The 15 Most Asked Questions About Tax Free Savings Accounts

Written by Lisa Meyer on March 28th, 2016

The 15 Most Asked Questions About Tax Free Savings Accounts

“Hands down the BEST way to invest”.

Tax Free Savings Account (TFSA) advertising is pretty much everywhere right now!

There’ve been radio ads, TV commercials, billboards, website banners, articles, websites, you name it!

It’s been lauded as one of the best ways to save & invest, and something every South African should have.

But with so much going on, and the tax-free media blitz out there, only a few thousand South Africans have actually opened their TFSA accounts, and even less understand them!

In fact, we’ve been inundated with so many TFSA questions we’ve noticed that certain ones seem to pop up time and time again.

A lot of investors want to know more about investing and saving tax-free, and they seem to all want to know the same things.

That’s why we’ve compiled this list of the 15 most asked questions about Tax Free Savings Accounts, just for you!


BONUS: Get your hands on this TFSA Cheat Sheet and discover the best ETFs you can invest in using your Tax Free Savings Account!

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Everything You Need To know About How TFSA’s Work


Tax free savings Accounts are actually pretty simple to understand at the end of the day.

But like most things financial, people tend to get scared off of them because they seem too complicated or complex.

Well, thankfully TFSA’s are a little different, and in just 15 steps below you’ll be able to invest tax-free in a matter of minutes.

And best yet, you’ll be able to understand exactly what you’re doing too.  

With that said, here are the 15 most frequently asked questions about TFSA’s:


“Why Should I Save In A Tax Free Savings Account”


A Tax Free Savings Account (TFSA) is a really effective way to put money away for certain financial goals, such as retirement.

The beauty of these accounts is that you don’t pay certain taxes, so money that you normally would’ve kissed goodbye to your broker or even the government stays in your account.

This means you can get growth on money you normally wouldn’t have.

Not to mention you also don’t pay tax on the growth of your investments within your TFSA, as well as the proceeds that get paid out to you.

This means your TFSA money can grow faster than when in other accounts.

Faster growth simply means more for you at the end of the day.

And that’s what these accounts are for at the end of it all – To grow your money, not to just stash it away (IE replace that shoebox under the bed with another one).

TFSA’s also offer you great flexibility.

You’re not tied down to specific arrangements like compulsory monthly debits, so you’re certainly not ‘locked’ into anything.

This means if for whatever reason you need to halt payments for a month or two, you have the flexibility to do so.

Over and above that you can also withdraw your money at any point in time.

However, this does defeat the entire purpose of having a TFSA as the point of long term investing is to let your money compound over the long term (where you earn returns on your returns so your investments grow exponentially).

Any withdrawal interrupts the compounding process which severely inhibits your ability to grow your TFSA pot at the end of the day (IE the whole point of having it!).

Any funds you withdraw also cannot be replaced, and you will be penalized, so just remember that.


“Who Should Consider Investing In A TFSA?”


Before we consider ‘who’ should consider a TFSA, lets explain the types of entities that are allowed to open one.

Quite simply, only people can open a TFSA (that is an individual in the eyes of the law).

So you can’t open a TFSA in the name of a company or a trust unfortunately.

Now, onto the ‘who’.

Believe it or not, TFSAs aren’t for everyone.

A large number of investors don’t pay tax on interest or capital gains anyway (what you’d be exempt from when opening and investing with your TFSA).

This could be because:

  • The interest they receive is less than the current annual allowance of R23,800 (or R34,500 if over 65)
  • Their capital gains don’t exceed the current annual allowance of R40,000.

For this type of investor, the only saving is on dividend tax.

There are also a few other things you have to consider whether or not a TFSA is right for you.

In fact, I’d sum it up to three questions.

If you answer yes to any of these, you should be investing in a TFSA:

  • Are you already investing in fixed income products with your bank, investing in ETFs, or even retail bonds?
  • Would you prefer NOT to learn the ins and outs of the stock market, or simply just don’t have the time to do so?
  • Do you feel you don’t have ‘enough’ money to invest and can only put away up to R2750 per month?

If you answer yes to any of those you really should consider a Tax Free Savings Account.

And the simple fact is outside of the investors who already don’t pay certain taxes, just about everyone should consider opening a TFSA.

Why pay taxes when you don’t have to?

Which roughly translates into "why turn down free money" (in the form of investment growth)


“What Are The Tax Benefits of Saving In A TFSA?”


This one is pretty straight forward.

When it comes to long term investing unfortunately you have to pay certain taxes.

Taxes that eat away into your investment pot, growth and performance.

