Invest and reap the Tax Free savings financial reward
Tax Free savings accounts (TFSA) were first introduced by government in 2015 to encourage and hopefully fuel a savings culture in South Africa. When you invest in a TFSA, you don’t have to pay income tax, dividends tax or capital gains tax on the returns from this investment.
An example of this would be if you were to invest a sum of R2 000 and have it grow to R3 000 over a certain period of time. In a tax free savings account, this R3 000 growth would not be taxed, like with other normal savings accounts. Instead, you would receive the full R3 000 benefit with no tax implications. This is a massive win for someone looking for easy ways to save money, especially in the long-term.
You can only invest up to a maximum of R33 000 per year, which works out to R2 750 per month, or in total, a R500 000 lifetime limit. Let’s say you contribute the R2 750 per month — this means that it will take you a little over 15 years to reach the lifetime limit of R500 000.
If you exceed these limits, there is a penalty of 40% of the excess amount, so it’s not worthwhile to contribute more than the prescirbed amounts.
With the tough economic times we are in, understandably, not everyone can afford to contribute the R2 750 per month, but with the African Bank Tax Free Savings Account, you can make contributions from as little as R50 per month. This makes investing both accessible and easy. Another advantage of the African Bank Tax Free Savings account is that you earn SA’s best savings interest rates starting from 8.67% per annum. If you stay invested for over 15 years, combined with the compounding interest, your money has the potential to grow signifiantly. Just like Albert Einstein said: “Compound interest is the eighth wonder of the world. Those who understand it, earn it; those who don’t, pay it!”
It is also good to note that Tax Free Investment accounts cannot be used as transactional accounts. Imagine being able to swipe your TFSA money at your local grocery store! If it was this easily accessible, you would never commit to your financial goal (like most of us!), so in a way it protects you from using the money recklessly.
Although you have probably heard and read about TFSA, you might be unsure as to the kind of financial goals it could help you achieve. Bear in mind that a TFSA is best used as a long-term investment. Here are a few ideas:
- You can supplement your retirement
If you have a pension, provident fund or even a retirement annuity, but you would like to add a more flexible option to your retirement plan, opening up a TFSA is a good choice.
- You can save towards your children’s university education
If you have kids, you know just how expensive school fees are. By putting money away in a Tax Free savings account, you let your money earn interest over a long-period of time and, on top of that, you will not pay any tax when you withdraw from the investment. You could easily fund your children’s tertiary education with money from your Tax Free savings account.
- Or start a ‘fun fund’
Whenever we talk about money, we always associate it with serious conversations that we perhaps don’t want to talk about. But I believe that because we work hard for the important things, we should also be able to have fun with money. You can do this responsible way, and all it takes is a little planning.
For example, one thing I would love to do for my son is to take him to Disney World. By contributing to a Tax Free Savings account, say until he turns 15 years old, this is definitely a possibility. We will also get to enjoy our holiday guilt-free as a family, knowing that we are not spending on credit.
You are not limited to the number of TFSA you can have, as long as you do not exceed the limits mentioned above. You can also open up a TFSA in your name and in your children’s names — all you will need is their birth certificates. You will surely give them a head start by putting it in their name.