With the tax year end approaching, it is an opportune time to ensure you have takenadvantage of the tax breaks available and are not leaving any ‘free money’ on thetable. With various avenues available for tax-efficient investment, understandingthese strategies can help investors make informed decisions, while adhering to taxregulations.
With the tax year end approaching, it is an opportune time to ensure you have taken advantage of the tax breaks available and are not leaving any ‘free money’ on the table. With various avenues available for tax-efficient investment, understanding these strategies can help investors make informed decisions, while adhering to tax regulations.
In this article we briefly discuss three ways to maximise your tax benefits.
TOP-UP your pension plan
Individuals contributing towards a retirement plan have until the end of February 2025 to maximise their tax-deductible contributions, with the limit currently being up to 27.5% of taxable income with an annual cap of R350 000. If you are already contributing to an occupational retirement fund, the tax deduction applies to the cumulative total of all pension plan contributions, including retirement annuities (RAs).
Unlike pension and provident funds, RAs are not tied to an employer, which gives individuals greater control over their investments. They are designed to supplement retirement income and are particularly suitable for:
If you invest in an RA, the earliest withdrawal can be made at 55 years of age, but there is no upper age limit at which you need to retire from the fund. By understanding the unique features of RAs, aligning them with your financial goals, and maintaining a disciplined savings strategy, you can secure a more financially stable retirement. Balancing RAs with other investment options will further enhance your overall portfolio, providing peace of mind as you approach your retirement years.
As such, it makes sense to use the weeks leading up to the year-end tax to calculate the contributions made towards your retirement funds during the year and to leverage the tax deductibility of your retirement contributions by topping up the investment accordingly. From a tax-efficiency perspective, contributing towards a retirement savings vehicle provide significant advantages in that investment premiums are tax deductible, dividends and interest are tax-exempt, and no capital gains tax (CGT) applies to investment growth.
MAXIMISE your TFSA
Another beneficial vehicle is the Tax-Free Savings Account (TFSA). With a TFSA, any investment growth, interest, or withdrawals are free from tax, making it an attractive choice for those looking to maximize their savings. Everyone has an annual contribution limit, which is currently R36 000 and a lifetime limit of R500 000. Thus, maximising contributions to this account before the end of the tax year can help ensure that investors are using their full tax-free allowance, which will benefit them in the long term.
It is important to note, however, that contributions to a TFSA are made with aftertax funds, which means that there is no possibility of claiming tax back on investment premiums. Unlike RAs, TFSA investment strategies are not subject to Regulation 28 of the Pension Funds Act, allowing for greater flexibility and optimising tax benefits by investing in growth portfolios such as equities and property – see section below that discusses what is not suitable for short term goals. While there is no limit on the number of TFSAs one can have, keeping track of annual contributions is essential to avoid exceeding the R36 000 limit to avoid tax penalties of 40% irrespective of personal tax rates.
Not suitable for short term goals
At present, individuals under the age of 65 benefit from an annual interest exemption of R23 800 per year. At current money market rates, investors can invest up to approximately R300 000 in a traditional money market account/fund before paying any tax on the interest. Investors should therefore be wise and not use their TFSA for short-term goals ≤ R300 000. In short, do not waste your TFSA lifetime limit of R500 000 to meet short-term goals – you already benefit from the annual tax-free interest exemption.
Contributions are made from after-tax income, but the interest, dividends, and capital gains earned are tax-free.
USE your CGT exemption
Individual investors can use their annual CGT exemption, being the first R40 000 of gains made on their discretionary investment portfolio, to reset the base cost (‘buy and sell’). If needed, this also allows the investor to simultaneously rebalance his/her investment portfolios to keep it aligned with their goals and objectives.
If you are invested for the long term, a comprehensive annual review of your overall investment portfolio will reveal whether there is a need to rebalance and/or adjust your investment strategy. However, if you feel that your circumstances have changed, your goals have been recalibrated, or your investment strategy is too risky for your appetite, you may want to consider rebalancing your savings portfolios before the end of the tax year.
Conclusion
As the end of the tax year approaches, it is vital for investors to take proactive steps in managing their investment savings. By TOPPING UP retirement portfolios, MAXIMISING your tax-free savings account and UTILISING your CGT exemption, investors can ensure that they effectively leverage the investment opportunities available to them while minimising the tax impact.
At year-end, your RA service provider will send you an IT3(f) tax certificate, which forms the basis for calculating your tax refund. Reinvesting the tax refund into your RA or FTSA in the following tax year, once again tax-free, is a sound financial planning strategy