RA’s and TFSA’s- Retirement AWESOMES and Tax free SUPER accounts
A very big hello to all our wonderful clients. If we haven’t managed to catch up with you yet in the new year, our hope is that you have entered 2024 feeling refreshed, recharged and ready for another wonderful year ahead.
As I write this, schools have already started and we have whizzed past January, with our February tax year end fast approaching. The beginning of the year always seems like such a great time to get things done, as we generally feel more energised and thoughtful after our December breaks, and top of the list should be making sure that we maximise our tax advantages available to us regarding out Retirement Annuities and our Tax Free Savings Accounts.
We have attached detailed documents at the end of this newsletter explaining in depth how these different products work, but we also wanted to quickly highlight some of the major benefits and features of each product below:
Retirement Annuities:
- Investors receive a tax deduction equal to the amount contributed. In the simple scenario of someone in the 45% tax bracket making a R100,000 contribution, their tax would be reduced by R45,000, thereby allowing them to make a R100,000 investment at the cost of only R55,000.
- Investors receive tax free growth whilst inside the RA on all types of income. The South African government is doing their utmost to incentivise people to save for retirement, as this reduces the need for State Grants.
- On withdrawal from the RA, the first R550,000 is tax free, and one generally finds that in retirement, your tax bracket is substantially lower than what it was when you were working, meaning you are potentially taxed at a lower rate than all of the tax deductions you have received
- Money within your RA falls outside of your estate, allowing for a potential 20% savings in estate tax at death.
- Money is also protected from creditors
- One cannot access the money until 55, so liquidity can be an issue, and upon retirement, there are strict rules around how you are able to access that money. So RA’s are not as flexible as discretionary savings products like unit trusts.
Tax Free Savings Accounts:
- Investors have a lifetime R500,000 limit for which they can invest into these products, and the growth on them will be able to be withdrawn tax free. The annual contribution limit is R36,000, meaning it takes just over 13 years to utilise your lifetime contribution limit
- No tax deduction is available on contributions like with retirement annuities, but there is way more flexibility when wanting to withdraw amounts, similar to completely discretionary products like unit trusts where there is immediate access to your money
- These are wonderful vehicles where you have a long time horizon and are designed for timeframes >15 years, where the benefit of zero tax on your wealth accumulation can be maximised. We often recommend these products to grandparents who are unsure of what to get for their grandkids, as a long term investment can outweigh the toy that is played with for a few days and then forgotten about.
With February being a leap year in 2024, we have an extra day to ensure that any top ups into our RA’s and TFSA’s are done, but many of the investment houses impose their own deadlines to ensure that all contributions are received, processed and invested before the 29th of February. As such, we would recommend ensuring that all top up requests are done by Friday 23rd February.
We hope that 2024 will be a year of great success and we look forward to a continued partnership in your journeys!
From Wesley and the GDA Team