What is tax free savings?
A tax free savings account is an account which is exempted to tax. No tax is paid on any deposits, interest or withdrawals. With a tax free savings account, it is made easy to get optimal profit from your capital. This allows the user (you) to save up for future goals but having the flexibility of accessing your money.
How does a tax free account work?
Any individual can either deposit a lump sum onto this account or make frequent deposits. A tax free account creates freedom for the user to manage their own finances as far as possible and with tax free saving it is now possible to get the most out of your hard earned savings. Unfortunately, because you do not pay tax on your money or its profit in this account, the government has implemented limits into how much you are allowed to deposit/invest into this account. Deposits are limited to:
- R30 000 yearly
- R500 000 over a lifetime
In South Africa, if contributions are made above these amounts SARS, will claim 40% of your profits as well as the deposit.
True and false about tax free savings
You can borrow money from your own account. True/false?
True - but technically you are not borrowing money. Tax free accounts gives you ultimate control over your finances. If you have chosen an account where constant deposits can be made, you are simply making withdrawals and deposits. When your account only allows a lump sum of money, you can still withdraw money from the account, the process just takes a bit longer.
You pay taxes on your withdrawals. True/false?
False - Isn’t that great? You do not pay taxes on your withdrawals. Don’t be confused or blurred by this. A tax free account does not come cheap. Tax free savings accounts do not have extremely high fees, however it is not always a fixed fee and can vary depending on the current interest rate.
Only one tax free savings account allowed. True/false?
False. The more the merrier. You may open as many as you wish. However, the total of all the accounts contributions’ must be within the allowed limit (this is where it gets tricky). Most people open various tax free savings account for spouses, children or in many cases funds for a future happening. When opening more than one account, be sure to monitor them frequently to avoid those pesky penalty costs.
Tax free savings can be used as collateral for secured loans. True/false?
True. This comes in very handy when you do not have a great credit record or assets worth risking and are in need of money. Try making use of the same bank when applying for your secured loan; chances are - you will pay less fees at one bank than you would at three or four banks.
What can I use tax free savings for?
Luckily this is a very popular savings option and due to the demand of this account there are a wide variety of things you can use it for:
- Extra retirement funds
- Can be used as a non-registered investment
- Save during retirement (this is important)
- Save for a specific goal
- Short term and long term savings