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Tax-Free Savings Account

questions & answers

Tax-free Savings Account | TFSA questions and answers Tax-free Savings Account | TFSA questions and answers

Tax-Free Savings Account

What is a Tax-Free Savings Account? What are the benefits of a TFSA? Who is eligible for a TFSA? How is the TFSA different from discretionary, endowment or contractual savings products? How much is an individual allowed to contribute? What happens if an individual over-contributes and how will they know the balance of their annual and lifetime contribution limits? What happens if an individual has not contributed the maximum of R30 000 in a given year? Will the allowed contribution for the next tax year be increased by the amount of the under-contribution? Are there limits on how much an individual is allowed to withdraw? Can withdrawals be reinvested in a Tax-Free Investment Plan in future? What are the options? How long can someone invest in a TFSA?  What happens at death? Can a TFSA be used as security? What is important principals to follow when investing? What does investment risk mean? What is the features and expectations of different risk profiles?  Why don’t investors just utilise ‘risk-free’ investments? What does ‘real return’ mean?

What is a Tax-Free Savings Account?

The Tax-Free Savings Account (TFSA) is a type of registered plan introduced by National Treasury. Through a TFSA, individuals can put their savings into suitable investments and not pay tax on the investment income and capital gains that they earn, or on withdrawals from the plan.

What are the benefits of a TFSA?

A TFSA allows individuals to set money aside and watch those savings grow, tax free, throughout their lifetime. They’ll benefit from the effects of compounded growth, while interest, dividends and capital gains earned in a TFSA are tax free.

Who is eligible for a TFSA?

Only South African taxpayers, who are natural persons, can invest in this product. A TFSA can be held in the name of any individual, including children. All account holders will need to have a registered tax number and a bank account in their own name in order to transact in the TFSA once it has been opened. Legal entities (e.g. companies) and trusts will not be eligible to invest in a TFSA. The following list of service providers that is able to offer a TFSA: Licensed banks Long-term insurance companies Asset managers (managers of registered collective investment schemes) Authorised users Linked Investment Service Providers or LISPs National government

How is the TFSA different from discretionary, endowment or contractual savings products?

The following table highlights the tax treatments for individuals across the various types of products: Investment Plan Endowment   RA, Preservation Funds, ILLA TFSA Dividends 15% withholding tax 15% withholding tax Contractually up to 0% retirement age, a client Interest Age < 65: first Fixed 30% withholding will be in the same tax 0% R23 800 is tax-free; tax position as a Tax-Free Investment Plan (0%), provided no withdraw- Age > 65: first als are made. R34 500 is tax-free Tax will apply when a withdrawal is made, CGT 33.3% of marginal tax Fixed 10% withholding including the payment 0% rate; tax of a lump sum at retirement. Specific tax tables are Annual exemption of applicable. R 30 000 See the TFSA vs RA calculator!

How much is an individual allowed to contribute?

The maximum TFSA contribution limit is currently R30 000 in any given tax year (1 March to the end of February). An annual lifetime limit also applies, and this is currently set at R500 000.

What happens if an individual over-contributes and how will they know the balance of their annual and lifetime

contribution limits?

The maximum contribution into any TFSA is currently legislated to be R30 000 per annum and R500 000 per lifetime. Any contributions exceeding these limits will be taxed at 40%. These limits will be reviewed annually by National Treasury. There is no limit on the number of Tax-Free Savings Accounts an individual can have. However, they need to ensure that their annual payments across all their approved Tax-Free Savings Accounts do not exceed the annual limit. It is the individual’s responsibility to monitor their annual contribution

What happens if an individual has not contributed the maximum of R30 000 in a given year? Will the allowed

contribution for the next tax year be increased by the amount of the under-contribution?

Unfortunately not. The maximum contribution in any given tax year is R30 000 regardless of whether the client has used his/her past allowances.

Are there limits on how much an individual is allowed to withdraw?

No, they can take out as much of their money as they want, whenever they want, and use it for anything they choose.

Can withdrawals be reinvested in a Tax-Free Investment Plan in future? What are the options?

