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Could the tax penalty for exceeding TFSA limits be worth it?

You are allowed to exceed the limits, but Sars will bring out its big 40% stick.
Sars won’t charge you any dividend-withholding tax, income tax or capital gains tax on money inside a tax-free savings account, which could make for an interesting dilemma. Image: Shutterstock

Those of you with tax-free savings accounts (TFSAs) should be familiar with the annual and lifetime limits that apply. As it stands, there are severe penalties for contributing more than R36 000 to your TFSA in a single tax year and more than R500 000 over your lifetime.

In other words, you are allowed to exceed the limits, but the South African Revenue Service (Sars) will bring out its big 40% stick.

That means any money you contribute to a TFSA that exceeds the limits will be liable for 40% tax – so if you contribute R40 000 in a year, you will pay 40% of R4 000 = R1 600 in tax.

If you contribute R600 000 over your lifetime, that is R100 000 over your lifetime limit, so you will pay 40% of R100 000 = R40 000 in tax.

I think you get the idea.

On the other hand, there are some really great tax benefits: Sars won’t charge you any dividend-withholding tax, income tax, or capital gains tax on any money inside a TFSA. And when you view this great perk of a TFSA in light of the over-contribution penalty, it makes for an interesting dilemma ….

Is it worth it to take the upfront tax hit to score on the tax benefits inside the TFSA?

Of course, practically, you may not be able to exceed your annual limit (some TFSA providers stop you from contributing more than the annual limit to protect investors from accidentally over-contributing), but let’s assume you found a TFSA provider that would allow you to do it.

Let’s also assume that someone hadn’t made any TFSA contributions and happened to have the TFSA lifetime limit of R500 000 lying around waiting to be invested.

Would the tax penalty from contributing the entire R500 000 in a single year be offset by the tax benefit of having the money inside a TFSA?

It’s an interesting question, and it may also solve the complaint many older investors have around not being able to maximise the lifetime limit of their TFSA because they have fewer than 14 years of employment left (at R36 000 a year, it will take you around 14 years to hit the current lifetime limit).

Okay, let’s check this out by running two  scenarios.

Someone with R500 000 to invest could either:

  1. Dump it all into a TFSA, take the tax hit, and let it run inside the TFSA without making any further contributions; or
  2. Phase the money into a TFSA at R36 000 a year until the lifetime limit is reached.

Let’s assume that in both cases, this person’s TFSA is invested in a diversified, equity-heavy portfolio that generates 12% per annum.

If this person puts the entire R500 000 in, it means they will exceed the R36 000 limit for that year by R464 000. This means they will be taxed at 40% of R464 000 = R185 600 (ouch!). Let’s also assume that they pay this tax hit upfront.

All this means that a total of R314 400 lands in the TFSA account.

Let’s check how that plays out versus a R36 000 per year contribution over 14 years:

Source: Stealthy Wealth

At the end of 14 years, the investment balance of dropping the R500 000 in and paying the tax penalty is R1 536 508.

Meanwhile, phasing the money in R36 000 at a time leaves you with an investment balance of R1 301 589.

So throwing it all in and taking the tax hit leaves you around R235 000 better off – seems like a great idea right?

Not yet – there are still two more factors to consider ….

Firstly, it might be possible to pay the tax hit from outside of your TFSA account – in other words, you can make sure the full R500 000 hits your TFSA account (and not just the after-tax R314 400). In order to do that you would need R500 000 plus an extra R185 600 to cover the tax bill – a total of R685 600.

And there’s something else we overlooked in the previous scenario ….

If you did have the lump sum available to phase into a TFSA, you would add the R36 000 a year, but it’s unlikely that the rest of the money would just be sitting idle. No, it would probably already be invested somewhere else earning a return while it waited to be transferred into a TFSA. Not so?

So let’s assume the remaining money is invested in a similar asset allocation as the TFSA. Again we assume a 12% return, except this time it is subject to all those delightful taxes you need to pay outside of a TFSA – dividend-withholding tax, income tax and so on.

Dividend-withholding tax is a flat 20%, and let’s assume the portfolio’s returns include 2% from dividends; 20% of 2% means the returns lose 0.4% per annum to dividend-withholding tax.

Income tax is a little more tricky to account for since that will depend on your marginal rate and how much of your portfolio is in Reits (real estate investment trusts). So let’s estimate that it adds another 0.4% drag on returns. This leaves a total of 0.8% per annum lost to tax – meaning the non-TFSA money earns 11.2% per annum.

So now the two scenarios are:

  1. Take a lump sum and invest R500 000 into a TFSA at once, pay the tax hit of R185 600 for a total investment cost of R685 600; or
  2. Phase a lump sum of R685 600 into a TFSA R36 000 at a time, while the rest stays invested in a discretionary account earning 11.5% per annum.

Here’s what it looks like over 14 years:

Source: Stealthy Wealth

Leaving the rest of the money invested now makes the tax penalty option pretty painful!

Phasing the money in leaves you with R3 109 685 versus the R2 443 556 you get after dropping it all in and paying the tax penalty. That leaves you around R666 000 (ominous!) better off by phasing it in.

Okay, so that covers the scenario up to 14 years, at which point the TFSA has been maxed.

But what about running it for longer – does the benefit of being in a TFSA kick in then?

Well, I extended the scenario to 100 years, and taking the tax penalty still leaves you worse off.

You just cannot recover from that 40% hit!

And finally, there is maybe still one more benefit of a TFSA that I have not considered – the fact that there is zero capital gains tax (CGT) payable on a TFSA when you sell.

