by Stienemarié Bonsma-Potgieter, CFP® – Financial Planner

Tax-free investments are one of the most effective ways to grow your wealth in South Africa without the burden of paying tax on your returns. If there is anything like a free lunch when it comes to investing, then a Tax-free Investment would be it. Let’s explore how these investments work, their benefits, and why starting now can make a huge difference to your financial future.

What Is a Tax-Free Investment?

A tax-free investment is a savings or investment account that allows your money to grow without being taxed on interest, dividends, or capital gains. Introduced by the South African government in 2015, these accounts are designed to encourage long-term savings and make investing more accessible.

The Rules You Need to Know

1. Annual Contribution Limit: You can contribute up to R36,000 per year. This can be via monthly debit orders or ad hoc contributions. The annual contribution limit has been amended before to account for inflation and is likely to be increased again in future.
2. Lifetime Contribution Limit: The total you can invest over your lifetime is currently capped at R500,000.
3. No Withdrawals Towards the Limit: If you withdraw money from the account, you cannot replace it without using up part of your annual or lifetime limits. To get the most advantage from tax-free growth, no withdrawals should ideally be made over the short term.
4. Multiple Accounts: You can have multiple tax-free investment accounts, but the combined contributions to all accounts cannot exceed the annual or lifetime limits.
5. Underlying fund choice: You have discretion to choose the underlying fund and asset allocation and there are no restrictions in terms of share and offshore exposure. This is however dependent on the platform administering your investment and whether they have any restrictions in place.

Why Choose a Tax-Free Investment?

1. No Taxes on Growth: Any returns from interest, dividends, or capital gains are completely tax-free. This allows your money to grow faster compared to taxable accounts.
2. Flexibility: You can invest in a variety of options, such as unit trusts, ETFs, or cash savings accounts, depending on your financial goals.
3. Great for Long-Term Goals: Whether you’re saving for your children’s education, retirement, or another big goal, the tax savings make a huge impact over time.
4. Encourages Discipline: The limits motivate consistent, manageable contributions that build up wealth over the years.

The Power of Starting Now

Should you start contributing the maximum annual amount of R36,000 today and continue for the next 14 years until you reach the lifetime limit of R500,000, here’s how your investment could grow:

• Total Contributions: R500,000
• Growth: Approximately R550,000 (assuming an average annual return of 10%)
• Total Investment Value: Over R1 million—completely tax-free

This scenario shows the immense power of compounding and the tax-free benefits over time. By starting early and sticking to the limits, you can build substantial wealth.

Tax-free investments are a simple yet powerful tool to help grow your wealth. By taking advantage of the annual and lifetime limits, you can enjoy the benefits of tax-free growth and achieve your financial goals faster. Start today and let your money work harder for you—tax-free!

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