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Wednesday 29 January 2020


Tax wars
*Updated November 2020

Yeah I know, I know, you’ve heard it all before– you need to save for retirement, pay yourself first, and look after your future so that you don’t have to leech off your kids in your old age.

And it’s true, one day you won’t be able to earn an income, and you are going to need to have an investment big enough to pay the bills (and hopefully a little extra for some fun too).

Everybody knows the theory, and many people have every intention of putting it into practice, but then…


The industry hits you with some abbreviations – “Great you want to start investing for your retirement, you should consider an RA and/or a TFSA because there’s some really great tax benefits.”

These abbreviations put a lot of people off investing.

And then for those who do make it past finding out that RA stands for Retirement Annuity, and TFSA stands for Tax Free Savings Account, they are hit by something even worse…

They have to make a choice.

And there is nothing that takes the steam out of someone’s sails quite like having to choose between two options. And this is where I feel many potential investors, people who want to start looking out for their future and their retirement, end up freezing and doing nothing.

Petrified of choosing the wrong option, these potential investors stop at knowing about RAs and TFSAs, and never go on to actually invest in a RA or a TFSA. Because choosing the wrong option seems like a worse outcome than doing nothing (and let’s be honest doing nothing is a lot easier and far less time consuming.)

But here is the great news – when it comes to investing for retirement through a RA or a TFSA, there actually is no right and wrong choice. It is really a choice between great, and awesome. Not picking either will have far more of an impact than whether you choose a RA or a TFSA.

Both RAs and TFSAs are fantastic ways to invest for retirement, while at the same time protecting you from paying tax. Below I will explain how each one works and the rules around them, and hopefully you will see that both are pretty good ways to stash money away and leave your future self well impressed about how smart and savvy your current self was!

How Does A RA Work?

RAs In a Nutshell

A RA (Retirement Annuity) is basically an investment account which holds some investments. You can put Unit Trusts, ETFs, or even Cash Inside of your RA, and these investments will be protected from Tax while inside of the RA.

Tax Treatment Of RA Contributions

The money you allocate to a Retirement Annuity, can be deducted from your annual income before you pay tax. For example, if you earned R250,000 for the year, but you put R1000 a month (which is R12,000 for the year) you will only be taxed on R238,000 (and not the full R250,000 that you earned). The cool kids will tell you that the contributions to an RA are "tax deductible".

Here is a picture of what it looks like:

RA Contribution Limits

So SARS are quite generous by allowing you to deduct contributions to an RA from your income before you are taxed. So does this mean if you were able to contribute your entire salary to an RA (maybe you live in your parents garage) you would pay 0 Tax?

Unfortunately not – SARS has a limit to their generosity. So they have put a cap on the amount of RA contributions you are allowed to deduct from your income. The maximum you are allowed to deduct is 27.5% of your annual income, or R350,000 – whichever is less. Unless you are earning more than R1.27 Million a year, you won’t have to worry about the R350k number – for us mere mortals the 27.5% applies. If you want to calculate your maximum tax deductible RA contribution, this is how you do it.

Tax On RA Investments

A really great feature of RAs is that you don’t pay any tax on the investments inside. This means no Tax on interest earned, no tax on dividends, no tax on income and no Capital Gains Tax on sales.

That’s a lot of no Tax, which means your investments work harder for you because you get to keep more of your returns.

RA Investment Rules

Unfortunately there are some rules around what you can and can’t put inside of an RA. SARS has quite a local is lekker approach to RAs and so no more than 25% of your investments can be outside of South Africa. (You are allowed an additional 5% into Africa, which means the offshore maximum is then 30%).

You are also not allowed to have more than 75% in equities, and not more than 25% in listed property.

When can you access your RA?

RAs were explicitly designed to help people save for retirement. And since the commonly accepted “earliest” retirement age is 55 (of course those of you aiming for FIRE know that this minimum age is BS) you cannot access the money inside of an RA until you are 55 years old.

But this might actually be a good thing, especially for those who struggle with keeping their hands out of their retirement kitty. No access before 55 forces you to be disciplined and to stay invested until you are retired.

There are a few ways you can get your money out sooner, but these are pretty much limited to financially emigrating from South Africa or as part of a divorce settlement. There may also be Tax payable if you take the funds out early.

Rules when accessing the money inside of an RA

Once you reach age 55, and your RA “matures” there are some rules around what you can do with the funds inside your RA. You are only allowed to take a maximum of 1/3 of the value of the RA as cash (unless the total value of the RA is less than R247,500, in which case you can take it all out as cash).

The remaining two-thirds of the value of the RA has to be used to buy either a living, or a guaranteed annuity (or a combination of both). The idea is that this annuity will pay you an income when you are retired (which is the whole point of saving for retirement right?)

Tax when accessing an RA investment

Since SARS has allowed you to deduct tax while contributing to an RA, and allowed the RA investments to grow tax free, they unfortunately have no issue with trying to get some Tax out of you once you retire.

The up to 1/3 cash you are allowed to take is Taxed according to a retirement tax table.

In addition, the monthly income which is generated from the living/guaranteed annuity you buy with the remaining 2/3 of your RA is subject to income tax according to the income tax table.

