RA: How much tax will I get back?
A Fin24 reader writes:
My wife earns R5 500 monthly. If she starts contributing
R350 to a retirement annuity (RA) fund, can she claim the amount on her tax at
the end of the year? Will she be getting back 35% of her year's contributions?
What is the minimum or maximum contribution towards the RA
fund she should be looking at to get the maximum tax benefit?
Hein Daffue, Sanlam's legal adviser, responds:
She can claim it at the end of the year in her tax return.
The SA Revenue Service (Sars) will allow a deduction per tax year which is the
(a) R3 500 minus any pension fund contributions; or
(b) R1 750; or
(c) 15% of non-pensionable taxable income.
Pensionable income means your employer has a pension or
provident fund for its employees, and the employer and/or employee fund
contributions are calculated as a percentage of such income.
If her income of R5 500 per month is not pensionable income
as per (c) above, then the full R350 per month (R4 200 per year) will be
deductible as it is less than 15% of her income.
However, if her income of R66 000 per year (R5 500 per
month) is pensionable income, then she will only be able to deduct R1 750 per
year (R145 per month) as (b) above will be more than (a) or (c).
For instance, if she contributes the maximum deductible 7.5%
of R66 000 per year (R5 500 per month) then it is R4 920, which means no RA
contributions will be deductible under (a) above and nothing under (c) as there
would be no non-pensionable income.
Will she be getting back the full 35% on her year's
contributions? Only if she qualifies for the full deduction and if that is her
marginal rate of tax per the individual tax table.
If her income for the year is just the R66 000, then her
marginal rate for the current tax year is only 18%.
Apart from the deduction limits mentioned above, the minimum
she should contribute depends on what the product provider who administers the
RA fund allows.
Also keep in mind that Sars will carry forward to the next
tax year any deduction it disallows, and any unused deductions by the time a
person retires will reduce the taxable portion of the one-third lump sum
payable at retirement.
You can still save on tax while investing in Old Mutual Unit trust linked RA. You get best of both. You actually have a unit t's portfolio while getting the benefit of tax return. You can also manage everything online quite easily.
RA's are more designed for those self-employed people, where all income taken, is non-pensionable. THERE IS NO ADVANTAGE FOR ANY ONE ELSE!?? IN FACT, IF YOU WANT TO MAKE THE LARGE LIFE COMPANIES (and their Advisors) RICHER, WASTE YOUR MONEY ON AN RA!?
@ Hatter - That is not the case at all.It not about making the advisors richer or the life companies richer. If you understood how an RA fits in one's retirement portfolio, you wouldn't of made that comment.
This lady is just above the tax threshold. If you take the primary rebate into account her average tax rate is pretty much 0%. Why lock up your contributions into an RA until the age of 55? The only reason to lock up the money until retirement is for tax purposes. If there are no tax benefits definitely do not tie up your money in a retirement annuity.
Remember that some pension funds are structured so that you can increase/decrease your pensionable amount. If this is not possible, you still have a R1750 py amount you can exploit for tax. At retirement, she will have a nice R6,300 extra tax free portion (assuming 20 years till 55 and 18% marginal rate). That does not seem all bad. It is good tax planning to get an RA. I might not get it from a Life assurer, but there are many unit trust based RA's to consider in the market. Even ones where you can stop your contributions at any time for any length of time. This will allow you to contribute only the R1750 if needed. I would suggest we should research all these vehicles and make a non emotional call.
@ bdj - you also need to consider the tax benefit at retirement (1/3rd tax free lump-sum...
How do Medical tax refunds work? My contributions for 2010 was R28962 plus a savings plan of R12000 pa.Medical expenses paid by me was R9892and R13522. I only got back R5446. I am a pensioner Earning R11500/MONTH,my medical contributions take about 1/3 of my monthly income.My wife is unemployed.
Linnda Sonno Magwaza
my father lost 2002 how can i get bacck his tax?