An individual’s TFSA savings can be withdrawn from their account at any time, for any reason, and all withdrawals are tax free. The full withdrawn amount can be put back into the TFSA, but it is the individual’s responsibility to ensure that this does not breach their contribution limit within a tax year, as an over- contributed amount will be subject to a 40% penalty tax.

How long can someone invest in a TFSA? 

There is no restriction on how long an individual can invest their money into a TFSA. However, a lifetime limit of R500 000 applies.

What happens at death?

Where an individual taxpayer dies while having one or more tax-free investments in their name, these investments will be added to the estate of the taxpayer for purposes of estate duty. While the investments are held within the estate, the returns from these investments will continue to be exempted from income and dividends tax. However, once the TFSA investments are transferred to the beneficiaries of the estate, the individual will be taxed as per the individual circumstances. Any transfer of a TFSA from one individual (or his estate) to another will be deemed to be a contribution, and will be subject to the annual and lifetime contribution limits of the recipient.

Can a TFSA be used as security?

Legislation currently does not allow a TFSA to be used as any form of security.

What is important principals to follow when investing?

Know yourself! Before you begin investing, you need to know your goals. You should have well-thought-out goals. Goals are critical to knowing yourself because they will help you understand what you are trying to accomplish with your investment. As part of knowing yourself, you need to know your budget. You cannot invest without funds. You also need to understand your ability to tolerate risk because this ability will determine what kind of an investor you are. You want to develop a “sleep well” portfolio—a portfolio that is planned so that even when investments go wrong, as they sometimes do, you can still sleep well at night. Understand Risk Risk is inherent in all investment activities. Some risks include inflation risk, business risk, interest-rate risk, financial risk, market risk, political and regulatory risk, exchange-rate risk and liquidity risk. The key to managing risk is understanding the different types of risk and investing at a risk level that is comfortable for you. It is critical for you to find the risk level at which you are most comfortable. You can use our risk- tolerance calculator to assist you to find the level of risk that is right for you. Stay Diversified Diversification is your best defense against risk. You should invest in a variety of assets and asset classes. Diversification does not mean investing in ten different banks. It means investing in different companies, industries, and perhaps even countries. Bank shares will all tend to go up and down together. To truly diversify you need to invest in different industries and perhaps countries that won’t be subject to the same economic factors or risks. Make sure you understand the risks of each of your investments. Investing is risky and uncertain: minimise risk by diversifying your portfolio. All our product providers have risk profiled managed funds which are managed by experienced fund managers. These risk profiled funds could be the best solution for the not so experienced investor as these funds are not only managed according to your tolerance towards risk but you have peace of mind that your money is in a diversified investment managed by professionals. Invest Low-Cost and Tax-Efficiently Watch your costs very carefully, including, management fees, and taxes. Remember that regarding investment, a rand saved is worth more than a rand earned; this is because while you have to pay taxes on every new rand you earn, every rand you save is already taxed and can earn interest on income. It is not the amount of money you make, but the amount of money you keep after costs, taxes and inflation that makes you wealthy. If you decide to find your investment direct on the Plandirect website you will enjoy big savings not only on the initial fees but also on the ongoing advise fee compared to the traditional fees charged! Invest for the Long Run Invest for the long run: this is how you will achieve your goals. Invest wisely: there are no “get-rich-quick” schemes that work, and short-term investing is expensive in terms of time, transaction costs, and taxes. Keep at least part of your funds in the market for the long run. Keep in mind that taking money out of the market, as well as discontinuing saving, may not only slow your progress but could stop it altogether. Use Caution If You Are Investing in Individual Assets If you must invest in individual assets (and this is not a given), know what you are investing in. Do your homework. If you do not have the time to research individual investments, invest in unit trust funds that have many individual assets. Know who you are investing with. Make sure you invest with unit trust companies that have built a tradition of meeting the needs of their investors. Work with good companies that have good products. Be very careful with your money and invest it wisely considering all the principals of investing. Invest Only with High-Quality, Licensed, Reputable People and Institutions When you need help, do not be afraid to ask for it. But get help from good people whose actions and beliefs are consistent with the principles discussed. Good help from qualified, licensed, and experienced financial planners, financial advisors and brokers may help you in your investment plan. Use the best resources available, but be aware of how those resources are compensated. In addition, make sure advisors have the required licenses to counsel you on the broad range of investment assets you are (and should be) considering. Work only with licensed and registered advisors. In some circumstances, fee-only financial planners or advisors may be a better choice than financial planners or advisors that are paid on commission.As discussed elsewhere on this website, Plandirect’s direct offer is intended for the DIY orientated investor that know exactly what they want and wants to do their investment direct with Quality, Licensed, Reputable People and Institutions. Not only will this investor have peace of mind but he/she will be benefiting from our fee for service approach. Remember that every rand discount you receive on fees increase your investment positively and ultimately your return and/or income will be more compared to full commission charged! Develop a Good Investment Plan and Follow It Closely Complying to the principals discussed above you can develop a good investment plan that is consistent with your goals and your budget. Follow this plan closely. An investment plan is a detailed road map of your investment risk and return, constraints and investment strategy.

