Tax Free Savings Accounts (TFSA) were introduced in 2015 with the main purpose of incentivising and encouraging household savings. They are designed to be an investment vehicle within which the investor has access to a myriad of investment options (unit trusts, ETF’s, money market instruments, savings accounts etc.), but with the advantage of not having to pay tax on those investments.

An investor can therefore be invested in a TFSA, with various levels of risk asset exposure and at various product providers, without paying income tax, dividend withholding tax or capital gains tax on the underlying investments.

This gives an investor all the benefits of a retirement investment (like a retirement annuity or pension fund), but with all the flexibility of a savings account.


What are the limitations?

Personal contributions

An investor is only allowed to invest into a TFSA as an individual, meaning these products cannot be used by a business or other legal entity (for example a trust) to achieve tax efficiencies. There are also annual and lifetime limits on contributions into a TFSA. These limits get updated from time to time, but at the moment the annual limit is R36 000 with a lifetime investment limit of R500 000.

R36,000 R500,000

Investors have the ability to withdraw from their TFSA at any time and are allowed to withdraw as much as they want, but any withdrawal does not influence the accumulated contributions. This is a very important aspect of a TFSA, because investors need to be aware that any money withdrawn out of a TFSA cannot be reinvested at a later stage.

Any contribution above the annual and lifetime limits will be taxed at 40% before being invested.

Underlying investments

There are a few restrictions on the type of investments that are eligible to invest in within a TFSA. Firstly, any underlying investment needs to be ‘adequately diversified’. According to the Final Notice and Regulation for Tax Free Savings and Investment Accounts (National Treasury, this excludes any direct share trading (including shares in REITs) or ‘products that otherwise do not comply with diversification requirements’.  Investments will also not be allowed to charge any performance fees.


Uses of Tax Free Savings Accounts

This investment vehicle is first and foremost intended as a savings account. This is because of the flexibility to access capital at any stage without penalties or restriction periods. In some cases, TFSAs are also used as additional retirement savings because of the similarities in tax benefits. There are also no restrictions in the percentage of risky assets that can be held in a TFSA, so it is preferable to see this as a long-term investment tool.

These vehicles are also used by some individuals to minimise tax implications on investments, by investing assets with a higher implicit tax rate into a TFSA and keeping the rest in regular investment vehicles.


Frequently asked questions

How many different TFSAs can one individual have?

There is no limit to the number of TFSAs an individual can have, only that total contributions cannot exceed the annual and lifetime limits.

Who is eligible for a TFSA?

Businesses or other legal entities (for example Trusts) are not eligible for TFSA. A TFSA can be opened for a minor, the contributions will however have to come from a bank account that is in the minor’s name (i.e. not directly from a parent’s bank account).

Does the annual allowance accrue if it is not used?

No, if an investor does not invest the full R36,000 in one year they are unable to ‘carry that over’ into a new year.

Download: What is a Tax Free Savings Account

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The content of this article is for information purposes only and does not constitute an offer or invitation to any person. The opinions expressed are subject to change and are not to be interpreted as investment advice. You should consult an adviser who will be able to provide appropriate advice that is based on your specific needs and circumstances. The information and opinions contained herein have been compiled or arrived at from sources believed to be reliable and given in good faith, but no representation is made as to their accuracy, completeness or correctness. MitonOptimal South Africa (Pty) Limited is an Authorised Financial Services Provider Licence No. 28160, regulated by the Financial Sector Conduct Authority (FSCA) – Registration No. 2005/032750/07.MitonOptimal Portfolio Management (Pty) Limited is an Authorised Financial Services Provider Licence No. 734, regulated by the FSCA – Registration No. 2000/000717/07.

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