It is highly unlikely that someone will just up and sell their entire TFSA at once (it’s far more likely that they’ll sell off portions annually once they hit retirement). But let’s assume they want to sell it all. Let’s also assume that they pay the highest CGT rate – 18%.

How do the ‘tax hit versus phasing it in’ numbers look now?

After 14 years:

Lump sum with tax hit – R2 443 556 (still the same; no CGT payable in a TFSA)

Phasing it in, CGT payable on discretionary investment – R2 784 228.

So it’s still better to phase it in.

And what about longer time frames?

Well, after 26 years or more, if you consider the CGT implication of selling the entire investment, you will be better off by taking the tax hit instead of phasing it in.

So does that make it worth incurring the tax penalty? In my view – no.

Unless you plan on investing it for over 26 years and you’re going to sell the entire investment and you will be bringing in more than R1 577 300 per annum in retirement (making you a 18% CGT kind of earner).

Till next time, Stay Stealthy.


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There is an obvious loophole with the tax free savings account as far as I am concerned – record keeping. If you consider the fact that it will take you 14 years @ R36 000 per annum to reach the current limit of R500 000, coupled with the fact that interest / dividends will become indistinguisable from contributions over the years, coupled further with the fact that you can transfer from one tax free account to another again and again, then please explain to me how anybody, including SARS, will know when you go beyond your lifetime contribution of R500 000 ? Imagine asking your bank for bank statements going back 14 years LOL. So I say, stick to your annual limit which is currently R36 000, but just keep on keeping on after 14 years. If SARS asks you if you have contributed more than R500 000, you tell them you will check your bank statements going back the past 14 years, Prudence at the bank’s call centre took your number and will get back to you………

You are required to state on your tax return the amount that you contributed to a TFSA during a specific year of assessment. So it should be easy for SARS to identify when you start to exceed your lifetime limit. All contributions and returns from TFSA’s are provided to SARS by the service provider in the form of an IT3s. Therefore no need to check bank statements.

Thanks Tertius. What happens when you do not declare contributions to a tax free savings account ? Does the money change from non taxable to taxable, or do you pay an admin penalty ?

That is already taken care of through the tax system. Your tax certificate reflects amounts deposited and returns of whatever kind. I haven;t tried doing a transfer yet bur presumably that would be done on the basis of capital transferred (not new deposit) plus returns.

The lifetime allowance will also increase, we following the same path as that of the ISA’s in the UK. There is no immediate need to increase it now (as we still got 8 years to get through), but just as the annual contributions increase, so will the lifetime allowances.

as tertius said, your annual tax return will require disclosure of capital payments made. your service provider/s also provide this info to SARS. additionally, it is clearly stated that the adherence to limits is your responsibility . with my provider (can’t speak for all, but i assume it must be similar) i can easily generate reports which clearly show, and separate , capital payments made per annum as well as any performance related reports. there is no loop hole.

… and as far as transfers are concerned, that, along with your investment (which contains a mix of capital and returns) will be within a tax free bubble. it’s like when you fly and transfer at heathrow … u never leave the airport.

@danie, your non declaration is irrelevant as the institution (much like your employer) already provide all of that info to SARS. your declaration these days is pretty much the formality of confirming what SARS has already received as third party data. that’s also how this year they will start with auto assessments.

You know what, instead of investing R500k at a cost of R685k into a TFSA, I’ll invest R828,5k at cost of R685k into an RA (41% tax break on R350k tax-deductible RA contribution added in – if I have that kind of money lying around, I am earning that kind of income).

I’ll have just over R4m after 14 years, at 12% pa. The tax threshold by then for someone over 65 will be R290k (inflation-adjusted by 6% pa, which appears to be the underlying assumption in these returns).

I’ll have almost 50% more money saved than with the ‘better’ TFSA option, and I’m also not paying tax on my (already too high) 7% pa draw-down from a living annuity. Even with other sources of retirement income, implying some tax on the draw-down, this would very probably be the more profitable option.

Couple of issues.

1 – Your income tax payable when younstrat drawing might be low for you, but that will be case by case. It it will be something, TFSA it is nothing
2 – Due to Reg 28, you will not get the 12% (try doong 100% offshore in your RA
3 – Rsik of changes to Reg 28 to make it even worse.

Asset allocation trumps tax vehicle every time

like you said, if you had that kind of money………. then you should do both , since even RA ‘s are limited by a max cap. (and regulated through reg 28!) but in principle you are also correct. TFSA does however give you flexibility , the potential of off shore without using annual or investment allowance etc etc .

On this subject, I made an error, see my email hereunder, which I sent to my broker on 4 March 2020,
“i refer to the above accounts and advise that unknowingly on the 27 and 28 February 2020, i made deposits, of R33000 and R36 000 into the two accounts merely to park the money in anticipation of using the money for the new TFSA which began on 1/3/2020. However, i have since learned that because the money was transferred in the year when i had already used up my full allocation it is subject to the SARS penalty.
As there was no benefit whatsoever for me to have made the deposits on the last two days of the year, can be seen that an error was made. In the circumstance, I hereby request that the above deposits be reallocated to 01 March 2020 “

Unfortunately, the broker was not helpful, is there anything I can do to avoid paying the 40% penalty. Any suggestions will be appreciated (the two accounts refer to two family members)

rkana, brokers would not be able to help. that would be fraud even though your error was clearly innocent. i would approach SARS and motivate. i don’t think there are many precedents if any so i really don’t know the prospect of success

End of comments.





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