Tax 101: Reduce your contribution with tax-free savings accounts

The 2023 filing season has been in full swing since July 7 and runs till 23 October 2023 for individual taxpayers. Tax-free savings accounts are the easiest and most effective way to reduce your tax contribution when filing season rolls around.

Here’s everything you need to know to get cash bank every year …

TAX-FREE SAVINGS ACCOUNTS

We’ve touched on various ways to reduce your tax contribution, including charitable donations, retirement annuities, etc. However, tax-free savings accounts, if utilised correctly, are probably the easiest and most lucrative way. There are a just a few provisos, say the experts from TaxTim.

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Tax-free savings accounts are offered by most large financial institutions – like Standard Bank, Investec, Santam, Discovery, Old Mutual, etc – and they will invest your money in unit trusts, fixed deposits, bonds, and various third-party offerings. And here’s why you should explore them over and above a regular savings account.

YOUR DIVIDENDS WILL BE TAX FREE

When you invest in tax-free savings accounts, you will not pay tax on the growth of your investment. Additionally, you won’t pay tax when you withdraw the money from your account, says TaxTim. There are limits to your annual contribution, but if you keep within these parameters, you can enjoy tax-free dividends on your investments every year.

ALSO READ: Putting off your 2023 tax return? Here are 12 reasons why you shouldn’t

The annual limit is R36 000 on tax-free savings accounts. Similarly, there is a lifetime limit of R500 000. Once you have reached your lifetime limit, the financial institution will advise that no further investment is allowed.

YOU CAN HAVE MULTIPLE TAX-FREE SAVINGS ACCOUNTS

Crucially, there is no limit on the amount of tax-free savings accounts you can have, provided you don’t exceed the R36 000 threshold in a year (note, that the financial year for these runs from 1 March to the end of February). In plain speak, that means you can invest R16 000 to one tax free savings account and R20 000 into another. But you cannot exceed R36 000 total.

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Remember, this annual limitation of R36 000 cannot be carried over to the next tax year, so if you do not use it all up, you will forfeit the unused amount, warns TaxTim. You are allowed to open tax-free savings accounts for a minor/your child or children. However, the same rules of annual and lifetime contributions apply, so you cannot exceed R500 000 total on their behalf.

TAX-FREE WITHDRAWALS

The upside to tax-free savings accounts, says TaxTim, is your growth on investment is exempt from tax when you withdraw it. You can remove and reinvest your returns and it doesn’t count towards your annual or lifetime contribution limit.

ALSO READ: Here’s why you MUST complete a tax return even if you earn less than R500 000

You’re free to withdraw from your tax savings account at any time, however, any new investment amount is treated as a new contribution and counts towards your R36 000 annual and R500 000 lifetime limit.

These are some of the top-ranked tax-free savings accounts in South Africa currently:

• Coronation
• Old Mutual
• Discovery Bank
• Standard Bank

These are just a few. Enquire about tax-free savings accounts with your current bank/financial institution.

This article is for informational purposes only and should not be construed as financial, tax or legal advice. For further details consult the SARS website or get in touch with a tax specialist, like TaxTim.