Tax-Free Savings Accounts can be promoted as an effective way to save because:
- The interest earned and the withdrawals you make will all be tax-free.
- You also can access your money at any time.
While this is all true, the problem with just focusing on this is that many consumers are unaware of the fact that we are all entitled to R23 800 tax-free interest earned per year. If you are 65-years or older you can earn up to
R34 500 tax-free interest.
This means that this account, as a short-term savings vehicle, is not really a benefit. Especially if you consider that you are using up your allowance for your Tax Free Savings Account (TFSA).
“The term 'savings account' may have been misleading because it led people to treat it as a traditional savings account. However, it is essential to remember that every taxpayer in the country is already exempt from paying tax on the first R23 800 of interest earned in a tax year." - Founder & CEO of Meerkat, David O'Brien
Collier went on to say that you’d have to have about R400 000 in your account at an interest rate of 7% to pay even R1 of tax.
What you NEED to know about TFSAs:
- It should NOT be used as a regular savings account or a short-term savings solution.
- The best way to use a TFSA is as a long-term savings vehicle, for 3 years or longer.
- By not making early withdrawals, you also don’t prematurely use your annual and lifetime TFSA allowance.
- The interest banks usually charge on TFSA may end up being less than one of their other regular savings accounts.
Tax-Free Saving Accounts RECAP & fast facts
The Tax-Free Savings Account was introduced in 2015 in South Africa.
You can contribute a maximum of R36 000 per year and R500 000 in your lifetime. If you exceed this amount, you will be charged a 40% penalty that’s payable to SARS.
- It’s also important to note that if you have contributed an amount to your TFSA, there is no way to get that portion of your contribution allowance back.
- This means, if you’ve contributed R36 000 and you’ve withdrawn that R36 000, you don’t start at zero again. You will now not be able to make a contribution for that particular year and your lifetime allowance will be R500 000 - R36 000 = R464 000. This is why it’s so important to not use this account as a short-term savings vehicle.
- You have to track your contributions yourself.
- It's very important that you track the contributions you make each year because you cannot exceed your annual and lifetime limits. This is also why it's important to use it as a longer-term investment so that you can make the most of your contribution limits.
Remember, while you don't have a withdrawal limit when it comes to TFSA's, you do have an annual contribution limit of
R36 000 and a lifetime limit of R500 000.
What should you do instead
Do make use of a Tax-Free Savings Account, but put it in an equity market instead. Equity is the best underlying investment because TFSA gives the best value there, but since equity is a long term game, you shouldn’t consider TFSA’s for anything shorter than 3 years.
If you want to save for shorter durations, instead of using a TFSA, you can just use a notice account at your bank, and earn the interest tax free.
At Meerkat, we also offer a short-term savings account with easy access to your money. You can open up this savings account from as little as R25 per month and get access to your money at anytime, anywhere, tax-free, while keeping your TFSA allowance in-tact.
If you are opening a savings account at an interest rate of about 8% and you have debt at an interest rate of 20%, you’re doing it wrong.
Try to pay up that debt first and then save.
- If you can’t afford to pay off your debt, consider debt counselling at Meerkat.
Who is Meerkat?
Meerkat is a financial wellness company that wants to help South African consumers do MORE with their money. We can help with debt repayment negotiations, provide affordable insurance and help you kickstart an emergency fund
Fill in the contact form on our website to receive a free callback from the Meerkat team today.