Tax-free savings accounts in a nutshell

Written by Your Future Now

Since the launch of Tax-free savings accounts (TFSA), South Africa has been a buzz about this new savings option offered to the people of Mzansi. Financial institutions have been running radio ads and marketing campaigns in an attempt to get the people of Mzansi on the bandwagon. Tax-free savings accounts were introduced in March 2015 by the National Treasury in an attempt to encourage South Africans to save. South Africans are notoriously bad at savings and this new product is looking to change that. If you are like me, you might wonder – what is a TFSA and is this something you should have? After doing all the nitty-gritty research on your behalf, this article will take a look at TFSA in a nutshell.

How does it work?

A TFSA is fairly simple to understand. The product allows consumers to invest an annual amount of up to R 30 000. There is also a limit on lifetime contributions to the value of R 500 000. This means you can never deposit more than R 500K capital into the account. These limits are in place to ensure that higher income earners don’t exploit the tax-free benefit. All returns, dividends and capital gains on your TFSA will be entirely tax-free. As a TFSA-holder, you will also be allowed to withdraw from the account, provided that you have giving a seven day notice. You might be subject to an early withdrawal fee, a maximum of R 300 as prescribed by the National Treasury, depending on the financial institution you chose to open the account with.

Who is it for?

The decision to invest in a TFSA will ultimately be up to every individual. There are no qualifying criteria in terms of an age limit or income bracket. The financial services institutions that offer TFSA each have various requirements in terms of an initial minimum deposit or monthly contribution. As a potential TFSA-holder, you also need to identify whether you want to invest short to medium-term or if you want to invest over a longer time period. TFSA are ideal for individuals who are looking for a long-term savings alternative. According to Rick Briers-Danks, partner at Veritas Wealth Management, you need to prioritise your long-term savings. Briers-Danks suggests paying off all short-term debt, building up an emergency fund, maximising your retirement fund contribution allowance and only then opening a TFSA.

Where can I invest?

Tax-free savings accounts are available at financial institutions like banks, mutual and co-operative banks included and the government. Each financial services institution will have different types of TFSA to suit the needs of each individual customer. For a detailed list of different options and comparisons, you can read the complete article written by financial journalist, Maya Fisher-French.

What to look out for?

Remember to read the fine print and see if a penalty fee will be charged if you choose to withdraw from the account. The most rewarding TFSA will also be exempted from any monthly fees – this sort of account is supposed to let your money work for you, not charge you. Make sure you understand all the terms and conditions before you sign and open the TFSA of your choice.

You already have some money saved up?

If you are part of the handful of savings conscience South Africans who actually save every month already, you deserve a pat on the back. Unfortunately, the National Treasury doesn’t allow existing savings and/or investment accounts to be converted into TFSA at the moment. The ability to convert an existing savings account into a TFSA might be in place by 2016.

There you have it. Tax-free savings accounts in a nutshell. As always, we want to encourage all readers of Your Future Now to do proper research before you put your name and signature on any piece of paper. Tax-free savings can be extremely rewarding if you use this savings account correctly. Long-term savings would be ideal when investing in a TFSA.

Article Categories:
Life Events · Saving and Spending

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