The Cons and Pros of Tax-Free Savings

At this point, you may have heard the phrase “Tax-Free Savings Account” (also known as the Tax-Free Investment, or TFSA for short) so many times you’re considering naming your new cat just that.

They came into existence as a governmental drive to encourage more South Africans to save. These accounts offer some tax relief since all proceeds and profits from these accounts (like interest accrued, capital gains and any dividends) are totally exempt from tax (note: we’re going to be saying the word ‘tax’ a lot, so bear with us).

But are they the answer to all your saving woes? We’ve done the research so you don’t have to, so let’s get right to it.

CONS

When we say cons, we really mean ‘things to consider’ since none of these points are deal breakers, just things to be aware of.

• You can’t convert existing savings accounts. The TFSA incentive is to encourage new savings, so you won’t be able to change previous savings accounts into tax-free ones.
• There are limits to how much you can invest. You can only invest R33,000 per year, and R500,000 in your lifetime, even if you have multiple tax-free accounts.
• Over-investing carries penalties. Investing more than your annual limit will result in a tax penalty of 40% on the excess amount, payable to SARS within that tax year.
• ‘Leftover’ contributions don’t roll over. For example, if you’ve only invested R30,000 in one year, the remaining R3,000 doesn’t roll over into the next year.
• Withdrawals will affect your contribution limits. If you withdraw money from your TFSA, you cannot ‘replace’ it. Basically, if you invested R33,000 in an account in one year, and you withdraw R13,000, you cannot put the money back. It’ll be seen as a new and separate investment, and if you’re over your annual limit, you’ll be penalised.
• No real benefit if you earn under the tax threshold. You’re already not paying tax, so any savings account will be just as good.

PROS

Now for the good stuff.

• You won’t be taxed on the account’s growth. Like we mentioned before, any interest earned, capital gains or dividends received from your TFSA are tax-free.
• Returns don’t affect your contributions limit. For example, if you’ve managed to earn R3,000 interest on the R33,000 you invested in the year, it doesn’t count as an additional investment and you won’t be penalised (unless you withdraw and reinvest it).
• Access at any time. Your TFSA is accessible at any point in your life, unlike a Retirement Annuity which can only be accessed (without penalty) once you turn 55.
• No penalties for withdrawals. You can take money out whenever you want without any fees or penalties. Just be careful with reinvesting that money into your TFSA, it’ll still count toward your annual contribution.
• The earlier you invest the better. The younger you are when you invest, the more time your investment has to grow. You can also get the ball rolling for your kids, giving them future access to a lump sum that could go towards paying for studies, etc.

Where does Sanlam Indie fit into all this tax-free stuff?

Sanlam Indie fits into the tax-free universe in a way that offers great benefits to you (of course we’d say that, but we also happen to believe it’s true).

Any policy you buy comes with a Wealth Bonus, a built-in, growing contribution we make on your behalf.

It works like this: You buy a policy, and we match up to 100% of your monthly premium into a Wealth Bonus that builds wealth for you. You don’t pay anything extra, so all you have to take care of is your premiums.

It’s a great alternative to a savings account if you can’t afford one, and it covers two birds with one stone (see what we did there?). You pay for life insurance, or funeral cover, or disability cover, or any of our other products, and we throw in a growing Wealth Bonus at no extra cost. Not sure how we can pull it off? More on that here.

Basically, we help you build savings with money that you can access as a larger lump sum when you’re 70, or access in 10% portions every 5 years. The best part? You don’t get taxed on any of the withdrawals you make.

Plus, even though the Wealth Bonus payout is tax free, it’s not a Tax-Free Savings Account, which means that the contributions we make on your behalf don’t affect your annual and lifetime contributions. The difference is that you don’t have unlimited access to your Wealth Bonus, but that just means your money has an opportunity to sit and grow.

So which is better for me?

Who knows! We’re just here to give you the facts, but ultimately you need to decide what’s best for you. A Tax-Free Savings Account is a great way to save, but then so is a retirement annuity, and so is repaying debt. Sanlam Indie is also a great way to save, especially if you’re unable to afford a savings account right now.

Either way, the more you know, the better equipped you’ll be to take charge of your financial future, which gives us a happy.