Why tax is an important part of your financial planning

Most financial decisions you make have a tax impact.

Just as fuel efficiency is one of the important aspects to consider when buying a car, so should tax be an important consideration for your financial plan. With clever engineering you can get to your destination with less.

Tax can be complicated and confusing, and for most people it is a sensitive subject they choose to avoid. But with a few smart moves, especially when planning for retirement, you can benefit significantly from tax incentives and improve the probability of achieving your investment goals.

You can start using two great ways to provide for your retirement: a retirement annuity and a tax-free investment (also known as a tax-free savings account). If you are already using one or both of these, you can invest more into them to make full use of the available tax opportunities.

Retirement annuity

Every tax year you can claim a tax deduction for the money you invest in a retirement fund. To make the most of this deduction, you can invest up to 27,5% of your taxable income or your remuneration, whichever is higher.

You can do this whether you are self-employed or earning a salary but not yet contributing the full amount to your employer’s retirement fund. The maximum deduction you can claim in a tax year is R350 000, a limit that only kicks in when you are earning more than R1,27 million a year.

If you have not yet used the full tax deduction available to you for the year, you can make an additional lump sum payment to your retirement annuity before the tax year ends on 29 February 2020.

In addition to the tax break you get on the money you invest, you also enjoy tax-free growth in your retirement annuity – you don’t pay income tax, dividends tax or capital gains tax while the money is growing.

But, some people say, when you retire you will pay tax on the income. This is true, but after the age of 65 you could pay less tax because of lower income levels in retirement, higher rebates and higher deductions for medical expenses.

Tax-free investment

Although you don’t get a tax deduction for money you invest in a tax-free investment, you still enjoy tax-free growth. And you won’t pay any tax on the proceeds when you decide to take money out of the investment.

You can invest up to R33 000 every tax year (R2 750 per month) in a tax-free investment, limited to R500 000 over your lifetime. Government may adjust these limits from time to time.

The secret is to make sure that you use these tax incentives optimally every year and consistently over time. By doing this you can reduce the impact of tax on your financial plan and increase the growth potential of your investments.

Discuss your options with your financial adviser so that you can reap the full benefits of tax incentives available to all taxpayers every year.

This post is written, sponsored and paid for by Momentum Investments.