruments.

“Through a TFSA, all proceeds that include interest income, capital gains and dividends from investments are tax-free and any withdrawals in a TFSA are not taxed, making this a very effective product for drawing down income in retirement,” said Samukelo Zwane.

Contributions
Zwane advised that investors and savers should keep their capital contributions limited to a maximum of R36 000 per year and a total lifetime contribution of R500 000.

“The annual contribution threshold runs in accordance with the tax year. The R36 000 can be contributed as a capital lump sum at the beginning of the tax year on March 1 or alternatively, monthly. The R36 000 annual threshold, however, should never be exceeded as any contributions above the R36 000 will be taxed at 40%,” said Zwane.

“It is important to note that the entire excess contribution will be taxed at 40%. Some people mistake the penalty to only apply to capital gains, interest, or dividends, but that’s not the case; it applies to the entire contribution. Therefore, avoid exceeding your annual contribution limits in a TFSA.”

The R500 000 lifetime contribution does not include returns from investments and savings, but rather the contributions into the fund over the lifetime of the investment.

The annual contribution limits reset at the end of the tax year on February 28. Thereafter, the limits are reset and the full R36 000 can be contributed again from March 1, 2022.

Flexibility and withdrawals
TFSA provides flexibility with regards to an annual lump sum or monthly contributions made.
Contributions can be as little as R300 per month and can be stopped and started at any time to suit the contributors’ needs.

“There is flexibility when it comes to withdrawing funds from a TFSA, but your lifetime capital contribution will be impacted. By withdrawing R50 000 from a TFSA, your total lifetime capital contribution for that investor or saver drops to R450 000.

“It is thus crucial to utilise this instrument for long term savings and investment goals, as any withdrawals impact the total capital balance that can compound tax-free,” added Zwane.

Opening multiple TFSAs
There is no limit to the number of TFSAs one can have.

Investors and savers can open multiple TFSA’s that meet different savings goals and risk criteria. For example, investing R18 000 in a tax-free cash deposit for security and then investing the additional annual R18 000 in a growth unit trust to look at growing the funds a bit more aggressively.

One can also open up TFSA’s for family members, including minors, as well as set up TFSA’s for specific purposes like paying off a child’s education.

“TFSA’s are fantastic long-term saving and investment instruments that should be utilised by all South Africans. 100% of all returns can be reinvested over the long term, thus increasing capital nest eggs. It’s a great vehicle as investors can choose different asset classes to invest in, aligning with their risk appetite and investment goals,” said Zwane.

• Samukelo Zwane, is head of product FNB Wealth and Investments.

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