#128: How to use your tax-free account

 

Save Squack's life!

While the term “tax-free savings account” makes it seem like it’s a savings product, you shouldn’t think of them as savings accounts at all. There’s nothing to be done about the confusing name, but this week we explain why we shouldn’t use them to save cash.

If you are under 65, the first R23,800 you earn in interest every year is exempt from tax. This is one of those little SARS gifts we really love. If your bank or savings vehicle offers you 6.75% in interest every year, you need R352,592 in cash before you start paying tax on your interest.

Since you’re limited to a R33,000 tax-free contribution every year, it will take 10 years’ worth of contributions before you become liable for tax on the interest.

In the case of share investments, you are liable for tax from the very first day. If you buy an ETF today and sell it tomorrow, you’ll have to pay tax on any profit you make right away - either in the form of income tax or capital gains. You also pay dividend withholding tax of 20% right from the first dividend.

In your lifetime your share investments will cost a lot more in tax than cash savings.

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Richard

I’m 24 and maxing out my tax free savings account with FNB for the past two years.

I’m earning 6.75% interest

After listening to the podcast it seems like you guys favour tax free investment into an ETF where dividends are reinvested tax free.

What are the main advantages of tax free investing vs saving and would you recommend moving my current account into an investing platform?

I currently have an EasyEquities account, where I have my taxable investments.

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Win of the week is Adam the actuary.

I've been listening since the start of the Fat Wallet Show when I was just a second year at university and now I am graduating from my actuarial sciences honours degree. This is in part to you guys.

1. Thank you for helping me get my degree. Your simple explanations of financial concepts have helped me in a couple of courses and tests (why can’t you guys write textbooks??)
2. Thank you for educating me. With your help, I have managed to support myself through university while building an emergency fund that has saved my ass in a couple of occasions!  
3. Thank you for giving me confidence to stand up to my family to tell them that I am not going to be buying an apartment and that I am not getting myself into debt right out of university to buy a new car (I'm going to be driving my current one until I have to push it).
4. Thank you for giving me a conscience. Your weekly chats about financial literacy and companies scamming their clients with unnecessary jargon and excessive fees have made me want to change the way insurance products are structured and made (Down with fees and nonsense).

You have provided me the knowledge to wrestle control over my finances; knowledge that I never got from my parents. You have created a money conscious 22 year old that is ready to go into the working world and use your teachings.

P.S. not all actuaries are boring

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Stefan

I have a TFSA, a till death do us part ETF account, Till death do us part Share account, a share trading account and a derivative trading account.

The company I work for does not offer any company benefits with regards to retirement investing.

I was always under the impression that the only way you got a tax benefit for these is if it was part of your employment package and deducted from your income.

From recent shows it sounds like If I got a retirement annuity on my own I would still get a tax break.

Should I get something like this or just keep adding to the DIY account mentioned at the start of this mail?

How do I get the tax break if there is one and which products do you recommend?

Tax is the one area in my life that I am failing miserably in  and am pretty sure I am giving away a lot of free money due to my lack of knowledge.

Herman wrote an algorithm to work out the tipping point where the tax you pay in retirement would be more than the tax you save contributing towards your retirement. He will write an article on his findings for justonelap.com in the next few months.

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Jan-Johan

I'm considering making some of my monthly contributions into global property.

I already have exposure in the local property market through the Proptrax 10 and Stanlib SA Property ETFs. My main reason for investing into property ETFs is the attractive yields.