The start of a new year always brings tax season and provides a good time to review your financial situation and take advantage of the tax benefits available before the end of the tax year on February 28.
You have until the end of February to make additional contributions to your retirement fund, retirement annuity (RA), or tax-free savings account (TFSA), to benefit in time for your next tax return, Rita Cool, certified financial planner. in Alexforbes, he said.
According to Cool, the South African Revenue Service (SARS) offers substantial tax deductions when you contribute to an RA, pension or provident fund, which means you can save more for retirement and at the same time pay less tax.
He said you can contribute up to 27.5% of your total taxable income, up to a maximum of R350 000 per year and get a tax refund. For example, in a contribution of R100 000, if the tax rate is 30%, this means that you get R30 000 back in tax and only reduce your take-home income with R70 000.
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There is no tax on the growth of your retirement fund or TFSA
“There is no tax on the growth in a pension fund or TFSA and this has a huge impact on the long-term composition of your investment compared to after-tax investments, where you also have to pay tax on the growth. If you combine the tax-free growth with the tax benefit on your contributions earn money that works for you, not just you working with your money.
Cool said other benefits of saving on this product:
- Income from pension funds and RAs are excluded from your estate when you die, which reduces estate duty.
- If you make an annual contribution of more than 27.5% or R350 000 per year, you will not lose tax benefits on contributions over the limit. If you can’t claim tax allowances before retirement, you can get these contributions over the limit as a tax-free lump sum in retirement, or they can be offset against your retirement income to reduce income tax in retirement.
- Contributions that exceed that limit will become part of your estate if you haven’t received the full tax benefit at the time of your death, but only if your heirs take the amount in cash.
- You can take up to one-third of the cash from your RA and pension fund after 1 March 2021 when you retire, or all of your provider funds before 1 March if you are aged 55 or over on that date. In the current tax table, the maximum tax rate at retirement is 36%. If your retirement income tax rate will be higher than 36%, you can access a one-third lump sum at a lower tax rate than receiving it as income. You can use this cash to increase the income prepared with two-thirds, which attracts tax. By combining your after-tax and taxable income streams after retirement, you reduce your overall income tax.
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Add extra contributions
You can add extra contributions to your pension fund whenever you want and there are generally no administration fees charged for these voluntary contributions.
“One way to do this is to ask your employer if you can increase your contribution rate. If you contribute an additional 5%, your take-home pay will not be reduced by 5%. Your taxable income will be reduced by 5% and so will your tax less. This means more money invested in your retirement savings and less for the taxman.
Cool said another way to make the most of the tax benefits is to open a tax-free savings account, which allows you to save up to R36 000 per tax year and R500 00 over a lifetime, tax-free.
“If you can’t make extra contributions to the employer’s fund, you should consider RA using tax benefits. Most annuities have a minimum investment amount to start.
He said consumers should talk to their financial advisers about their options for getting tax benefits for this tax year.