Tax-Free Savings Accounts (TFSA): Maximizing Your R36,000 Limit

If you walk into any boardroom in Sandton or sit around a fire at a braai in the suburbs, the conversation eventually turns to one thing: Tax. We all complain about it. We watch our payslips shrink, and we look for legal ways to minimize what we pay to the South African Revenue Service (SARS). Yet, surprisingly, millions of South Africans are completely ignoring the single most powerful “gift” the National Treasury has ever given us.

I am talking about Tax-Free Savings Accounts (TFSA).

Introduced in 2015, this vehicle was designed to encourage a savings culture in a nation that frankly spends too much and saves too little. However, there is a massive misconception about what Tax-Free Savings Accounts (TFSA) actually are. Most people treat them as “savings” accounts for a holiday, a wedding, or a car deposit. This is a fundamental error that is costing investors millions in potential growth.

If you use your TFSA for short-term savings, you are wasting a golden ticket. This account is not for saving; it is for distinct, long-term wealth building. In this comprehensive guide, we will strip away the banking jargon. I will show you how to maximize your R36,000 annual limit, why you should never hold cash in this account, and how to use it to build a multi-million Rand portfolio that SARS cannot touch.

For a broader understanding of how this specific account fits into your total investment portfolio, I strongly recommend you read our pillar article: The Ultimate Guide to Investing in South Africa.

What Exactly is a Tax-Free Savings Account?

Let’s clarify the terminology immediately. A TFSA is not a specific “product” like a distinct gold coin or a specific share. It is a “wrapper” designated by Section 12T of the Income Tax Act.

Think of it like a briefcase. You can put different things inside that briefcase: cash, fixed deposits, Exchange Traded Funds (ETFs), or Unit Trusts. The magic isn’t the briefcase itself; the magic is the invisible shield around it that repels the taxman.

When you invest outside of this wrapper, SARS taxes you in three specific ways:

1. Tax on Interest: You pay income tax on interest earned above the annual exemption threshold.
2. Tax on Dividends: Companies withhold 20% of your payout before you even see it (Dividends Withholding Tax).
3. Capital Gains Tax (CGT): When you sell an asset for a profit, a portion of that gain is included in your taxable income.

Inside Tax-Free Savings Accounts (TFSA), all three of these are zero.

You pay absolutely no tax on interest. You pay no tax on dividends (you get the full 100% payout). And most importantly, when you sell your shares in 20 years for a massive profit, you pay zero Capital Gains Tax. This “triple exemption” is what makes the TFSA the most powerful investment vehicle available to individual South Africans today.

The Rules of Engagement: Limits and Penalties

Before we discuss strategy, we must respect the boundaries set by the government. The rules are strict, and the penalties for breaking them are immediate and severe. You cannot plead ignorance with SARS.

1. The Annual Limit: R36,000

You can contribute a maximum of R36,000 per tax year. The tax year runs from 1 March to 28 February. This averages out to R3,000 per month. However, you don’t have to contribute monthly. You can do a lump sum of R36,000 on the 1st of March, or sporadic payments throughout the year whenever you have spare cash.

2. The Lifetime Limit: R500,000

You can contribute a total of R500,000 over your lifetime. Based on current limits, it will take you roughly 14 years to max out your lifetime allowance if you contribute the full R36,000 every year. Once you hit that R500,000 cap, you can no longer add money to the account, but the money inside can continue to grow tax-free indefinitely.

3. The Penalty: 40%

This is where people get burned. If you contribute R37,000 in a single year, you have exceeded the limit by R1,000. SARS will levy a penalty of 40% on that excess amount. That means you instantly lose R400 to the taxman. Never exceed the limit. It is your responsibility to track this across all your accounts.

4. The “No Replacement” Rule

This is the most critical rule to understand, and the one most beginners get wrong. If you withdraw money, you do not get that allowance back.

