Understanding Tax-Free Savings Accounts (TFSA)
By MoneyToday Team • Oct 12, 2024 • 5 min read
If you are a South African looking to save money, the Tax-Free Savings Account (TFSA) is arguably the first place you should start. Introduced by the National Treasury in 2015, TFSAs were designed to encourage a savings culture in SA.
The Golden Rules
Before opening an account, you need to understand the limits set by SARS. These are strict, and exceeding them leads to significant tax penalties.
Annual Limit
R36,000
Per tax year (1 March - 28 Feb)
Lifetime Limit
R500,000
Total contribution over your life
Why use a TFSA?
The magic of a TFSA is in the name: Tax-Free. In a normal savings or investment account, you eventually pay tax on the growth. In a TFSA, you pay zero tax on:
- Interest: No tax on interest earned from cash deposits.
- Dividends: No 20% Dividend Withholding Tax on shares.
- Capital Gains: No Capital Gains Tax (CGT) when you sell your investments for a profit.
Beware the Penalty
If you contribute more than R36,000 in a year, SARS will tax the excess amount at 40%. This happens regardless of your personal tax bracket. Be careful not to "replace" withdrawn funds if it pushes your total contribution over the limit.
Cash vs. Investments
You can open a TFSA at a bank (Cash TFSA) or an investment provider (Stock/ETF TFSA).
Cash TFSA (Bank)
Low risk, earns interest. Best if you need the money in 1-3 years, but generally not recommended for long-term TFSAs because cash growth often barely beats inflation.
Investment TFSA (ETF)
Invests in ETFs (Exchange Traded Funds) like the S&P 500 or Top 40. Higher risk in the short term, but potentially much higher growth over 10+ years. Since the tax benefit compounds over time, using a TFSA for high-growth assets is generally recommended by financial experts.
Can I withdraw my money?
Yes, you can withdraw at any time (some providers make take a few days like 7 days notice). However, you do not get your allowance back.
Example: If you deposit R36,000 and withdraw R10,000, you have used R36,000 of your annual allowance. You cannot put that R10,000 back in the same tax year without hitting the penalty.