Not paying these means you get to kick the effect of compounding up a notch!

That means a better performance, and more growth at the end of the day for you.

Ultimately that means more money at the end of your TFSA investment period.

Tax Free Savings Accounts are different, and they’ve changed the game for investors entirely!

You see, with a Tax Free Savings Account, there are a number of taxes you simply don’t pay.

Capital gains tax?


Securities transfer tax?


Dividend withholding tax?

Yes, you guessed it, also gone!

That means the usual 0.2% you'd have to fork over as securities transfer tax, get kissed goodbye.

The same goes for the 12%-13% you could pay on capital gains tax and the 20% tax on your dividends.


All gone.

In fact, with a Tax Free Savings Account you even save as much as half your brokerage on run of the mill trading accounts.

The potential to save money, and reinvest it is huge (which is what you should be doing).

That means the cash you normally would’ve handed over to your broker or the government comes straight back to you, and you get to use it to boost your compounded returns over the long run.


“How Much Can I Invest Per Month?”


Unfortunately, at this point in time there are tax free savings account limits.

That means you can’t pile into your TFSA and just pop in whatever you want.

When it comes to monthly limits, you can only put in R2,750 per month over a tax year (a total of R33,000 per year).

And you can only do this for 15 years.

Can this potentially change in the future?


But until it does, and the Treasury says otherwise, you can only contribute R2,750 each and every month.

However, this monthly amount isn’t fixed, so long as you stick to your annual limit. See more in the below question…


“What Are The Tax Free Savings Account Limits?”


There are basically two tax free savings account limits you need to be aware of.

Annual limits.

And overall limits.

Each is designed to ensure that you stick to ALL of them over the long run so you don’t get penalized.

(More on that in a second).

You can only contribute R33,000 per tax year, and no more.

And finally, you can only contribute R500,000 over the entirety of your investment term (15 years).

So where does the R2,750 monthly contributions come from?

Well, R33,000 per tax year is R2,750 a month.

Naturally you could contribute R5,000 one month and nothing the following month, but ultimately over a tax year your contributions are capped at R33,000.

So if you’re looking to ‘autopilot’ your investing, sticking to a consistent plan and contributing to it accordingly is a good way to go about things (IE R2,750 per month).


“What Happens If I Exceed My Limits?”


If you exceed the annual cap or the total limit, you’ll pay a tax penalty of 40% on the excess amount.

Depending on what your goal is, there are workarounds.

For example, if you’d like to open a TFSA for your kids you can open one in their name and contribute towards it without ever denting your own TFSA limit.

So if you were planning on opening a ‘university fund’ through a TFSA you can still do so, without ever having to impede your own tax free investing!


“Can I Open More Than One Tax Free Savings Accounts?”


Yes, you can have more than one TFSA.

For instance, you may decide to split your annual amount / limit between unit trusts and a fixed deposit account by using two separate Tax Free Accounts.

The onus is on you to manage the amounts you pay in.

But nothing changes when it comes to your limits and how much you can put in.

Remember: If you exceed the annual cap or the total limit, you’ll pay a tax penalty of 40% on the excess amount!


“How Can I Get The Maximum Benefit From My TFSA?”


Tax Free Savings Accounts were created to encourage more people to save and put away for their retirement.

That means long term investing.

And what’s the magic behind long term investing (it’s something I’ve already touched on)?

Yip, you guessed it…


The earlier you start investing, the easier it is to build proper wealth.


Through the power of compounding.

Think of it like this.

If you have R100, and you earn 10% of that R100, you’re left with R110.

Now if you earn 10% of that R110, you’ll earn R11, leaving you with R121 on total.

That’s the power of compounding in action.

Instead of earning returns on just your pot (the R100), you earn returns on your pot and the returns (R100 + R10 + R11).

You’re earning returns on your returns.

And for compounding to do some serious work, it needs years and years to make this happen.

Another way to look at it is like this.

You can save much less money, and end up far richer, if you begin investing early!

All thanks to the effect of compounding.

Compounding is also important more towards the end of your investment journey.

Or should I say, that’s where the “magic” really happens.

It’s those final years where, thanks to the power of compounding, each year will add millions to your portfolio.

Yes, millions.

If you’ve saved enough over the course of your investment journey, every additional year you don’t drawdown on your pot allows you to compound the returns you’ve achieved over the course of 20 or more years.

If it were to be visualized in a chart, think of it as a hockey stick.

The line would gradually move upwards as you move along, but towards the final part of your investment journey it suddenly starts to go up, drastically.

