The benefits of Tax-Free Savings Accounts and Retirement Annuities
Tax-Free Savings Accounts
Tax-Free Savings Accounts (TFSA) allow you and your family to set money aside and watch those savings grow, tax-free, throughout your lifetime. Making a TFSA work for you to your best advantage, and within the context of your overall investment portfolio requires some consideration, and professional financial advice in this regard is invaluable.
When to use a Tax-Free Savings Account
- Achieving long-term investment goals;
- Saving for retirement when your income is below the income tax threshold, and you’ll consequently not enjoy any personal income tax relief from contributions made to retirement funds;
- Topping up retirement savings over and above the maximum amount per annum (namely R350,000) that one can receive tax breaks on.
“Parents can open a Tax-Free Savings Account for their children. This is an ideal way to save for a child’s education and can also help to cultivate a savings ethic from a young age.”
A Retirement Annuity or RA is an investment vehicle to save for retirement, and has the following tax benefits:
- Contributions you make to all retirement vehicles are tax deductible up to 27,5% of your taxable income and limited to R350,000 per tax year;
- Investment returns are not subject to income tax, capital gains tax or dividends tax;
- The lump sum payout at retirement or death may be tax-free within certain cumulative limits that apply to lump sum payouts from all retirement savings vehicles;
- On death, any benefits paid out from an RA or lump sum are free of estate duty
With both a Tax-Free Savings Account and a Retirement Fund, your savings grow free of dividends tax, income tax and interest or Capital Gains Tax, but your Retirement Fund has the edge – you make contributions with earnings on which you have not paid tax.