Tax Free Savings Accounts was launched on 1 March.
Savers are, understandably, exited as you won’t be taxed a cent (no Capital Gains Tax, no Dividends Tax and no Income Tax from interest earned) on any returns within these accounts.
Maximising the benefits of these accounts
To maximise the benefits offered through these investment accounts, it is necessary to realise that there are certain restrictions in place with regards to the amount an individual can contribute to one of these accounts. Individuals are restricted to an annual limit of R30 000 and a lifetime contribution maximum of R500 000.
Once your total capital contribution has reached the cap, no replenishment of capital will be allowed after withdrawals. In other words, you won’t be allowed to replace funds that have been withdrawn.
Supercharge your returns
This is where the crux lies in terms of maximising the benefits offered by these products.
In order to really reap the rewards, investors need to reach the cap of R500 000 as early as possible without exceeding any of the annual limits as penalties will apply. Then sit back and let the power of compounding take care of the rest.
The longer the capital is invested, the more tax free growth there will be. As there won’t be restrictions to access these funds, like with retirement funds, investors might be tempted to make withdrawals or use this as an emergency fund.
Don’t use this as an emergency fund!
It would be wise to have a separate investment for emergency purposes and regard the Tax Free Savings Account as additional retirement savings not to be touched unless there is no other alternative.
Once companies start launching their new products, the finer details will become evident. In the meantime, spend some time considering what your long term goal for this investment will be.
Claude Hannah is a financial planner for Venn-Sure Consulting. He completed a degree in Financial Risk Management from the University of Stellenbosch in 2006 as well as a post graduate diploma in Financial Planning. Claude helps to organise and simplify the often complicated and busy financial lives of his clients. He takes great pride in providing the highest level of service to help his clients build and protect their wealth. For more information, email him (firstname.lastname@example.org) to arrange for a free consultation.
This article first appeared on 702 : How to maximise the benefits offered by Tax Free Savings Accounts