Tax Free Savings Accounts (TFSAs) in South Africa: Benefits, Limits, and Rules

What Is A Tax Free Savings Account (TFSA)? 

Back in March 2015, National Treasury introduced an incentive for South Africans to save and invest more. This came in the form of a tax free investment vehicle, known as a Tax Free Savings Account (TFSA). The incentive? All investments within a TFSA are not subject to tax on any interest, income, capital gains (CGT) or withdrawals, hence the term 'tax-free'. 

Licensed banks, investment platforms, fund managers, financial service providers and long-term insurers can provide a TFSA, and they’re easy to activate.  

Why Choose A TFSA? 

When you have an investment or savings account, you are required to pay tax on a portion of your gains or income generated by your account.  In other words, as your money made more money for you, there’s still tax to pay on your realised gains. With a TFSA, the taxman will not touch 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. 

What Can You Invest In Via A TFSA? 

Most financial service providers and platforms that offer TFSAs provide both interest-bearing and investment products. However, banks and long-term insurers typically lead with interest-bearing offerings, while stockbrokers, investment platforms, and fund managers often lead with investment products. 

When selecting the underlying investments for your TFSA, you can have savings products that will attract interest over a certain period, or you could have your money locked into a call account or a money market fund. You can also include your favourite Exchange Traded Funds (ETFs) or unit trusts (UTs) in your TFSA too.

Legislators deemed singular equities or shares as too risky to invest in alone, so they made it impossible to invest in single stocks in a TFSA. However, a collection of equities as collective investment scheme (CIS) compliant funds, like ETFs or unit trusts, has individual risks that are mitigated. 

While there are a wide range of ETFs and unit trusts to invest in, observant investors would have noticed that commodity-based ETFs are never among the options to choose from in their TFSAs. That’s because that category of ETFs is deemed as having higher risk profiles, lacks diversification, and is not subject to the same regulatory oversight, and is therefore not CIS-compliant, a key requirement for TFSA investment products.

TFSA Contribution Limits and Rules

While we have covered the hard limitations to the TFSA, which are automatic and cannot be bypassed, there are self-governing limitations you need to be aware of: 

• The maximum amount you can contribute to your TFSA each tax year is R36 000. If you have one TFSA, you must not exceed the R36 000, and if you have more than one TFSA, you must ensure that all your contributions across your accounts do not exceed R36 000 in any given tax year.
• There is also a lifetime maximum amount of R500 000. This means that if you started with your annual contributions when TFSAs were introduced in March 2015, by 2030 you should reach the lifetime maximum contribution amount. If you start now, you should reach this limit by the year 2040.
• Another important consideration is which investments your TFSA can hold. Different providers offer different underlying investment options. Make sure your selection aligns with your risk profile and goals.
• For each new tax year, there is no “rollover” amount from the previous tax year. For example, if you only contributed R20 000 in the previous year, you won’t have an extra R16 000 to add in the new tax year as part of your annual limit.
• Also, withdrawals during the tax year don’t influence your maximum limit. For example, if you have already contributed the maximum amount of R36 000 for this tax year and you then decide to withdraw R20 000, you cannot deposit that amount back again in this tax year without tax penalties.
• In the same way, withdrawals during the tax year don’t influence your maximum annual limit of R36 000. If you have already contributed the maximum amount of R36 000 for a particular tax year and you then decide to withdraw R10 000, you cannot deposit that amount back again in this tax year without tax penalties.
• If you invest more than R36 000 in any tax year, the amount invested over this limit will attract 40% tax. 

Flexibilities Outweighing Limits 

The flexibilities and benefits of investing in a TFSA far outweigh the limitations. You can deposit an annual lump sum, or you could invest with smaller amounts throughout the year until you reach your annual contribution. Even if you do not reach the annual maximum, you will not be penalised, but just starting and building over the years is a great place to begin.  

Adults can open a TFSA for their children and other minors in the family. The opportunity for caregivers to open TFSAs for their dependents also includes elderly dependents. Minors are allowed to have TFSAs in their names as well, as long as they’re opened and operated by their guardians. If you have an infant and you would like to save for their tertiary education, a TFSA would be an ideal way to start. Contributions to the minor’s account can be made by guardians, family members, family friends, or anyone in the guardian or child’s community. 

Open Your Satrix TFSA

If you’re wondering how to open a TFSA with Satrix, the process is simple and quick. Every SatrixNOW account comes with a tax-free investment account. Find out more here or register your account.

Disclaimer

_{Satrix Investments (Pty) Ltd is an approved FSP in terms of the Financial Advisory and Intermediary Services Act (FAIS). The information does not constitute advice as contemplated in FAIS. Use or rely on this information at your own risk. Consult your Financial Adviser before making an investment decision. Satrix Managers (RF) (Pty) Ltd (Satrix) is a registered and approved Manager in Collective Investment Schemes in Securities and an authorised financial services provider in terms of the FAIS.  
While every effort has been made to ensure the reasonableness and accuracy of the information contained in this document (“the information”), the FSPs, their shareholders, subsidiaries, clients, agents, officers and employees do not make any representations or warranties regarding the accuracy or suitability of the information and shall not be held responsible and disclaim all liability for any loss, liability and damage whatsoever suffered as a result of or which may be attributable, directly or indirectly, to any use of or reliance upon the information.}