It is the start of the new tax year and it will be worth your while to become a tax-savvy investor to ensure maximum benefits for your nest egg.
What better way to start off the new tax year, which kicked off on March 1, than opening a tax-free investment account (TFIA) to gain as much benefit as possible from compound interest.
A TFIA allows you to save R3 000 a month, R36 000 a year, and a maximum of R500 000 in a lifetime without incurring tax on interest earned.
First-time savers should not be intimidated by the initial amounts. Most people start off putting away R250 a month and gradually build up to reach the monthly R3 000.
The trick is in starting and building momentum along the way.
The beauty of TFIAs is that whatever interest you earn, the SA Revenue Service (SARS) will not lay its hands on it.
For long-term investors, this is awesome news, as they would start seeing the magic of compound interest hard at work.
Compound interest happens when you earn interest on interest. Albert Einstein called it the eighth wonder of the world, as it allows you to turbo-boost your investment.
Dos and Don’ts of TFIA
- If you can, do not be tempted to withdraw and later deposit funds into your TFIA, as it negates tax-free benefits. The amount you withdraw cannot be recontributed. You can open a TFIA for children, but it is not wise to make withdrawals, as the amount cannot be recontributed as well.
- Do not use a TFIA as an emergency fund (this is money you save for rainy day such as car/roof repairs etc). Instead, open an emergency fund and keep it separate from the TFIA.
- Do not exceed the annual R36 000 investment limit. Avoid unnecessary penalties as any deposits above the annual R36 000 threshold will be taxed by SARS based on your tax rate.
- For ease of operations, try to automate your investment by setting up a debit order that goes off your account every month to avoid blaming your lack of investment on “black tax”.
You should be guided by service charges on where to open your TFIA and always think long term. It will take you almost 14 years to reach the lifetime limit of R500 000.
You also do not want to enrich someone over the term of your TFIA with higher service charges. It pays to shop around.
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