Example: You deposit R36,000 in March. In June, you withdraw R36,000 to fix your car. Your balance is zero. However, SARS views your contribution for the year as “used.” You cannot put that R36,000 back. You have permanently wasted R36,000 of your R500,000 lifetime limit.

Johan’s Analyst Insight: Treat your TFSA like a one-way street. Money goes in; it does not come out until you are ready to retire or buy a significant asset decades from now. If you need an emergency fund, put it in a standard bank savings account. Never rob your future self by raiding your TFSA.

The Great Debate: Cash vs. Equity

This is where I see 80% of South Africans failing in their strategy. When you walk into a traditional bank, the teller will often offer you a “Tax-Free Cash Account” offering 7% or 8% interest. It sounds safe. It sounds guaranteed.

Do not take it.

Here is the mathematics behind why holding cash in Tax-Free Savings Accounts (TFSA) is a financial mistake:

1. The Interest Exemption SARS already gives every South African individual an annual interest exemption.

• Under 65: The first R23,800 of interest you earn annually is tax-free.
• Over 65: The first R34,500 is tax-free.

To earn R23,800 in interest (at a generous 8% rate), you need roughly R300,000 in cash savings. Unless you already have R300,000 sitting in a normal bank account, you are already earning tax-free interest. You do not need a TFSA wrapper for that. You are wasting a powerful vehicle on a benefit you already possess.

2. The Power of High Growth The real enemy of long-term wealth is Capital Gains Tax (CGT) and Dividends Tax. Cash does not generate capital gains (R1 is always R1). Equities (shares) generate capital gains.

Imagine you invest in a global ETF (like the S&P 500 or MSCI World). Over 20 years, your R500,000 contribution could grow to R2 million or R3 million due to compound growth. Outside of a TFSA, that R2.5 million profit would trigger a massive Capital Gains Tax bill. Inside the TFSA, that entire R2.5 million profit is yours. Tax-free.

The Verdict:

• Cash in TFSA: Safe, low return, wastes the tax benefit.
• ETFs/Equities in TFSA: Volatile in the short term, massive tax savings in the long term.

If your timeline is less than 5 years, do not use a TFSA. If your timeline is 10+ years (which it must be for this account), you must be 100% invested in high-growth Equities.

Asset Allocation: What Should You Buy?

Now that we have established that we want growth, what specifically should we put in the account? Since you can hold this account for 20, 30, or 40 years, you need aggressive growth. You want exposure to the best companies in the world, not just South Africa.

1. Global ETFs (The Core)

I recommend allocating at least 60-70% of your TFSA to global markets. The JSE represents less than 1% of the world economy. By restricting yourself to South Africa, you miss out on the innovation of Silicon Valley, the luxury brands of Europe, and the manufacturing of Asia.

• Look for: ETFs tracking the MSCI World Index or the S&P 500.
• Examples: Satrix MSCI World, Sygnia Itrix S&P 500, or CoreShares Total World.

2. Local Growth (The Satellite)

While the SA economy struggles, we have incredible companies that pay high dividends.

• Look for: The Satrix Top 40 or Dividend Plus indices.
• Benefit: In a TFSA, you don’t pay the 20% dividend withholding tax. If a company pays a R10 dividend, you keep R10. Outside a TFSA, you would only keep R8. This “dividend drag” makes a huge difference over two decades.

3. Property (REITs)

Listed property is unique. Outside of a TFSA, REIT payouts are taxed as income (up to 45% depending on your tax bracket). Inside a TFSA, they are tax-free. This makes the TFSA the only tax-efficient place to hold listed property.

Case Study: The Cost of Waiting

Let’s look at two investors, Thabo and Sarah. Both are 25 years old and earning decent salaries.

• Sarah understands the power of Tax-Free Savings Accounts (TFSA). She contributes R3,000 a month into a High Growth ETF (10% average return). She stops contributing when she hits the R500,000 limit (approx 14 years). She then just leaves the money there until age 60.
• Thabo waits. He says he will start “later when he earns more.” He starts contributing at age 40.

