Tax-free savings accounts: issues to consider

Tax-free savings accounts are ideal tools for long-term investment strategies, but education is needed to ensure customers use products in the most effective manner.

South Africans are allowed to contribute up to R33 000 per tax year. There’s no limit on the number of tax-free accounts that an individual may have, however the R33 000 still applies to the sum of all the contributions. Nevertheless, individuals frequently overshoot this limit, incurring penalties from the South African Revenue Service (Sars).

There is also a lifetime limit of R500 000 one can contribute to a tax-free savings or investment product. If you withdraw money from your account after exhausting your limit, you should not pay it back into the account again in the same tax year. For example, if you contribute a lump sum of R33 000 at the beginning of the tax year you cannot cash out R20 000 halfway through the year with the intention of paying it back during the same tax year, as this over-contribution will attract a penalty.

When tax-free savings accounts were first introduced to the market, customers were not allowed to transfer funds between tax-free accounts, as it was viewed as a withdrawal from one tax-free account and contribution to another tax-free account. However, as of March 1, customers have been able to transfer seamlessly.

A tax-free account also provides parents or grandparents with an opportunity to open accounts in the name of a minor to save for their education or provide them with a future nest egg, which they can access when they come of age.

If you open up a tax-free account in the name of a minor and exhaust their R500 000 lifetime contribution allowance threshold by the time they reach 18, they will not be able to contribute further to a tax-free account. Similarly, should the child decide to cash out of the tax-free savings account, they will not be able to contribute to a tax-free vehicle as they would’ve already utilised their lifetime allowance.

Takumi Daling is product manager: savings and investments at Standard Bank