So that more or less covers RAs, but for a real deep dive check out this comprehensive write up on Retirement Annuities.

Right, let's have a look at TFSAs...

How Does A TFSA Work?

TFSAs In a Nutshell

A TFSA (Tax Free Savings Account) is basically an investment account which holds some investments. You can put Unit Trusts, ETFs, or even Cash inside of a TFSA, and these investments will be protected from Tax while inside of the TFSA.

Tax Treatment Of TFSA Contributions

The money you put into a TFSA cannot be deducted from your income for tax purposes. In other words the money you invest will be after tax money.

Something like this:

TFSA Contribution Limits

As it stands, you are not allowed to contribute more than R36,000 in a Tax year to a TFSA. So if you want to do it monthly, that works out to R2,750 a month. If you invest more than the limit, you will be taxed at 40% of the amount by which you exceeded the limit (Eina!)

There is also a limit on the total amount you can contribute to a TFSA over your lifetime. This is currently set at R500,000. That means if you contribute the maximum annual amount (R36,000) each year, it will take you a little over 15 years to reach the lifetime limit.

Note that the contribution limits only apply to money which you put into a TFSA, and that means that any interest, dividends or proceeds earned from the investments inside of the account will not affect your annual or lifetime limits.

Tax On TFSA Investments

Just like RAs, there is no South African tax payable on any of the investments inside of a TFSA. No Tax on interest earned, no tax on dividends, no tax on income and no Capital Gains Tax on sales.

That means your returns will be super charged because of the tax protection you get.

TFSA Investment Rules

Because SARS is incentivising you to save for your retirement (by giving you some pretty cool Tax breaks) they do impose a few rules around what you can invest in. Most Unit Trusts and ETFs are available, but you are not allowed to invest in commodities (e.g. gold, platinum etc.). The reason for this is because, without this restriction, there would be nothing stopping an investor from putting their entire retirement savings into gold (for example) and this is not very diversified and therefore really risky!

You are also not allowed to invest in ETNs (Exchange Traded Notes ) since it is technically possible for you to lose all your money in an ETN if the ETN provider goes bankrupt (no such problem exists with ETFs).

When can you access your TFSA?

The hinges of the door to your TFSA money are pretty lose. So you can take money out at any time. This is great for those who are pursuing early retirement (guilty as charged) because it means you can access your money at whatever age you need it. It’s maybe not so great for those who will be tempted to dip into their investment when they are short of cash.

Worth mentioning that any money taken out of a TFSA cannot be “replaced” without affecting your limits. For example if you put 20k into your TFSA and then took it out again, you will only have 16k you can put in for the rest of the year before you hit the R36k annual limit. You will also only be able to contribute another R480k over your lifetime.

Rules when accessing the money inside of an TFSA

TFSA’s are the gymnasts of the retirement product world – they are really flexible! If you want to take the entire value of the TFSA as cash, no problem! Unlike an RA, there are no restrictions about how much you can take out as cash, and there are no restrictions around what you have to use that cash for.

Tax when accessing a TFSA investment

There is no Tax payable when accessing the money inside a TFSA. Because you use after tax money to make contributions to a TFSA, SARS have already taken their cut, and so they are happy to let you keep everything that comes out of your TFSA.

TFSA vs RA – A Summary

The above was quite a lot of information, and it may seem a little overwhelming. So I decided to summarize the most important aspects of RAs and TFSAs into a compact picture which outlines pretty much everything you need to know about each. Refer back to it whenever you need to check up something related to either of them.

(Click for a larger image)

Tax Free Savings Account (TFSA) vs Retirement Annuity (RA)

Retirement Annuity vs Tax Free Savings Account – Which Way To Go?

Right so now that you know the ins and outs of RAs and TFSAs, you may be wondering which of them would work better for you.

They are both excellent products to save for retirement and the Tax breaks you get are really awesome. So you will do well in either one. However there are maybe a few game changers which may make one much better suited for your goals than the other:
  • When do you plan to retire? If the answer is before age 55, then you may want to consider a TFSA over a RA. A RA does not allow you to access your money before age 55, and this means a TFSA would likely be better suited.
  • Do you have a work pension fund? The tax treatment and rules around pension funds are pretty much the same as a RA. This means that you already have a RA-type product through your employer and you may want to consider a TFSA instead of an RA, so that you can diversify your tax treatment.
  • Are you in a high Tax bracket? If you are a high income earner (lucky you) and you find yourself in one of the higher tax brackets (unlucky you) then the Tax deductions on RA contributions can really super charge your investments and could leave you better off than if you used a TFSA (especially if you will find yourself in a much lower tax bracket once you retire)

The Combo Of Doom

If you are still undecided, there is also nothing wrong with doing a combination of a RA and a TFSA (there are no rules preventing you from having both!). That way you can get the benefits of both types of retirement products and this will also give you a lot of flexibility when you eventually retire.

And then finally to end off, here is a really great tax hack which forms the retirement product combo of doom (which I first came across courtesy of Nerina Visser from ETFSA).

Because RA contributions are tax deductible, you get a tax refund after you submit your tax return. Take this refund and plug it straight into your TFSA, and let SARS fund your TFSA for you. 

What a win!

Till next time, Stay Stealthy!
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