By the time they are both 60:

• Sarah’s Portfolio: Will be worth approximately R9.8 Million.
• Thabo’s Portfolio: Will be worth significantly less, likely under R3 Million, because his money had less time to compound tax-free.

The R500,000 limit is fixed for everyone. But the time you give that money to grow is variable. The earlier you fill the bucket, the more “tax-free” growth you capture.

Strategies for Parents: Generational Wealth

Can you open a TFSA for your child? Yes. And you should.

Every individual has a R36,000 limit, including newborns. If you have two children, you can contribute R36,000 to your account, and R36,000 to each of their accounts.

The Strategy: Open a TFSA for your child the year they are born. Contribute the max. By the time they are 14, their lifetime contribution is full (R500,000). Leave that money in the market (Global ETFs) until they are 25 or 30. By the time they want to buy a house or start a business, that account could be worth R2 million to R3 million.

The Warning: Be aware that this uses up their lifetime allowance. When they are adults, they cannot contribute more. You must ensure the money is used for a life-changing asset (education, property), not wasted on a flashy car at age 21. Legally, the money belongs to the child, so you need to raise them to be financially responsible.

How to Move Money (Transfers)

What if you made a mistake? What if you opened a “Cash TFSA” at a bank five years ago and now you realize you should be in an “Equity TFSA” at a broker like EasyEquities or Sygnia?

Do not withdraw the cash. If you withdraw, you lose the allowance.

Instead, you must request a Section 12T Transfer.

1. Open your new account with the new provider.
2. Fill out a transfer form with them (usually available on their website).
3. They will contact your old bank and pull the funds across directly.
4. Because the money never touched your personal bank account, it does not count as a withdrawal or a new contribution. Your limits remain safe.
5. Note: This process can take 10 to 20 business days. Do not attempt this in the last week of February.

The First R36,000 is the Most Important

In the world of investing, there are no guarantees. Markets crash. Currencies devalue. But taxes are a certainty.

Tax-Free Savings Accounts (TFSA) are the only tool in South Africa that guarantees you total immunity from the taxman on your investment growth. It is a finite resource—you only get R500,000 of “space” in your lifetime. Treat it like gold.

Stop looking for the “safe” option. The safety lies in the tax structure, not in the asset class. Be bold. Be aggressive with your allocation. Fill your TFSA with the world’s best companies, and let time do the heavy lifting.

If you haven’t contributed your R36,000 for this tax year yet, do it now. The tax year ends on 28 February. If you miss the deadline, that year’s R36,000 allowance is gone forever.

Your Next Step: Log in to your banking profile or brokerage account today. Check your “Tax-Free” contribution status for the current year. If you are not at R36,000 yet, top it up before February 28th.

Frequently Asked Questions (FAQ)

1. Can I have more than one TFSA?

Yes, you can have a TFSA at Standard Bank and another at EasyEquities. However, the R36,000 annual limit applies to you (your ID number), not the accounts. If you put R20,000 in one and R20,000 in the other, you have contributed R40,000 total. You will be penalised 40% on the R4,000 excess. It is administratively safer to keep just one account to avoid accidental penalties.

2. Does the R500,000 limit increase with inflation?

Currently, no. The National Treasury has not adjusted the lifetime limit since the inception of the TFSA. However, many analysts (myself included) hope/expect that they will increase this cap in the future to account for inflation. For now, plan as if R500k is the hard cap.

3. What is the best time of year to invest?

Mathematically, investing a lump sum of R36,000 on the 1st of March (the first day of the tax year) is the best strategy. It gives your money the maximum amount of time (365 days) to grow tax-free for that year. If you can’t do a lump sum, a monthly debit order of R3,000 is the next best option.

4. Can I use a TFSA for my emergency fund?

Technically yes, but strategically no. An emergency fund is money you might need to withdraw quickly. Remember, if you withdraw from a TFSA, you lose that contribution space forever. Keep your emergency fund in a high-interest bank savings account (like TymeBank or Capitec) and save your TFSA for long-term wealth.