South Africans leave millions in TFSA benefits on the table

New data released on 23 February by leading online tax platform TaxTim reveals a costly blind spot among South African investors, just days before the tax year ends on 28 February.

The data shows that while every South African can invest up to R36 000 per year in a tax-free savings account (TFSA), nearly 48% of TaxTim users with a TFSA contributed only R14 000.

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This means they are missing out on potential long-term tax-free growth of approximately R22 000 of their annual tax-free allowance, representing millions in lost tax savings nationwide.

Once the tax year ends, any unused allowance vanishes.

TaxTim director Daniel Swiegers notes that many taxpayers are saving and planning, but they are not maximising the full tax benefits available to them.

Consider Thandi, who has R500 000 earning 8% interest. She would earn R40 000 interest per year. After applying the annual interest exemption and an assumed marginal tax bracket of 26%, she would pay R4 212, leaving over 35 000 in her pocket.

With the power of compounding over 35 years at 8%, the investment would have grown to about R7.4 million inside a TFSA. Under a normal taxable account, the same investment would earn her around R5.6 million, a staggering R1.8 million difference she could have earned just from a TFSA.

Even R4 000 per annum may seem small, but with the power of compounding, it can equate to millions in lost wealth.

Why leave money behind?

TimTax reveals some likely reasons why many South Africans fail to fully use their TFSA allowance:

• Many are cash-strapped, making it difficult to maximise contributions;
• Most are unaware that TFSA allowances expire at the end of February and cannot be carried forward;
• Some choose low-return cash accounts over a TFSA, missing out on long-term compounding; and
• The R36 000 annual limit doesn’t feel urgent, until the unused allowance is lost forever.

TFSA importance and guidelines

In a decade, many miss out on more than R200 000 in potential tax-free growth.

The rules for TFSAs are strict because the benefits are significant.

You can invest up to R36 000 per tax year, with a lifetime cap of R500 000, and exceeding these limits triggers a 40% penalty from the South African Revenue Service on the excess.

Importantly, withdrawals permanently reduce your lifetime allowance.

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For example, withdrawing R10 000 means that R10 000 is gone for good. Any portion of the annual R36 000 not used by 28 February is lost and cannot be carried forward, making tax-free savings one of South Africa’s clearest use-it-or-lose-it tax opportunities.

* Phenyo Selinda is a Moneyweb intern. 

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