When to Use Tax Free Savings Accounts

Tax Free Savings Accounts are the new big thing! Being able to save on capital gains and income tax is a huge plus! But is it for everyone? What are the downsides? And what should you look out for?

What is a Tax-Free Savings Account?

Tax-Free Savings Accounts were introduced in 2015 by the National Treasury to encourage the low and middle class to invest. The investing product allows a person to invest up to R33 000 per annum of their after-tax income. This investment will not incur any tax for Interest, Income, or Capital Gains earned within the account.

Image by Joshua_Willson from Pixabay

What are the Downsides?

There are few downsides to this type of investment, but there are a few things you should be aware of when investing in a Tax-Free Savings Account:

  1. You have a maximum Lifetime contribution of R500 000. Any more than this will be taxed.
  2. You are limited to specific investments such as ETFs, Unit Trusts, and other funds. Your Advisor will be able to go into more detail on this.
  3. If you take money out you cannot put it back. If you withdraw you cannot replace it, you will have to use more of your lifetime limit. It is thus often looked at as a Long term Investment.
Image by Bruno /Germany from Pixabay

What to look out for?

Like with all investments, there are a few key points you should always check and discuss with your Financial Advisor before investing:

  1. Costs – Always check the fees of your investments. Both Upfront and Recurring.
  2. Performance – How has the asset performed and is it matching up with your goals
  3. Risk – Calculate your risk number with your advisor to find the right investment
  4. Credibility – is the provider registered and regulated?

Tax-Free Savings Account can be a great way for you to save money for the long term. With the right investment and right Advisor, you can have long term growth! 

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