Frequently asked questions on tax-free accounts
With a tax-free savings account, you get your full investment return without being taxed on the growth you earn.
Tax-free savings accounts are part of the government’s drive to encourage people to invest and save more for their future. You will not be taxed a single cent on any of the returns on these investments.
If you are wondering how or where to open your first tax-free savings account, here’s everything you need to know:
- What is a tax-free savings account?
- What is the difference between tax-free savings and regular bank accounts?
- What is the limit on tax-free savings accounts?
- What happens if I exceed the annual tax-free savings account limit?
- Can I make withdrawals from a tax-free savings account?
- What is the difference between tax-free savings vs retirement annuities?
- What is the difference between a tax-free savings account vs tax-free investment?
- Regular monthly tax-free savings account contributions
- Tax-free savings for children
- Can I switch a tax-free savings account?
- Can I open more than one tax-free savings account?
- What are Standard Bank’s tax-free account solutions?
A tax-free savings account (TFSA) can be a money market or fixed-term bank account, a unit trust investment, a JSE-listed exchange-traded fund and more. It guarantees your capital investment and is an effective way to save for your goals because any interest, dividends or capital gains will be free of tax.
It also gives you flexibility as you do not have to commit to making future contributions. You can withdraw funds anytime you choose, but it’s not advisable to do so as this may prevent you from achieving your goals. In addition, making withdrawals will have an impact on your lifetime tax-free savings limit.
If you’re looking for rapid growth on your investment, a TFSA is a better option than a regular savings account.
The money invested into a tax-free savings account is not subject to tax on any interest, dividends, capital gains and withdrawals, unlike a regular savings account.
There are limits on the amount you can save in a tax-free savings account. The total annual contribution in a tax year may not exceed R36 000, while the total lifetime contribution may not exceed R500 000.
It does not matter how much growth you earn on your annual contributions, as long as the amounts you put in do not add up to more than the annual or the lifetime limit.
There is a stiff penalty tax of 40% for contributions to your tax-free account that exceeds the limits.
If, in one tax year, you invest R16 000 in an account with one provider and R30 000 in an account with another provider, you will have contributed R10 000 more than the annual limit. You will have to pay 40% tax on the excess R10 000 you have invested, and SARS will expect you to find the money to pay the tax.
It’s important to monitor your TFSAs across all approved accounts regularly to avoid exceeding the limit.
You can withdraw money from TFSAs as and when you like, depending on the type of account. If the investment has no maturity date, you can access your money within seven days of requesting it. If the investment is a one-year fixed deposit, it will be payable to you within 32 days of your request to withdraw. Penalties for early withdrawals vary from provider to provider but may not exceed R500.
Withdrawals must be considered carefully because once an amount is withdrawn, that amount is deducted from your lifetime contribution limit. For example, if you were to save R100 000 in your tax-free savings account, and you withdrew the full amount, your total remaining lifetime contribution is limited to R400 000.
Tax-free savings accounts were created to encourage saving and not as a retirement product, although you may use them for retirement savings.
Bear in mind that the lifetime contribution limit of R500 000 may not be sufficient to cover your expenses upon retirement. A TFSA can, however, be used to supplement your retirement investment.
A tax-free investment account is an investment fund traded on the stock exchange, where assets such as shares, commodities, or bonds are held. A tax-free investment account’s attractiveness lies in its low costs, tax efficiency, and share-like features. With this type of account, you have the choice of either making monthly contribution or a once-off lump sum.
You can invest whenever you like, and even choose a once-a-year lump sum if you prefer. This means you can reinvest your tax rebate or annual bonus if you’d like. Some providers may put a minimum limit on your investment for administrative purposes.
You can open a TFSA account in the name of your children. However, you will be using part of their tax-free allowance, which may limit their ability to save for themselves via a TFSA later in life. Money withdrawn can only be paid out into a bank account in their name. You will also need to be aware of donations tax, if applicable.
Can you switch my tax-free savings account from one financial institution to another? Yes, but transfers can only be carried out between service providers. You will not be able to switch to another financial institution by withdrawing your funds from your TFSA and putting them into a TFSA with a different provider – that would be classified as a new contribution.
The Regulations define the following minimum requirements for a transfer between product providers to be deemed valid:
- A transfer certificate
- The number of days within which a transfer must be effected
- The type of information that must be passed on to the new product provider
Can I open more than one tax-free savings account in my name? Yes. There is no limit to the number of tax-free savings accounts you can have, but you must ensure the sum of your annual payments across all TFSAs doesn’t exceed the annual contribution limit, or you will have to pay a penalty tax.
Standard Bank offers two types of tax-free accounts:
Tax-Free Call account
Standard Bank’s Tax-Free Call account is a savings account that enables you to save up to R36 000 a year and a maximum of R500 000 in your lifetime. You can also access your money anytime.
Tax-Free investment account
This is an investment account, which enables you to invest up to R36 000 per year on the JSE tax-free, with a total limit of up to R500 000 per lifetime. Unlike the Tax-Free Call account, your funds are only available to you 3 days after a sale. You would also need to have an Online Share Trading account to open up a Tax-Free investment account.