What does investment risk mean? 

Investing entails risk, and risk means different things to different investors. Risk could mean the possibility of losing all your money. Risk could also entail the possibility of not achieving a return. Risk has many different meanings. In the past, the main risk of investing was considered to be “default risk,” or the risk that a company would not be able to pay back an investment due to default or bankruptcy. Government securities were considered risk-free investments, because investors knew the government could always print money.In more recent years, analysts began to use variance, or standard deviation, to better measure risk; they found that even government securities are risky. This measure of risk is not concerned with the possibility of default; rather, it is concerned with the volatility of the investments, or the risk that the investment’s return may be lower than expected. Currently, investors also use a system which measures the way a specific instrument moves in relation to a specific market or benchmark. There are a few important concepts that an investor should understand related to risk: Investment risk is the probability of not achieving some specific return objective. The risk-free rate is the rate of return that will definitely be obtained. It is often assumed to be the return on fixed investment at bank institutions. The risk premium is the difference between the expected return and the risk-free rate. Risk aversion is the reluctance of an investor to accept risk. Risk is inherent in all investment activities. Some risks include inflation risk, business risk, interest-rate risk, financial risk, market risk, political and regulatory risk, exchange-rate risk and liquidity risk. The key to managing risk is understanding the different types of risk and investing at a risk level that is comfortable for you. It is critical for you to find the risk level at which you are most comfortable. You can use our risk-tolerance calculator to assist you to find the level of risk that is right for you.

What is the features and expectations of different risk profiles? 

Why don’t investors just utilise ‘risk-free’ investments? 

If you assume that the rate that you receive on a fixed deposit at a bank as a ‘risk-free’ investment the reasons all investments must not be made only in these vehicles are: If you compare your after cost and tax rate of return on the interest you receive on these investments with the current inflation rate you will notice that if you’re rate of return is more that the inflation rate that it is hardly significant. If you are not earning a better interest rate than the inflation rate you have no real return. (A real return is the rate of return you receive after the impact of inflation - see next faq) If you have a negative or no real growth in your investment you are not getting richer and you can even become poorer every year.

What does ‘real return’ mean?

A real return is the rate of return you receive after the impact of inflation. Inflation has a negative impact on your investments because your money will buy less in the future. Use our inflation calculators to see inflation in action! If, for example, an investor earned 8% growth on his investment in a year and the inflation rate was 6%, the real return would be 2%. However if the investor received 6% or less he would not have had any real growth!
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Risk Profile to describe:
 
Definition and Main Characteristics
 
 
 
 
Capital Growth
 
Short term volatility & risk appetite
 
Investment Portfolio
 
Income generation
 
Personal circumstances
 
Main objective
 
Investment Term
 
Withdrawals requirements
 
Expected return over full term
 
Income & Capital gains
 
Best expected return over 1 year
 
Worst expected return over 1 year
 
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