There are apparently very few to no freebies at all from the South African Revenue Service (SARS). However, some peeps think a tax refund is free money.
It reminds me of my childhood thoughts….
Are SARS Tax Refunds Free Money? Here’s the Truth
So, during my primary school days, there was some sort of a scheme where parents would pay a monthly fee for their child to receive a 250ml packet of flavoured milk each day of school.
If, for some reason, the milk was delayed a couple of days, I would receive three or four 250ml packets of milk.
Not known to a grade 3, I used to think my school was awesome and generous, giving us free milk.
I will forgive you for thinking that a tax refund is free money from SARS, see I used to have the same thoughts. We should all know by now that nothing is for mahala, particularly if you live in South Africa.
Tax refund is not free money; it’s actually your money that SARS might have overcharged you on the tax you paid previously, so use those refunds wisely if you got some. It is hard to get a lump sum of money. When you get your refund, make it work for you somehow.
Starting a Tax-Free Savings Account (TFSA) could be a good idea if you already do not invest in one. If you do, there is still a need to top up the contribution if you are lagging. Now let’s get to the free lunch TFSA.
What Is a Tax-Free Savings Account (TFSA) in South Africa?
Tax-free Investments were introduced by the South African government in 2015, in order to encourage people to save more for their financial wellness.
Given the low savings rate in South Africa, this is a form of an incentive by the government for you to save more money.
This saving bucket will allow you to invest your money without paying any tax to SARS. Given the fact that we pay an awful amount of tax on most investments, this saving vehicle is a real deal since you won’t pay tax on:
- Interest
- Dividends
- Capital gains
So, when one withdraws their money from the TFSA, they will not pay any taxes at all.
TFSA Contribution Limits in South Africa: Annual and Lifetime Limits
Each person in South Africa is entitled to contribute a maximum of R46,000 per tax year, which is from 1 March to the end of February the following year.
R46,000 works out to about R3,833 per month if you want to contribute evenly throughout the tax year. If you can’t contribute the full R3,833 per month, no pressure. Some JSE-listed Exchange Traded Funds (ETFs) and unit trusts etc. allow you to contribute as little as R250 per month or whenever.
Remember it’s personal finance. Contribute whatever you can. Don’t let maximum numbers stop you, after all, the only person you are competing with in personal finance is you.
Please remember that:
- An individual has a lifetime contribution limit of R500,000
- If you miss a year’s contribution, you can’t carry it over it is use it or lose it
- These amounts might change from time to time, but as of the time of writing, these are the numbers you should work with.
- If you misuse the system by contributing over the acceptable limit, SARS will tax you 40% of the excess amount.
What Can You Invest in Through a TFSA?
- Money markets or fixed-term bank accounts
Offered by most banks. I don’t suggest these since they will not beat the mysterious invisible dude, called inflation. Since you and I are long-term investors investing for financial freedom, these accounts might not help us. Again, just my suggestion the choice is yours. - Unit trusts (collective investment schemes)
✅ Recommended - JSE-listed exchange-traded funds (ETFs)
✅ Recommended - Some policies offered by insurance companies
In my mind, these are not ideal since it’s often an issue to mix insurance and investments.
Can You Open a TFSA for Your Child in South Africa?
Note, you can also open a Tax-Free investment account for your child. This can be a major stepping stone for your little one. One can empower their children this way, at the same time teaching them how to invest, etc.
Why a TFSA Should Not Be Your Emergency Fund
TFSA can be a real superpower for long-term investors. Please never use this account as an emergency fund. If you withdraw money from it, you lose your lifetime allocation remember that R500k lifetime contribution limit?
One can treat TFSA as:
- An addition (if not supplement) to retirement funds
- A long-term investment that works best when left to compound over time.
TFSA and Estate Planning: What Happens When You Die?
TFSA also has benefits related to estate planning. Remember, death is part of life, so understanding what happens to your investments when you die is important. Not morbid at all, sooner or later, we are all going to die.
TFSA Investment Fees: Your Tax-Free Account Still Has Costs
Meanwhile, let’s grab this free lunch from SARS with both hands.
However, watch the fees you pay to service providers who offer these investment products. Otherwise, your free lunch might feed the bully across the block.
High investment fees are one of those mistakes you should avoid at all costs, since they compound over time.
we all make mistakes at one point in our lives, some cost money, here is my latest mistake.
The other day, I was enjoying a delicious breakfast at a restaurant with my wife. We finished eating, paid, etc., and walked back to the car…
Only to discover that I was slammed with a R500 fine 🥺.
“For what?” my lovely wife asked.
She thought I was joking. The fine was for parking my car parallel to the curb, facing oncoming traffic.
I had battled to find parking and later parked on a small spot next to a tree, facing the opposite direction. You see, I was punished for my silly mistake whether I was correct or not, you judge that. Moral of the story: a R500 mistake parking fine to eat a R328 breakfast should not be repeated.
At least it’s a once-off mistake, I guess 😕
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