Photo by Edgar Chaparro
It’s hard to believe we are at the end of the first month of 2025! What adjustments have you made to your investment strategy? Are you investing at all? Are you investing more? Or are you just continuing with the same old, same old? If you haven’t started yet, it's time to get back to the financial gym!
It's not just important to build your physical muscles; it's also important to build your financial muscles and build your wealth. And just like achieving a good physique takes sacrifice, building financial wealth also takes sacrifice. So, we are challenging you to one-up yourself. Whatever amount you were investing last year, invest more this year! Don't get stuck wondering what to invest in. Begin today and put that money aside in a simple savings account, which is a great start.
Investing is an essential pillar of financial security and wealth-building. In South Africa, where economic challenges and opportunities coexist, having a strategic savings plan is critical. And if too many debt repayments are preventing you from investing remember to contact us on 087 183 5012 or WhatsApp 076 451 6944.
To help you, we are starting 2025 with a series of blogs that focus on the three common types of investments that you must consider:
Tax-free savings accounts,
Endowments, and
Retirement annuities.
We will be explaining the basic advantages of each and vital facts about each you should know. Then we are going to compare each of the different options.
This week we focus on Tax-Free Savings Accounts (TFSAs), one of the most popular savings tools available. We introduce you to its features and provide answers to common questions to help you make informed decisions about this powerful savings method.
What Are Tax-Free Savings Accounts (TFSAs)?
TFSAs were introduced in South Africa in 2015 to encourage individuals to save and invest without the burden of taxes on returns. These accounts are versatile and can be used for various financial goals, such as saving for education, a home deposit, or emergency funds.
Key Features:
No tax on earnings/growth within the investment e.g. interest, dividends, or capital gains earned within the account.
Annual contribution limit of R36,000 / R3,000 per month and a lifetime limit of R500,000 (as of 2025).
Contributions cannot be replaced once withdrawn without impacting the life time limit.
Benefits:
Encourages long-term savings due to tax-free growth.
Ideal for flexible, medium-term financial goals.
Accessible without penalties (though careful planning is required to maximise the tax benefits).
Obligations:
Responsibility for choosing suitable investment options within the TFSA.
Adherence to contribution limits to avoid penalties.
Contributions above and beyond the maximum limits stated above will attract a tax penalty of 40%.
For example:
You are contributing R1,500 per month to a TFSA with provider A that amounts to annual contributions of R18,000. You then invest a lump sum of R25,000 in a TFSA with provider B. Contributions for the tax year therefore exceed the annual limit of R36,000 by R7,000. You will therefore have to pay a penalty tax on the R7,000 of 40%.
If you have multiple TFSA’s with different providers, you will have to monitor how much you are contributing to each of the TFSA’s to ensure that you do not exceed the annual R36,000 / R3,000 per month and a lifetime limit of R500,000.
Common Questions About TFSAs
To better understand how TFSAs work and how to use them effectively, let’s address some frequently asked questions.
1. What Can I Invest in Through a TFSA?
TFSAs allow for a range of investment options, including:
Unit trusts – Actively managed funds managed by fund managers like e.g. Investec, Stanlib, Allan Gray, etc.
Exchange-Traded Funds (ETFs) – Low cost, passive funds.
Fixed deposits – issued by Banks
Government retail savings bonds
You can choose options based on your financial goals and risk tolerance. It’s important to research or consult with a financial advisor to select investments aligned with your objectives.
2. Can I Withdraw Money from My TFSA?
Yes, you can withdraw funds at any time without paying penalties or taxes on the growth.
However, once withdrawn, the amount reduces your overall lifetime contribution limit.
Let's explain. Everyone has a lifetime contribution limit for TFSAs of R500,000, A withdrawal of R20,000 uses up some of this life time limit, in this case, reducing it to R480,000. This makes it essential to carefully plan withdrawals.
3. How Do TFSAs Compare to Other Savings Options?
The primary advantage of a TFSA is the tax-free growth of earnings, making it more efficient than taxable accounts. While it offers flexibility, because you have access to the funds at any time, it does not provide tax deductions on contributions, unlike Retirement Annuities.
4. What Are the Risks Involved?
As with any investment, the risks depend on the assets you choose. For example:
Market-linked options like ETFs and actively managed equity funds carry market risk.
Fixed conservative Balanced Funds, fixed deposits, or bonds have a lower risk but may offer lower returns.
In simple terms, the riskier funds/assets you invest in, the higher the possible returns/growth you may receive, alternatively, you may also experience higher possible losses when markets have a “downward slump”.
It is therefore important that you consult a financial adviser to assess your personal risk profile and have them advise on the best combination of funds, ETF’s, Bonds and other assets to protect your capital while ensuring long-term growth.
Diversifying your investments within a TFSA can help balance risk and return.
5. Who Should Use a TFSA?
TFSAs should be part of every investment portfolio and are suitable for individuals aiming to:
Save for medium-term goals, such as buying a home or funding education.
Build an emergency fund while maximising tax-free returns.
Complement other long-term savings like Retirement Annuities.
Tax-Free Savings Accounts are a powerful tool for tax-efficient savings in South Africa. Whether you’re saving for a specific goal or building an emergency fund, TFSAs offer flexibility and growth potential that can fit into almost any financial plan.
In the next article, we will explore Endowments and how they cater to specific savings needs, especially for those in higher tax brackets. So, stay tuned!
Have any questions for us on this article? Please send them to us on info@zenmunni.co.za.
If you are struggling with knowing how to invest, or have too much debt, call us at 087 183 5012 or WhatsApp us at 076 451 6944, or email us at info@zenmunni.co.za. We are FAIS and NCR registered, and we can partner with you to grow and build your wealth.
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