YOUR MONEY: Are tax-free accounts worth the bother?
It depends on what the purpose of the investment is — what the investor wants to achieve
20 October 2022 - 05:00
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Do tax free investments play any role for higher net worth individuals, or is it just unnecessary administration? The tax saving on retirement annuities is great, but on tax-free investments it takes time (plus they need to be local — again, perhaps not what the person wants).
— Name withheld
Answer:
The short answer is yes and no. When considering whether a financial product plays a role, the product should not be looked at in a vacuum, but in the context of a financial plan that considers a person’s goals and objectives and the interplay between the various elements of a financial plan. To answer the question of whether a tax-free savings account is beneficial for a high net worth individual would therefore take more space than allocated for this reply. I will attempt to look at it from only one aspect, namely taxation.
The product should not be looked at in a vacuum, but in the context of a financial plan
One of the many considerations that need to be taken into account is the tax treatment of a retirement annuity vs a tax-free savings account.
Retirement funds are taxed on a system under which an investor can deduct contributions to the fund from tax, and the growth in the underlying assets of the fund is exempted from tax, but later on the retirement income is taxed.
A tax-free savings account works the other way around: contributions cannot be deducted from tax, but both the capital growth and the eventual income are not taxed. Both these systems have the same result of ensuring that income is not taxed twice.
Which one is better? Again, it depends on what you are trying to achieve. Some of the questions that need to be answered are:
What is the purpose of the investment — to generate an income or a lump sum? Where a lump sum is the goal, a tax-free investment may be the better option.
Do you want to lessen your current tax burden? A tax-free investment isn’t tax deductible, whereas the retirement annuity is — up to certain limits.
What is the time horizon of the investment? Due to the annual (R36,000) and lifetime (R500,000) caps on contributions to a tax-free savings account, with this investment type it may take longer to build the necessary capital.
I hope I have been able to provide some insight into the thinking that is required when selecting a financial product. I would, however, recommend that you seek advice based on your personal circumstances.
— David Kop is head of policy and engagement at the Financial Planning Institute
Support our award-winning journalism. The Premium package (digital only) is R30 for the first month and thereafter you pay R129 p/m now ad-free for all subscribers.
READER LETTER OF THE WEEK
YOUR MONEY: Are tax-free accounts worth the bother?
It depends on what the purpose of the investment is — what the investor wants to achieve
Question:
Do tax free investments play any role for higher net worth individuals, or is it just unnecessary administration? The tax saving on retirement annuities is great, but on tax-free investments it takes time (plus they need to be local — again, perhaps not what the person wants).
— Name withheld
Answer:
The short answer is yes and no. When considering whether a financial product plays a role, the product should not be looked at in a vacuum, but in the context of a financial plan that considers a person’s goals and objectives and the interplay between the various elements of a financial plan. To answer the question of whether a tax-free savings account is beneficial for a high net worth individual would therefore take more space than allocated for this reply. I will attempt to look at it from only one aspect, namely taxation.
One of the many considerations that need to be taken into account is the tax treatment of a retirement annuity vs a tax-free savings account.
Retirement funds are taxed on a system under which an investor can deduct contributions to the fund from tax, and the growth in the underlying assets of the fund is exempted from tax, but later on the retirement income is taxed.
A tax-free savings account works the other way around: contributions cannot be deducted from tax, but both the capital growth and the eventual income are not taxed. Both these systems have the same result of ensuring that income is not taxed twice.
Which one is better? Again, it depends on what you are trying to achieve. Some of the questions that need to be answered are:
I hope I have been able to provide some insight into the thinking that is required when selecting a financial product. I would, however, recommend that you seek advice based on your personal circumstances.
— David Kop is head of policy and engagement at the Financial Planning Institute
Send your questions to yourmoney@fm.co.za
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