We’re quickly approaching the end of the tax-year with just one month to go until end-February. That means time’s running out on a number of highly valuable tax-saving moves one can make.
One particularly savvy move for savers is to contribute the maximum annual amount allowable to a retirement annuity (RA) or a tax-free savings account (TFSA). Although TFSAs are not tax-deductible, all interest income, capital gains and dividends received from investments made from the TFSA are exempt from tax.
Usually, dividend withholding tax is levied at 20% on distributions, while interest income is subject to income tax, and is taxed at your marginal tax rate up to 45%. Currently, individual taxpayers enjoy an annual exemption on interest income. For both 2018 and 2019, this exemption is R23,800 for individuals under 65 years old and R34,500 for individuals 65 years and older.
When it comes to Capital Gains Tax (CGT), which is a separate tax, it forms part of income tax at the end of the day. A capital gains event is triggered only when you decide to sell (part or all of) your investments. Currently, only an amount of 40% of this capital gain (not the total gain) is included in your annual income; this makes the maximum CGT rate for individuals paying the maximum 45% marginal tax rate 18%. Note that for 2018 and 2019, individual taxpayers enjoy an annual capital gain exclusion of R40,000.Not being taxed on the growth in your TFSA is a benefit not to be ignored, and as an investor one is currently permitted to contribute up to R33,000 per year towards this investment, with a maximum lifetime contribution of R500,000.
When it comes to RAs the South African Revenue Service (SARS) is quite generous in allowing you to deduct contributions to an RA from your income before you’re taxed. But this doesn’t mean that if you could contribute your entire salary to an RA you’d pay zero tax. SARS caps the amount of RA contributions you’re allowed to deduct from your income.
The maximum you may deduct is 27.5% of your annual income or R350,000, whichever is lower. Unless you’re earning over R1.27 million a year, you won’t have to worry about the R350,000 number, but for the rest, the 27.5% applies.
Similar to TFSAs you don’t pay any tax on the investments inside of your RA. That means your investments work harder for you because you keep more of your returns.
At the end of the day, one’s income, debt, investment horizon, together with specific goals, will all play a role in determining the suitability of incorporating a TFSA into your financial plan and the amount contributed to it on a monthly and annual basis.
Before setting up a TFSA or an RA, chat to us at Summa, about how to use it optimally in your portfolio and in context of your overall financial strategy – bearing in mind that it is best viewed as a long-term investment.