Wisdom for decisions in tax season


The 2021 tax season is upon us, and we need wisdom to make the right choices during this time. One of the difficult decisions for taxpayers is how much to contribute to their retirement annuities and tax-free savings accounts respectively.

What is a retirement annuity (RA)?

It is a financial instrument through which you make provision for your old age, using pre-taxed money.

Why is it important to contribute to a RA?

The answer is simply that it is still, rumours of prescribed assets notwithstanding, one of the most effective ways to save taxes and ensure a secure retirement.

What is a tax-free savings account (TFSA)?

A financial instrument you can use in addition to your RA to invest for long-term goals using after-taxed money.

Before we try to develop a strategy for contributions to our RA’s and TFSA’s, it is important to understand the most important similarities and differences between these two products:

Seven similarities:

  1. Both products are available for individuals only;
  2. Neither of these products have age restrictions;
  3. There is no tax payable on investment returns (such as income, dividends or realised gains) in these products;
  4. You can contribute towards more that one RA or TFSA at a time;
  5. You can switch your products between product providers;
  6. There doesn’t have to be any executor’s fees payable if your TFSA nominates a beneficiary. Your RA should fall mostly outside your estate, and should also nominate a beneficiary;
  7. Your TFSA can, if structured in terms of the Long-Term insurance Act, be protected against your creditors (as is your RA).

Six differences:

  1. The contributions to your TFSA are not tax deductible, whereas your RA contributions are;
  2. A TFSA has stricter contribution limits than those on a RA;
  3. A TFSA can be withdrawn at any time, while a RA can only be accessed at retirement;
  4. There is no tax payable when you withdraw from your TFSA. Withdrawals from a RA are usually taxed.
  5. A TFSA forms part of a deceased estate, while a RA is usually excluded;
  6. A TFSA is not subject to Regulation 28, while RA’s are, meaning your offshore asset allocation is limited to 30% in your RA. In a TFSA, you can invest 100% offshore.

What is the best strategy when it comes to making contribution decisions for these products?

The strategy:

It is important to take a holistic and integrated approach when making decisions about RA and TFSA contributions.

For this reason, RiG advisory services has developed one overarching strategy in 3 short courses – these are available for free on our online learning platform, School of wisdom for wealth.

Follow the course links below:

  1. Understand your tax-free savings account
  2. Understand your retirement annuity
  3. Wisdom for decisions in the tax season

Please also share this information by sending our WRAP to others. For interesting short videos, visit our YouTube channel and find more informative courses on our online learning platform.

Email us at info@rig.ac or phone as at 086 1221 777  to help you implement wise investment decisions in this tax season.

RiG Advisory Services (Pty) Ltd is an authorised financial services provider (FSP number: 44730).

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