15 February 2022 | 5 - 8 min read
Tax: How to put more cash in the bank
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We can all agree that taxes are easily one of the worst aspects of adulting. Worse, paying more than you have to in tax, or retiring without enough money in the bank to see you through. That’s a big NO from us.
SO, this month, we’re going to help make you a savvy saver and ensure that neither of those issues becomes a problem in your life. First, you need to understand a simple principle:
You CAN reduce your taxes.
You read that right. There are perfectly legal ways to reduce your tax bill while also saving more for retirement. You just need to know what steps to take.
Remember, this isn’t the same as ‘tax evasion’ - tax evasion is a criminal act and refers to using illegal methods to avoid paying tax. That’s not what we’re talking about in this article.
Here’s how to legally reduce your tax bill with some pretty easy savings tricks.
Save on taxes by saving for retirement
The government wants you to save towards your retirement, because the more money we all save, the less of a burden we are to the state or our families when we retire.
In a previous article, we explained that only 6% of people in South Africa will be able to retire comfortably and not have to rely on the state for SASSA pensions.
That situation isn’t sustainable.
To incentivise us to save for our retirement, SARS allows us to reduce our tax bill by making contributions to retirement products like retirement annuities. The exact amount you can claim against your tax bill is subject to a number of calculations, but it can result in some pretty epic tax refunds. Refunds that could potentially cover your December holiday, deposit on a car... or even fund your next tax-free savings investment.
Something else to keep in mind is that there is an annual limit on how much you may claim against your tax bill, but the good news is that if your retirement savings exceed that annual limit, then the extra contributions carry over to the following tax year and can be claimed at that point.
If you’re pretty flush and you’re going over the limit every year, then you can likely still claim those extra credits when you eventually retire, via a reduction in your tax bill for the lump sum you’re paid out at that time.
Look, we know that saving for your retirement is not very appealing. We know that spending money can be exciting, and owning beautiful things is fun. But the reality is that when you do eventually retire, you're going to wish that you'd saved every cent that you could. Trust us, your future self will thank you for making the right decisions now.
By putting money into retirement savings each month, you’ll begin to develop habits of a good and disciplined saver. Retirement annuity savings aren’t available to be used until you’re 55 years old and even at that point, there are limits to how they can be used.
For example, SARS won’t allow you to withdraw the whole lump sum so that you can splurge on a flashy car and a fancy holiday. You will only be able to withdraw a certain amount and the rest will be provided in the form of a monthly annuity, ensuring that your money stretches as far as possible.
So as you can see, saving for retirement can really teach us all some valuable lessons about financial discipline and the value of saving money for a rainy - retired - day. And it can ensure that when that day comes, there's enough money each month to see to our lifestyles.
One last thing to mention here is that retirement savings are not included as part of your estate. When you pass away - and especially if you pass away whilst insolvent/bankrupt - your creditors are not able to access your retirement annuity, and your family will continue to benefit from it.
Retirement is a long time. Many of us will ideally retire at age 60 and, given the state of modern medicine, will quite feasibly still live another 30+ years. That’s a lot of time that your savings needs to fund.
Best get cracking. We can show you how - answer a few easy questions to book a FREE session with a Velocity Club consultant. We’ll meet you where you’re at in your financial journey right now, understand your situation and help find the best retirement solution for you. Get started.
Invest into a tax-free savings account
Tax-free savings accounts were introduced in South Africa in March 2015. We’re a country of stubborn spenders and so the government saw this as another opportunity to incentivise us to start saving money by dangling a tax-savings carrot in front of us.
Apparently, it’s working.
The statistics say that South Africans are now saving more than ever before, with household savings rates increasing each year. So, what are you waiting for? If you're not already the proud owner of a tax-free savings account, it's time to start!
Each year, we are allowed to deposit a maximum of R36 000 into a tax-free savings account, up to a maximum of R500 000 over our lifetime. By the way, this refers only to the money you actually put in - it excludes the growth of that money.
Any growth that your money scores whilst in that account, is tax-free. Nice. Even better, is that any withdrawal you make later on in life (preferably during retirement), is also tax-free and will not be taxed as income.
In comparison to ordinary savings accounts, that means that the return on your savings invested in a tax-free savings account will be better than in an ordinary savings account.
Oh and here’s another thing you’ll be keen to know: Just because it says ‘savings account’ doesn’t mean that that’s the only account format available to you. Tax-free savings accounts include facilities like:
- Unit trusts
- ETFs
- Flexible investment products
- Retail savings bonds and some endowment policies
The particular savings option you choose may need some research on your part because it can get quite complicated out there. But that’s where Velocity Club can help - our experts will work with you to secure the best option that suits your current financial situation while helping you plan for your future. Book your FREE session today
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