YOUR MONEY: Tax-free investing — lump sum or monthly deposit?

Question:

I have two questions about tax-free investing. Did the tax-free contribution limits change in the budget last month and is it better to do a monthly or lump sum deposit (with the lump sum paid in March)?

— A Fat Wallet Facebook community member

Answer:

The annual contribution limit for tax-free accounts is R36,000 per individual with a lifetime limit of R500,000, both unchanged in last month’s budget.

As for paying monthly or lump sum in March, the maths is easy. Lump sum is better. Markets mostly move higher, so the earlier you get the money into the tax-free account, the more you benefit. And, yes, some years the market goes down, as we saw with international markets in 2022, but this is the exception.

But if this stresses you because you’re worried about market volatility, or if you simply can’t afford a lump sum deposit, then monthly is just fine.

A sneaky hack for those who can’t afford the lump sum but do have discretionary ETFs in a non-tax-free account: you could sell R36,000 of discretionary ETFs in February and use this for the lump sum in March. Then buy R3,000 discretionary every month to build to the R36,000 for next year’s tax-free contribution, repeating this process every year.

The sale of the discretionary ETFs may attract capital gains tax (CGT) if they’re in profit. But you get a R40,000 CGT exemption every year and a gain on a R36,000 sale will be well within that exemption limit.

— Simon Brown, Just One Lap

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