But you NEED to have spent the earlier years putting money away and growing it over that period of time in order for that “hockey stick growth” to happen.

That’s why starting early is so crucial.

It goes back to the old saying…

The best time to plant a tree was yesterday.

The second best time is today.

So start planting!


“Can I Open A Tax Free Savings Account For My Child Or Other Family Member?”


Yes, you can definitely do this.

However, you need to keep in mind it’d probably be better to open a TFSA in their name (by doing it with them and having their documentation ready), and not in your name for them.

Not doing so means that your limits would be eaten into.

This doesn’t need to happen and is quite a simple fix to avoid it.

You wouldn’t only impede your ability to save and invest over the period, but that of whoever you’re opening the account for.

You also need to keep in mind things like donations tax, as they could become applicable here and are not exempt.


“Can I Withdraw From My TFSA?”


Thankfully TFSA’s are flexible enough for this.

So yes, you can…

but it isn’t advised.

As I’ve explained above, you really shouldn’t touch money you’ve invested in your TFSA.

If you withdraw money from your TFSA, you can’t replace it.

For example, you invest R33,000 one year in your TFSA, but later decide to withdraw R15,000.

You can’t invest another R15,000 in the same year or you’ll have to pay a tax penalty.

Whilst this encourages you to save, it also means you need to ensure that you don’t need the money you’re putting to work in your TFSA.

TFSA investing really is for the long term, and it’s not just a ‘benefit’ you’ll miss out on if you withdraw early, but you’ll get penalized if you want to replace that amount.

So what about transferring funds between your accounts?

At the moment you can’t transfer balances between TFSAs.

It was recently reported that the Treasury plans to introduce this facility in November ’16 after consulting with various product providers.

So keep an eye out for that later this year…


“May I Add My TFSA To My Existing Portfolio?”


Your portfolio is executed through your broker or provider through an account (most likely an equity account).

A Tax Free Savings Account is exactly that, an account.

This means it sits separately to whatever your other account is.

Although the TFSA forms an important component of an overall investment strategy, these funds need to be segregated into a separate JSE trading account.

Can you convert your current JSE account into a TFSA?

Unfortunately not.

Existing investments may not be converted into a TFSA, and you’d need to fund your account with new contributions.


“What Do I Need To Send The Tax Man (SARS) When It comes To My TFSA?”


One simple document, that’s all.

And you can even get your TFSA provider to do it for you!

All you need to do is submit the IT3(s) statement provided to you by your TFSA institution to SARS alongside your annual tax return.

And as I mentioned, if you even give your tax number to your TFSA institution, some will even electronically submit that information to SARS for you!

What a win.


“What Is the Tax Year / Period That My TFSA Limits Stick To?”


Again this is fairly straight forward.

The SA tax year runs from the 1st of March to the 28th of February of the next year.

So that means your annual limit of R33,000 needs to be within that time frame.


“What Exactly Can I Invest In With My TFSA?”


Right now TFSA’s only let you invest in ETFs, Unit Trusts and Retail Bonds.

That means that unfortunately you can’t put your money directly into stocks just yet.

Things could change in the future, but for the time being you’re limited to just those.

Personally I don’t think it’s a problem, because if you ask me ETFs let you profit from the stock market the lazy investors way.

Either way, I’d suggest you look at investing in ETFs anyway!


“What Are The Best ETFs I Can Invest In With My TFSA?”


I’m sure at this stage you’re wondering what exact ETFs you should be putting your money into with your TFSA?

I’ve been asked this question so often I decided to put together a TFSA ETF Cheat Sheet just for you!

In it I reveal all the best ETFs you can include in your TFSA, so you don’t have to spend hours researching, or spending time asking advisors and unnecessarily trawling the net.

All you need to do is tell me where to send your copy.

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Why Pay Tax When You Don’t Have To? Start Investing Tax Free Today!


Tax free investing is straight forward, easy to understand, and even simpler to do.

You can choose to be active with your TFSA and pick your own funds.

Or you could even go the ‘autopilot’ route and run your TFSA through your advisor and let them run it for you.

But at the end of the day, every investor looking to put away for the long term should absolutely have a TFSA.

Not doing so just means you’re leaving money on the table and forking out your hard earned cash to brokers and the government when you simply don’t have to.

Not to mention by keeping that within your TFSA you get to earn more at the end of the day.

It’s a no brainer if you ask me!

So what are you waiting for, have you opened your tax free savings account yet?

Until then, here’s to tax free investing!

Lisa Meyer Signature

Lisa Meyer
Editorial Contributor
The Money Lab