How to make most of RAs

Many South Africans retire with insufficient retirement savings. One of the easiest ways to ensure you can retire comfortably is by contributing a monthly contribution to a retirement annuity (RA) fund, which also holds a number of tax benefits. 10X Investments outlines how an investor can make the most of their RA.

Let’s say you earn R500 000 a year. If you contributed 10% of that (R50 000) to your RA, then at the current income tax rates, you’d qualify for a refund of R18 000. That’s a pretty decent bonus. And, effectively, your R50 000 contribution only costs you R32 000.

If you contribute R75 000 instead of 50 000 (15% instead of 10%), your tax refund increases to R27 000.

What if you put the R18 000 refund (from the example above) back into your RA the next tax year? Add that to the R50 000 that you’ll probably continue contributing and you’ve suddenly contributed R68 000. Now your tax refund is going to be R24 480. Reinvest that the following year and your refund will be R26 813.

At the same time, you’re contributing more to your RA. Those extra savings will grow and compound over time, hugely boosting your income when you retire.

The tax year ends on February 28. If you have a lump sum of money available to top up your RA before then, you can increase your tax benefits for that year. Some people are able to make several lump sum contributions in the months leading up to the end of the tax year.

Others choose to increase their monthly contributions, ideally through a debit order. That way, the contribution is automatic, and they aren’t tempted to spend the money. People also say they find it easier to live on what’s left after they’ve saved, rather than save what’s left after they’ve lived (which is usually nothing). – Moneyweb

You’re contributing more to your RA. Those extra savings will grow and compound over time.