Save R 2 750.00 per month and reap the benefits.
You can invest R 33 000.00 per year in tax-free savings accounts up to a lifetime limit of
R 500 000.00 (likely to be revised upwards in the future). A tax-free savings account is an investment product where capital growth, interest, withdrawals and returns on investment are not taxable.
The sooner you start the more likely you are to reap the full threshold benefits of your tax-free incentive.
Save R 2 750.00 a month for 15 years and you can enjoy all the growth and interest earned
tax-free.
This means that if you were to invest in a tax-free savings account, over a 15-year period, and avoid the temptation to withdraw from it, even a low risk 5% interest bearing account will accumulate you a tax-free income of R 207 000.00 plus. This over and above your R 500 000.00 contribution you have saved for a rainy day.
Ask your advisor what savings accounts qualify legitimately as a tax-free account and be careful not to exceed the lifetime threshold of R 500 000.00 as you will incur a stiff 40% tax penalty.
It should be noted that a tax-free savings account is a long-term vehicle and is generally not the right vehicle to save in for education plans, emergency savings etc. This is due to the withdrawal restrictions. When you withdraw an amount from your tax-free Savings account it deducts what you can put back on your life-time limit in the future. So, once you have withdrawn the R500 000 you are not allowed to put this back or take out another tax-free savings accounts. Parents should thus be very careful to invest and withdraw in their children’s names as this will impact what their kids can do in the future. For example: I invest R33 000 into my tax-free savings account in 2016, in 2017 I need the money for an emergency, and I withdraw R20 000. The R20 000 I withdrew was already allocated to my lifetime limit of R500 000 and I can thus only contribute another R467 000 to my tax-free savings account in future. I cannot put the R20 000 back to bring it back up to R500 000.
It is thus very important to discuss the reasons, tax implications and need of your investment with your financial planner.