It’s that time of the year again, where you can reduce your income tax bill by making an additional contribution to your retirement annuity as well as contribute to a tax-free investment.
The tax year-end in February means that you need to act soon if you still want to maximise your tax savings for this year.
What are the key tax benefits of saving in a retirement annuity (RA)
Your contributions to your RA reduce your taxable income, this means that you pay less income tax.
Your contributions are limited to 27.5% of the higher of taxable income or remuneration and are capped at R350 000 per tax year
Another big tax advantage is that while you are invested in an RA growth is free of dividends tax, income tax on interest and capital gains tax. In addition, at retirement, the portion that you withdraw in cash is exempt from tax up to a specified limit.
Use a tax-free investment account (TFI) to benefit from long-term tax savings
You can invest R33 000 per year (up to a maximum of R500 000 over your lifetime) and benefit from the growth of your investment which is free of dividends tax, income tax on interest and capital gains tax.
It’s important to note that you can only invest R33 000 per year in TFI products. This is the maximum limit for all TFI accounts in your name, across product providers. If you over-contribute, SARS will hit you with a hefty 40% tax penalty.
Which product is right for you?
RAs and TFIs fulfil different objectives and it may not be an either/or decision, but rather a question of using both for different needs. From a retirement savings perspective, in most cases RAs offer the best tax deal. However, access to your money is a lot more restricted in a RA than a TFI. On the other hand, with a TFI you will need to be disciplined and resist the temptation of withdrawing from your TFI account in order to enjoy the long-term compounding benefits.
You can contribute as little as R500 per month:
The below graph illustrates that a debit order can really add up to significant savings when combined, and when done consistently over a long period of time. This also speaks to the power of compound interest, which is often overlooked when thinking about savings and investments.
If you haven’t reached these limits you have until the end of February to take advantage.