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Maximizing Tax Efficiency in Retirement Savings

As tax season draws near, you may be pondering how to maximize your financial resources for the future while minimizing your tax obligations today.

If you’re a working professional balancing various financial responsibilities, comprehending the tax advantages of retirement savings could serve as your hidden gem for accumulating long-term wealth—all without drastically altering your current way of life.

Speaking of your retirement savings, how have they been performing recently, and do you know if you’re spending excessively for your investment returns?

Retirement annuity investments are often perceived as costly and inadequately managed. Did you realize that you can obtain a free, no-obligation comparison report from 10X to determine if your investments could yield better results?

Effective tax strategies for your retirement savings

Let’s illustrate this with a straightforward example. If you find yourself in the fourth tax bracket below, earning R540 000 per year (R45 000 per month) and contributing 15% of that (R6 750) to a retirement annuity, you could save approximately R26 000 on taxes.

When divided over 12 months, this results in a tax saving of just over R2 000 monthly. Consequently, your retirement savings cost roughly a third less than what you actually contribute—effectively allowing Sars to assist in funding your retirement.

Source: 10X Investments

This is what makes contributions to retirement funds exceptionally valuable:

  • You can deduct up to 27.5% or R350 000 (whichever is lower) of your taxable income or gross remuneration (whichever is higher);
  • This applies across all your retirement funds collectively (pension, provident, and retirement annuities); and
  • If you contribute more than the annual threshold, the excess rolls over to future years.

But the advantages don’t end there. When you finally withdraw from these savings in retirement, you might find yourself paying a lower tax rate than your current one.

Want to calculate your potential savings? Our Tax Savings Calculator can illustrate the immediate effects on your take-home pay and tax responsibilities.

Tax-free growth: The often-overlooked benefit of retirement annuity savings

While the immediate tax deduction is enticing, there’s an even greater benefit that many individuals disregard: your investment experiences tax-free growth within a retirement fund.

Unlike discretionary investments like unit trusts, you incur:

  • No tax on interest earned;
  • No tax on dividends; and
  • No capital gains tax.

Currently, Morningstar estimates the ‘tax drag’ on a local high equity portfolio to be about 1.2% annually. However, members of retirement funds are exempt from this tax. Considering the compounding effect, this annual savings could lead to as much as 30% more wealth after 40 years.

Effective strategies to enhance your tax advantages

If you receive an annual bonus or 13th cheque, consider this tax-efficient strategy:

  • Additional voluntary contributions (AVCs): Discuss with your HR about directing part of your bonus to your company retirement fund through an AVC. You’ll enjoy the tax advantage right away, and your future self will be grateful.
  • Enhance your retirement annuity: Don’t have access to an AVC? Think about using your bonus to increase your retirement annuity contributions instead. The tax benefits are the same.
  • Maintain your benefits when changing jobs: One significant mistake individuals make is cashing out their retirement savings when switching jobs. The tax repercussions are considerable:

Source: 10X Investments

By keeping your savings intact in a preservation fund or retirement annuity, you ensure your money continues to work for you alongside its tax benefits. Additionally, you allow more time for compound interest to accrue.

It’s incredibly challenging to make up for the years you contributed to your company retirement fund. Withdrawing early significantly reduces the chances that the real effects of compounding (from around year 20 onward) can operate most effectively for you.

So, you want to be savvy with your taxes—what’s your next step?

  • Review your details annually: Verify your personal information on the South African Revenue Service (Sars) eFiling system, including bank details, contact numbers, and addresses. Incorrect details can lead to delays in processing refunds.
  • Account for all income sources: Make sure you include all forms of income, such as salary, rental income, side businesses, or any other earnings. Omitting even small amounts can result in penalties.
  • Clarify your tax status with Sars: Determine if you fall under provisional taxpayer status, which is relevant if you have income from sources outside of your salary that surpass specific thresholds, necessitating tax payments throughout the year.
  • Don’t rely solely on auto-assessments: Although Sars provides auto assessments, it’s essential not to accept them without scrutiny. Errors in data collection are common, so always review the calculations and ensure their accuracy.
  • Compare with previous returns: Use last year’s tax return as a reference. If your financial situation hasn’t changed significantly, the line items should be largely similar. Major deviations might signal a missing income source or expense.
  • Request a statement of account: After filing, ask Sars for a statement of account, which reflects your current tax status, including any outstanding payments, penalties, or refunds owed. Ideally, this statement should indicate a zero balance, confirming that your tax matters are aligned.
  • Ensure the correct reference number is used: When making payments to Sars, double-check that you’re using the appropriate payment references. Incorrect references can lead to misallocations and potential penalties, even if your total payment is correct. Also, verify your bank details with Sars, especially if you’ve recently changed accounts, as even minor updates can result in significant issues with refunds.

Ensure you know where your retirement annuity stands

  • Utilize 10X’s Retirement Annuity Calculator to determine if you’re on course for a comfortable retirement.
  • Compare your investment fees. Elevated fees can diminish your returns similarly to taxes. Use our EAC (effective annual cost) calculator to understand what you’re truly paying to invest for retirement, or get a free comparison report to see if you could reduce fees.
  • Consult a retirement specialist. Our investment consultants have been enlightening thousands of South Africans about their retirement options for over a decade. They can assist you in structuring your contributions for optimal tax benefits—unlike a financial advisor, there’s no cost for consulting with them.

Intelligent tax planning through retirement savings is not just about reducing your tax bill today—it’s about making your money work harder for your future. By grasping and maximizing these benefits, you’re not only saving on taxes but also building a more secure retirement.

Ready to enhance how your money works for you? Get in touch with a 10X Investment Consultant today.

This content is provided as general information and does not serve as financial, tax, legal, investment, or other advice. 10X Investments is an authorized financial service provider (number 28250). The 10X Living Annuity is underwritten by Guardrisk Life Limited. 10X Investments offers a variety of investment options directly to the public accessible via the My10X online investor portal www.10x.co.za, through corporate pension funds, and via your financial advisor.

Presented by 10X Investments.

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