RA’s still make so much sense
I must admit to feeling quite deflated post the budget speech – kind of feels like we are just getting squeezed even more and that there is little motive to working hard and attempting to save when in reality we are just being taxed more and more and are given little incentive to save (R33000 into a tax-free savings account is not going to get you anywhere meaningful).
Dividend tax has gone up by 33% (15 to 20%) , capital gains tax has gone up for the maximum marginal tax payers and there was also no increase in the maximum tax deductible contribution to retirement saving – it is still capped at R350k per annum.
And then I got to thinking about the tax advantages of using RA’s and of even over-contributing to one where there is no tax relief on the contribution. Think about it…
- You will get tax free growth on the investment – there is no tax on interest, no dividend taxes and no capital gains tax in the RA.
- Any contributions where there has been no tax relief roll over to the following year or to retirement when you can take them out tax-free. This can either be as a lump sum (tax-free) or as income via your living annuity. I know that this is currently a bit of a process as SARS’s systems cant deal with it so you end up getting a tax refund not tax-free income. But if you take it out as a tax-free lump sum you could then invest it into some UT funds and draw income from it by way of sale of units. This would allow you to reduce the income draw on your annuity (which is taxable) by supplementing it with income from your UT portfolio (which would be close to tax-free income).
- If you were to die with excess contributions in your RA then currently they would still form part of your estate but your beneficiaries could take them out as a tax-free lump sum.
So maybe there was little in the way of incentive to encourage people to save but with a little bit of thought we can make use of the prevailing tax laws to maximise retirement saving and find the light at the end of the tunnel.
I’m off to do another RA top-up!