Tax season 2023 is almost here, and there are a couple of relevant deadlines you should know about. Contributions to a retirement annuity and tax-free savings account are collated so that we can report to the South African Revenue Service (SARS) for the tax year 1 March 2022 to 28 February 2023.
In order to take full advantage of the tax breaks available to us within these investment vehicles, contributions need to be made prior to the 20th of February. This will allow for enough time for deposits to reflect in our account, get priced, and then be allocated to the relevant fund.
With an RA you can contribute up to 27.5% (capped at R350,000) of your total annual income and deduct it from your taxable income to enjoy tax relief on it. The tax deduction limit applies to cumulative annual retirement contributions, regardless of whether you have saved in a retirement annuity fund, a pension fund, or a provident fund.
The tax benefit can be carried forward to reduce tax liability in future tax years if you exceed the 27.5% maximum contribution limit. Ultimately, the more you top up your RA contribution for the tax year, the higher the tax benefit.
In addition to the tax-deductible premiums, RAs are exempt from tax on dividends and interest, and Capital Gains Tax on growth earned within the investment.
The tax benefits extend to when you reach retirement, where you can make one tax-free withdrawal, which can be up to one-third of your investment as a lump sum and the first R500 000 is tax-free. Any lump sum withdrawal exceeding the R500 000 tax-free portion will be taxed according to the retirement tax tables.
One of the most popular savings tools in recent years is a tax-free investment account (TFIA), which was introduced in 2015.
The banks have been very good at getting people to buy into Tax-Free Investment Accounts (TFIA), but not always for the right reasons, as there isn't advice that comes from the bank that explains what assets customers will get the most tax relief on and how long customers should be invested into the product to get the most benefit out from it.
The tangible benefit of a TFIA is that individuals do not have to pay Income Tax, Dividends Tax, or Capital Gains Tax on the returns from their investments. Individuals can invest up to R36 000 per tax year until they reach the lifetime limit of R500 000. It is important to note that if you exceed the annual or lifetime limit you will face significant tax penalties that can impact the value of your investment.
In my opinion, TFIA's are retirement vehicles too, and let me explain why.
Your retirement savings pays out a maximum tax-free lump sum of R500 000 at retirement, anything above that gets taxed at retirement tax tables. If more capital is needed at retirement to cover any immediate costs. Your TFIA should be used to top up the tax-free capital amount you have available instead of having to pay exorbitant amounts of tax when increasing your retirement withdrawal.
On top of the opportunity to boost your retirement nest egg with a lump sum, Tax-free investments are not subject to Regulation 28 (which limits the percentage allocated across assets or asset classes) offering more freedom in choosing investment options and how much offshore allocation we may want.
If you have not taken full advantage of the benefits and have the means to do so before the tax year comes to an end, let's catch up and formulate a plan to do so.
Have an amazing February!
Kind Regards,
Fabio Brogneri