Millennials, aged 18 – 40, are increasingly shrugging off their traditional nine-to-five employment for self-employment. Old Mutual reported in 2017 that 8% of millennials make an income outside of the traditional employment market. Deloitte also found that 43% of millennials were open to the new so-called gig economy. This entails earning income through freelancing and short-term project-based mini-jobs. Unfortunately, lack of funds, courage and innovative ideas were factors that kept them from pursuing this career path. Many young people have a side-hustle. This refers to a job that they work on after hours and that might even earn them an extra income. In today’s times, whether you’re a millennial or already retired – most people are looking to supplement their income.
Unlike people who are permanently employed, these movers and shakers are not obliged to pay into a company retirement scheme and this is often not even a priority. The same Old Mutual survey found that 68% of the survey group withdrew from their retirement savings and investments to fund their hustle.
Boost your savings with a tax-free investment account
For anyone looking to invest for the long-term but who do not want to be tied to traditional retirement savings products, a tax-free investment account is an excellent starting point. What makes this ideal is that, if you have patience and are willing to wait for your returns, a tax-free account is ideal as you pay no tax on the interest or capital gains. This all adds up in the long run.
How does it work?
Individuals are allowed to contribute R 33 000 per year into a tax-free account. This means a limit of R 2 750 per month. Unfortunately, there is a currently a lifetime contribution limit of R 500 000 per person, which the National Treasury may increase or decrease in future. If you have more than one tax-free account, it applies to the total of all these accounts combined. If you exceed the contribution limit, you will be taxed at 40% when you withdraw these savings.
But what does this mean for newbies?
Well, let’s use a practical example. Joe Soap is paying R 2 750 per month into a tax-free investment. If he keeps these payments up every month he will reach the investment limit of R 500 000 in 16 years. Assuming his investment grows at the rate of inflation (5.82%), the total market value of his investment will be R 789 727 by 2035.
After this, he will not be able to contribute without tax implications. The investment is allowed to grow without further contributions into the account. The withdrawal of this investment will be completely tax-free.
Can you withdraw from the tax-free investment at any time?
Yes, you can. However, this has an impact on the overall growth as the magic of compound interest ensures that your money grows. Also, withdrawing money does not increase the limit you are allowed to contribute, thus you cannot replace any funds that you have withdrawn. This might be bad if you are not disciplined enough and could spend all the funds before you see any real returns.
Are there any other drawbacks to a tax-free investment?
Tax-free investments are not protected from creditors, unlike retirement annuities. This means, should you default on any credit agreements, the courts can get access to these funds to pay your debtors. Should you have a retirement annuity, pension / provident fund, or any preservation fund, you cannot transfer funds from this tax-free investment into the other investment.
A tax-free investment is a great opportunity to invest tax-free. It can almost be seen as a DIY Retirement Fund or can be used to supplement your own retirement planning. If you are disciplined and leave the funds invested for the long term you will receive a nice, tax-free lump sump to enjoy at you see fit.