By Carl Roothman, 18 February 2016
retirement annuity (RA) has been around for many years, but this is the first year that investors need to remember to contribute to a
tax-free savings account (TFSA) as well, to make full use of their annual contributions allowed by SARS.
All the proceeds – dividends, interest and capital gains - are tax-free. After several years of investing in a balanced or equity portfolio, the capital gain payable when ultimately withdrawing the money could be substantial. This tax benefit makes the TFSA very attractive relative to discretionary, taxable products.
TFSA investors’ overall contributions will be limited to R30 000 per tax year. Any contributions exceeding the annual cap will be taxed at 40% and therefore need to be monitored carefully to remain within the annual limit. Investors cannot roll over this year’s unused allowance to next year, so if they don’t contribute before the end of February, they’ve missed the boat for the 2015/2016 tax year. A lifetime contribution limit of R500 000 also applies.
The benefit may be small during the first few years, but as the value of the investment grows, it becomes significant. The example below shows how big the difference between investing R2 500 per month in a TFSA and investing the same amount in a ‘normal’ taxable product becomes over a period of 25 years. (Contributions cease after 16 years and 8 months as the lifetime limit is reached, but the money remains invested for the remainder of the 25-year investment period). The tax benefit of the TFSA is therefore significant for long-term tax free investments that are not invested mainly in cash, but applied to a diversified portfolio.
Sanlam Investments offers three tax-free products administered by Sanlam Collective Investments (RF) (Pty) Ltd and Satrix Managers (RF) (Pty) Ltd. They are the:
The Sanlam Collective Investments tax-free unit trust is for investors who prefer actively managed funds, run by portfolio managers who research and analyse the investment universe before picking only certain assets within an index. The minimum investment amounts vary from fund to fund, and start at as little as R200 per month. The Satrix tax-free unit trust is for those who prefer low-cost passive investments (the portfolio manager buys all the assets in a particular index) and the minimum investment amount is R500 per month.
It is possible to invest in the Satrix and Sanlam Collective Investments offerings
online but we recommend that investors first meet with a financial adviser to select the fund most suitable to their investment goals.
The sooner investors open a TFSA, the sooner the power of compound returns can start working in their favour. Even better when those returns are tax free!